As the Obama administration looks for ways to persuade Chinese energy companies to end their trade with the Iranian regime, China is seeking a strategic foothold in the United States energy sector.
Earlier this week China's state-owned CNOOC signed a $2.16 billion agreement with Chesapeake Energy Corporation, an Oklahoma City-based oil and natural gas firm, to buy a 33 percent share in an oil and natural gas project in south Texas, and access to cutting-edge drilling technologies that can extract energy resources from shale rock formations.
According to a 2009 Congressional Research Service report on unconventional gas shales, directional drilling (sometimes referred to as horizontal drilling) allows for access beyond the area below the drill to both oil and gas reserves in locations inaccessible to conventional drilling, including to difficult to reach offshore reserves.
Thanks in part to these shale deposits, the U.S. natural gas industry is experiencing a boom, and foreign companies including CNOOC and India's Reliance Industries are moving aggressively to capture a piece of the action. Reliance has also spent billions acquiring stakes in U.S. natural gas projects, though it reportedly lost the Chesapeake deal to CNOOC.
In order to ensure that the CNOOC deal is not a threat to U.S. national security, it requires review and approval by the Committee on Foreign Investment in the United States (CFIUS). In 2005, Cnooc withdrew a multibillion dollar bid for Unocal Corp. as a result of national security concerns in Washington.
Aubrey McClendon, Chesapeake's chief executive officer, expressed confidence that CFIUS will find few objections to his company's deal with CNOOC.
Here are a few objections CFIUS should consider:
CNOOC has extensive commercial ties in Iran, reportedly including a $16 billion memorandum of understanding, signed in 2006, to develop the North Pars gas field and construct liquefied natural gas facilities. In May 2009, the company also signed a contract under which it aims to produce 10 million tons of natural gas per year in Iran.
Pension fund boards in California, Florida, Illinois and Minnesota list CNOOC as a restricted company or a company under scrutiny. These pension fund boards are divesting their holdings from companies identified as doing business with Iran.
U.S. officials should determine whether CNOOC is in violation of U.S. sanctions law. If CNOOC moves forward on its current deals and engages in transactions that would trigger action under the Iran Sanctions Act — investing $20 million or more in the Iranian energy sector, providing it with technology, goods or services, or selling refined petroleum to Iran — Washington should prohibit it from making major investments like the Chesapeake deal.
While the U.S., EU and their allies have prohibited the transfer of key energy technologies and technical expertise to Iran, CNOOC and other Chinese firms are aggressively seeking access to technologies that allow for natural gas and oil extraction. Access to this technology could benefit CNOOC's work in Iran. Iranian news sources reported in 2008 that Iran had acquired directional drilling technology. It is unclear however whether these Iranian reports are accurate or whether the technology itself permits Iran to do the type of directional boring in hard-to-reach locations that Chesapeake's technology could enable. This would be particularly important to Iran given that its largest natural gas reserves are found offshore in the Persian Gulf.
If these technologies are used to develop China's own natural gas deposits, that is of benefit to China, and to the United States, as Washington seeks to persuade Beijing to decrease its energy ties to Iran. If, however, CNOOC and other Chinese companies intend to use these technologies and their acquired expertise to help develop Iran's energy resources, the CNOOC investment should be blocked.
CNOOC's other North American interests also deserve scrutiny. In late 2009, the company signed an agreement with Norway's StatoilHydro to become a stakeholder in four oil field leases in the Gulf of Mexico. The Gulf Security and Iran Sanctions Enforcement Act, recently introduced by Representatives Ron Klein (D-FL) and Mark Kirk (R-IL), and Senators Kirsten Gillibrand (D-NY) and Ben Cardin (D-MD), requires companies bidding on these energy leases to disclose that neither they nor their partners are in violation of U.S. sanctions laws or doing business with entities the U.S. Treasury identifies as under Iranian government control.
To evaluate the natural gas deal in Texas and the oil leases in the Gulf of Mexico, U.S. officials should put CNOOC's representatives to a series of questions: What is the nature of your company's activities in Iran? Has CNOOC conducted business that would trigger sanctions under the Iran Sanctions Act? What are your future plans in Iran, and do they include transactions that could trigger sanctions? Will CNOOC use the technology and expertise it acquires in the United States in any projects with Iran? Is CNOOC doing business with any entities controlled by the Iranian government?
Foreign investment in America's energy industry should be encouraged, but not when it benefits the companies that are propping up an Iranian regime that threatens the U.S. and its allies. British Petroleum, Total, Royal Dutch Shell and Statoil, for example, have reportedly all halted or committed to halt their investments in Iran's energy sector. Reliance Industries, which lost the Chesapeake deal to CNOOC, also appears to have chosen to do business with the U.S. instead of Iran, reportedly ceasing its sales of refined petroleum to Iran in June 2009.
As part of its sanctions strategy, the Obama administration should reward companies which terminate their ties with Iran and penalize those who don't. Only when CNOOC answers questions over its activities in Iran to Washington's satisfaction should the U.S. government declare America's energy riches open to the state-owned Chinese energy giant.
Until then, if the Obama administration is serious about making its sanctions strategy work, it should put CNOOC to a choice between Tehran and Texas.