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Oil firm says it will withdraw from Iran

But lucrative deals will delay its exit

By Farah Stockman
Globe Staff / November 12, 2010

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WASHINGTON —The world’s largest oil-services company has quietly promised the US State Department that it will pull out of Iran when its current contracts are complete, a spokesman for Schlumberger Ltd. has confirmed, marking what could be a major victory in the US struggle to cut off Iran’s access to funds for its nuclear program.

“If it is true, it’s huge,’’ said Richard Modesette, a former Commerce Department special agent.

But internal company documents obtained by The Boston Globe show that Schlumberger — which is under investigation for possible sanctions violations — has signed contracts worth hundreds of millions of dollars that it intends to complete before it exits. Those contracts will keep the company, believed to be the last Western oil-services firm in Iran, working in the oil-rich country until least 2013, a delay that has angered some US officials.

The company, which has a research facility on MIT’s campus, has kept the scope of its work in Iran — and its decision to leave eventually — under a veil of secrecy. Unlike other firms that trumpeted their decision to pull out, Schlumberger has never publicly announced its intention to leave.

Still, Schlumberger’s private pledge to US officials marks perhaps the final chapter in a 15-year game of cat-and-mouse between the US government and Western companies that are helping to build Iran’s oil and gas industry, which brings in more than 60 percent of Iranian government revenue.

Internal documents — given to the Globe by a worker who accuses Schlumberger of sidestepping the embargo on Iran — illustrate how the company adapted to ever-increasing sanctions, reaping lucrative contracts long after its competitors were forced out. The worker asked not to be named out of fear of retaliation.

Sanctions banning Americans from helping Iran’s oil sector have been in place since 1995. But Schlumberger was able to keep working in Iran because it is registered offshore. In 1996, US officials tried to force foreign companies out of Iran’s oil fields by threatening to fine them. But those threats sparked such outrage in Europe that US officials never carried them out.

In recent years, US officials have pressed other countries to implement their own sanctions. As concern over Iran’s nuclear program grew, the European Union passed its own ban on transferring oil technology to Iran. Europe’s increasing support for sanctions was the final straw that persuaded Schlumberger to leave, said Rod Nelson, the company’s vice president of communications.

“It caused us to reevaluate whether we could keep operating,’’ he said. “Our decision means that if nothing changes we will ultimately end operations in Iran.’’

But Nelson said the company has never broken the law, and he underscored that the decision to pull out was voluntary.

Schlumberger’s critics, however, say the company went too far in its efforts to sidestep sanctions and stay in Iran.

“This is a clear case where punishment should be imposed,’’ said Representative Brad Sherman, a California Democrat who sponsored the Iran Sanctions Act, a law passed this summer that gives the State Department the power to freeze assets and deny federal contracts to foreign companies that work in Iran’s oil sector.

The Justice Department is also examining whether the company should face penalties. A September 2009 quarterly report by Schlumberger to the Securities and Exchange Commission acknowledged that “United States officials are currently conducting a grand jury investigation and an associated inquiry, both related to certain Schlumberger operations in specified countries that are subject to United States trade and economic sanctions.’’

Stretching supply lines Schlumberger was founded in 1919 by two French brothers who invented machines that could detect oil under the ground. The company has worked in Iran since the 1940s, when that nation’s petroleum industry was dominated by British and American oil giants. After the 1979 Islamic revolution, Schlumberger and other oil-field service companies stayed on, helping Iran keep the oil flowing.

In the 1980s, Schlumberger had competition in Iran: Texas-based Halliburton, Baker Hughes, and Weatherford.

But after President Clinton banned US firms from working in Iran, they were eventually forced to withdraw.

Schlumberger was exempt from Clinton’s order because it is registered in the Netherlands Antilles, even though its headquarters are in Texas and France. Its multinational identity made it easier to resist political pressure and continue helping Iranians tap their underground oil reserves.

After Clinton issued another order in 1995, this one banning US equipment from being sent to Iran, Schlumberger sent US goods to its Jebel Ali facility in Dubai. It then reexported them to Iran. Such shipments are considered legal, as long as Schlumberger’s Iranian employees did not request that the goods be ordered on their behalf.

“Spares from anywhere may be ordered via the . . . Jebel Ali unit and used by Iran,’’ notes one internal company report.

But shipments sometimes crossed the line. In 2004, Schlumberger’s Iranian employees ordered and received $16,000 worth of US spare parts through Jebel Ali, according to company documents, an apparent sanctions violation not previously reported.

The company fired three employees and reprimanded three others in 2006 for the violation, said Dianne Ralston, Schlumberger compliance director. Schlumberger also beefed up its compliance department to better train employees to follow sanctions laws, and it severely punishes those who don’t, Ralston said.

But some employees complained that the company was punishing employees for activities that were considered routine.

“A lot of [Schlumberger] hands in Jebel Ali have been burned in the past when they thought they were doing their jobs of supporting Iran,’’ an employee wrote in a 2008 e-mail.

As the United States and Europe stepped up the pressure on Iran, Schlumberger shifted some of its manufacturing to China, which has no embargo. But the company still struggled to get some equipment it needed.

For instance, in 2007, the European Union banned the export of safety badges that detect radiation from drilling machines. For a year, Schlumberger’s wireline manager in Iran continued to purchase the badges from the France-based subsidiary of Landauer, an Illinois manufacturer, according to an invoice. But in January of 2009, a Schlumberger compliance officer ordered them to stop.

“This is a clear violation to EU sanction rules,’’ he wrote in an e-mail.

At first, Schlumberger’s manager in Iran could not find a replacement and responded that he had “no other choice to continue using Landauer.’’

But eventually, he found a new supplier in Asia, illustrating how Asian companies are stepping in to replace European and American firms.

Last-minute deals By late 2008, Schlumberger faced mounting pressure to get out of Iran. A Boston Globe article about Schlumberger’s export of US machines with radioactive parts to Iran prompted a Justice Department subpoena. It also prompted telephone conversations between senior Schlumberger executives and State Department officials, according to both Nelson and a State Department official.

In February 2009, executives flew to Washington and pledged not to undertake any new work in Iran.

But over the next 10 months, Schlumberger began work on at least 12 fresh contracts in Iran worth more than $400 million, including a $277 million contract in Iran’s South Pars gas field that doesn’t expire until 2013, according to the documents. Nelson acknowledged that the company signed some contracts after February 2009, but said all of those deals had been negotiated months before, and in some cases more than a year before. He said the company’s promise to pull out of Iran remains in place.

“We made it clear to the State Department that we would honor all prior commitments, including bids made prior to the 2009 meeting,’’ he said.

Nelson said he could not give a final date for Schlumberger’s departure because some contracts give Iranians the right to renew. But he said the company has passed up the chance to bid on at least 100 new contracts.

A State Department official who was present at the 2009 meeting expressed disappointment that Schlumberger continued to sign contracts, noting that other companies had walked away from lucrative bids in Iran. The official, who asked not to be identified since he is not authorized to be quoted in the press, also said the company’s continued work in Iran leaves it vulnerable to punishment under the Iran Sanctions Act.

Modesette, a former Commerce Department special agent who investigated sanctions violations, said Schlumberger’s departure could be a major setback for Iran’s oil industry.

“I’m really curious as to who the Iranians are going to have to complete their wells for them now,’’ he said.

But Victor Comras, a former State Department official, said it may happen too late to have an impact.

“If Iran is moving as fast as we think they are, they will have a nuclear weapon’’ by 2013, Comras said.

But if Iran agrees to curb its nuclear program, sanctions could ease by the time Schlumberger’s last contract expires, he said. In that case, the firm could just keep on doing business.

Farah Stockman can be reached at fstockman@globe.com.

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