Oil firm sidesteps sanctions on Iran

High-tech tool poses 'dirty bomb' risk; Legal loopholes frustrate US efforts

By Farah Stockman, Globe Staff  |  December 7, 2008

TEHRAN - In the oil fields of Iran, a 2,000-pound drilling tool shaped like a metal pipe probes deep under the earth for fresh supplies of crude, the lifeblood of one of the most formidable foes of the United States.

While helping to enrich Iran's economy, the drilling tool also presents a potential risk to American security, were it to fall into the wrong hands. It is powered by a radioactive chemical that scientists say could fuel a so-called "dirty bomb," capable of spreading radiation across many city blocks.

The tool is the type of sophisticated technology that the United States has sought for 13 years to prevent from reaching Iran, a country the US government says is financing terrorism with its oil profits.

But the device - developed by the oil-services firm Schlumberger in labs in Connecticut and Texas - was brought to Iran through a legal loophole that allows multinational corporations to use foreign subsidiaries to sidestep US sanctions, according to a Globe investigation.

Over the years, despite three executive orders by the Clinton administration, increased public pressure after 9/11, and close monitoring by Congress, gray areas in the law have seriously eroded the ability of the United States to ensure that technology developed by Americans does not go to potential US enemies.

"Our sanctions laws are useless as long as loopholes exist," Senator Frank R. Lautenberg, a New Jersey Democrat, said in a statement that strongly condemned Schlumberger's use of US-manufactured oil technology in Iran. "US technology and innovation should not be transferred to the benefit of the Iranian regime."

Schlumberger acknowledges that its US-developed tool has been used in Iran, and a spokesman said the company followed "all applicable laws and regulations."

But Victor D. Comras, a specialist on international trade embargoes, said Schlumberger's transport of US-made oil tools to Iran "is certainly activity that goes against the spirit if not the letter of the law." He adds that Schlumberger is not the only multinational corporation to have used its global status to bring US technology to potential US enemies.

"With the global economy of today, a number of companies subject to US law have devised structures that allow them to circumvent the US regulations," said Comras, who helped supervise international sanctions for the State Department until his retirement in 2001.

But while the US government has been largely successful in forcing companies registered in the United States to stop sending technology to Iran, it has far less leverage against Schlumberger, because the oil-services giant is registered in the Caribbean, despite having its CEO based in Houston.

Schlumberger's international status also helped the firm avoid a post-9/11 crackdown on major American contractors who were skirting sanctions.

Since 1995, federal regulations have barred Americans from exporting goods, technology, or services to Iran, and also prohibited non-Americans from directly exporting US-made equipment there.

But the regulations leave the door open for companies to stock the warehouses of their overseas subsidiaries for general international commerce, after which the subsidiaries can "reexport" the goods to Iran, so long as no Americans were involved in the transfers.

Such "reexports" are generally regarded as legal if the goods are not on a Commerce Department list of items with potential military applications, according to current and former Commerce Department officials.

"If a company has got all their ducks in a row, they can take advantage of [the reexportation exception] and I'm sure that they do," said Richard Modesette, a former special agent with the Commerce Department's Office of Export Enforcement in Houston.

The regulations were designed to allow companies to avoid penalties if they happened to send low-tech items, such as light bulbs or tires, to stock warehouses overseas, and the goods inadvertently ended up in Iran, the current and former officials said.

But over the years, sophisticated oil machinery, including devices that contain radioactive material, began to be sent to Iran in this way, seriously eroding the impact of the sanctions.

The vast majority of US exports - an estimated 96 percent - are not on the Commerce Department list, and therefore could potentially make their way to Iran. Schlumberger's radioactive drilling tool, called the azimuthal density neutron tool, is not on the list, according the company.

"The reexportation of the tools is absolutely legal," said Stephen Harris, a company spokesman. " No US person or entities are involved in any reexport."

At first, even companies incorporated in the United States - including such Schlumberger rivals as Halliburton, Weatherford, and Baker-Hughes - got around US sanctions by utilizing their overseas subsidiaries to perform work in Iran.

Then the Sept. 11, 2001, terrorist attacks sparked federal investigations into whether US personnel were involved in the subsidiaries operating in Iran. Facing tighter scrutiny, negative publicity, and investor anger, all three of Schlumberger's main American competitors pulled out of Iran.

"People do business in Iran at their peril," said Robert Clifton Burns, a Washington-based lawyer and international export controls expert.

But American companies felt the heat much more directly than Schlumberger. As US-registered firms, they answered to the US government and could be subject to a deeper crackdown; but while the government could impose rules on Schlumberger's work involving Americans, the US government has little sway over what foreign firms can do outside the United States.

So Schlumberger - which was founded in Paris, moved its headquarters to the United States, and is now incorporated offshore - was particularly well-positioned to avoid US sanctions. As the world's largest oil service provider, it has subsidiaries around the world, employing some 60,000 foreign citizens who are not subject to US laws.

"<ORG idsrc="NYSE" value="SLB">Schlumberger Limited</ORG> is incorporated in the Netherlands Antilles and, as such, is not a US company," Harris said.

But when it comes to researching and developing the most technologically sophisticated products, Schlumberger draws heavily on American expertise. For 60 years, the company has maintained labs in Texas and New England - at various times drawing on funding from US government contracts.

That has led some in Congress to try to rein the company in. But while the Senate is currently weighing a bill aimed at holding US companies accountable for the work of their foreign subsidiaries in Iran, Schlumberger, with its foreign status, remains largely out of the government's reach.

"People on the Hill want to put Schlumberger under the same constraints of a typical American company, but no one can figure out how to make than happen," said Robert Ebel, an oil specialist who has served in the State Department and the CIA.

Meanwhile, some of Schlumberger's rivals have sought to replicate its international status. Weatherford shifted its place of incorporation from Delaware to Bermuda in 2002, and last year Halliburton moved its headquarters and CEO to Dubai.

Both companies say they remain accountable to US laws. But the moves have sparked fears in Congress that more multinational companies will try to emulate Schlumberger by incorporating overseas.

Policymakers say Congress's ability to control multinational companies operating on US soil and the products they develop here is already rapidly diminishing.

"It is getting harder and harder to make sanctions effective," said Michael Lynch, an oil market analyst and director at Strategic Energy & Economic Research Inc., an energy consulting firm based in Winchester. "It has gotten to the point where keeping the technology away from [Iran and other countries under sanctions] is almost impossible."

Corporate chameleon

Schlumberger's use of American scientists to develop a tool that ended up in Iran is a harbinger of what many see as the borderless future of multinational companies.

One of the world's first truly global firms, Schlumberger is a corporate chameleon, forming research partnerships with both the US Department of Energy and the state-owned National Oil Company of Iran. It develops cutting-edge oil field technologies in its new lab near the MIT campus in Cambridge, but it also utilizes its expertise in Sudan and Cuba. It pays taxes in more than 80 jurisdictions, but is accountable to the foreign policy dictates of none.

The Schlumberger lab in Kendall Square is decorated with stone tiles resembling rock formations and bronze plaques commemorating the successful inventions of its scientists in America. Meanwhile, thousands of miles away, in an upscale neighborhood in Tehran, Schlumberger's office is packed with non-Americans. A bronze plate spells out Schlumberger in Farsi in front of the company's office and a sign on the lobby wall reads: "Our vision: Schlumberger is the preferred oil field service provider of Iran."

The company's roots date back to 1919, when two French brothers, Marcel and Conrad Schlumberger, set out to invent an instrument that could determine what was below the earth's surface. Vowing to form a company that valued scientific achievement as much as profit, the brothers succeeded in using electrical measurements to produce the world's first map of an underground oil well in the French countryside.

Until then, oil companies used guesswork to decide where to drill and most wells turned up dry. But the Schlumbergers' invention proved that science could perfect the art of drilling, helping to usher in a new era of oil production and consumption.

In 1940, after Germany invaded France, the Schlumbergers moved their company to Houston, where they set up headquarters among the giants of the budding global oil industry.

For decades, they held a near-monopoly on so-called "wireline" logging - a term that refers to lowering measurement devices down a hole to determine the quality and quantity of oil there.

During World War II, Conrad's son-in-law, Henri Doll, set up a lab in Ridgefield, Conn., inventing tools for the US military that searched for mines. The same technology later proved to be a boon for the oil industry.

In 1956, Schlumberger incorporated the company in the Netherlands Antilles, a group of islands in the Caribbean and a budding tax haven, but maintained its headquarters in Houston. Schlumberger listed itself on the New York Stock Exchange, and received contracts and research grants from the US government.

The Schlumberger-Doll Research Center in Connecticut became the world's oldest and most prestigious source of oil technology research, churning out increasingly sophisticated devices that accounted for more than 40 percent of the company's revenues in 1967, the year that Doll retired, according to a company publication. In 1982, the company earned $1.3 billion, making it by some measures the most profitable of the world's 1,000 largest corporations that year.

Some of its breakthroughs were made with the help of the US government. Schlumberger was allowed to use to use a sensitive neutron pulser at the Argonne National Laboratory in Illinois under a joint project with the US Department of Energy in the 1980s. In the 1990s, the company's scientists participated in a joint venture with Lawrence Livermore National Laboratory, and later used equipment at the Brookhaven National Laboratory in New York.

In the past decade, Schlumberger had received modest contracts with the US Navy to supply communications and radar equipment, with NASA to deploy sensor equipment to measure asteroids, and with the Department of the Interior for help with mapping mineral resources, among others. And it signed a new Department of Energy contract in 2006 to develop another new oil field tool.

But at the same time, Schlumberger pursued partnerships with governments all over the world, including Iran, where it developed a reputation for loyalty to the country's Islamic leadership by staying in Iran throughout the country's devastating eight-year war with Iraq. In 2004, Schlumberger signed a research agreement with the National Iranian Oil Company to examine ways to boost crude production by solving problems of lime and carbonated fields.

"I think their attitude has been very traditional, that 'we are involved in business and technical activities and not in politics, and to the extent that we can legally do that, we'll do that,' " said Jeffrey S. Schweitzer, a scientist formerly employed by Schlumberger.

"We bend over backwards to treat all customers equally," said Ram Shenoy, managing director of the Schlumberger-Doll Research Center, which moved from Ridgefield to Kendall Square in 2006.

Unimpeded by sanctions

The science behind the azimuthal density neutron tool was developed in Connecticut, in the 1960s. An American physicist at the Schlumberger-Doll laboratory named Stanley Locke devised a way to use neutrons to measure the density of material under the earth's surface. Locke created a tool that could be lowered into boreholes on a wire, unlocking the secrets under the ground using a neutron sensor.

Decades later, Daniel C. Minette, a physicist at a company called Telecos - a small, Connecticut-based rival to Schlumberger - got the idea of affixing a similar tool to a drill so that it could take measurements as the hole was being dug, saving time and money.

Minette's machine became the model for Schlumberger's azimuthal density neutron tool, according to Philip Kurkoski, a former Schlumberger employee listed as one of the tool's inventors. Kurkoski said Schlumberger assembled a team to design a device like Minette's, while adding enough improvements to allow Schlumberger to patent it as a new product.

"The lawyers said, 'It's your job to design it. Let us worry about the patents,' " said Kurkoski, who is now employed by <ORG idsrc="NYSE" value="BHI">Baker Hughes</ORG>, a competitor of Schlumberger.

Kurkoski said the team swiftly designed the device, which uses five curies of americium-241, a radioactive chemical that comes from nuclear weapons production.

The company began producing the tool at a plant in Sugarland, Texas, importing the radioactive fuel from Russia, Kurkoski said.

But a few months before Kurkoski and his colleagues unveiled the new tool at a symposium in the summer of 1995, President Bill Clinton issued two executive orders that shocked the oil-services industry.

Citing concerns that Iran was using its oil revenues to fund terrorism and to finance a nuclear weapon, Clinton issued an order in March of 1995 that prohibited any US citizen or company operating on US soil from assisting Iran's oil industry. At the time, many policymakers believed that the United States had a monopoly on cutting-edge oil technology, and that the sanctions would prevent Iran from developing its oil fields.

"The basic premise behind Clinton's executive order was that the oil-and-gas sector was the major source of revenue to fund their program on weapons of mass destruction, missile technology, and radical groups like Hezbollah and Hamas," said Stuart E. Eizenstat, who served as Clinton's undersecretary of state for economic affairs and also served as deputy treasury secretary. "To the extent that you could reduce that, you would crimp their capacity to fund those things. It is an absolutely crucial sector for them."

Two months later, in May of 1995, Clinton banned the export of all goods and services from the United States to Iran.

Despite the orders, Schlumberger was able to ship its device to its Middle Eastern subsidiaries, and eventually began using it in Iran.

In 2003, Schlumberger held a conference in Tehran where it heralded its role in modernizing Iran's stagnant oil industry. In a brochure, it showcased a series of highly sophisticated tools that had never been used in Iran. Among them was the combinable magnetic resonance tool, an imaging device invented in Connecticut, and the azimuthal density neutron tool.

"The new generation ADN tool addresses the shortcomings of older tools," Schlumberger announced in a paper released at the conference.

Schlumberger's employees could have faced jail time or criminal fines if the company had been caught shipping the machine directly to Iran, or if its American workers had knowledge of its transfer.

Harris, the spokesman for Schlumberger, declined to detail how it got the tool to Iran, but insisted that the company's methods were legal. Schlumberger said in a statement that the tool was not exported specifically "for use in Iran" and that no Americans were involved in its use.

Harris said the machine has been brought into Iran for temporary periods, and moved in and out as needed. Schlumberger takes great precautions to ensure that no US citizens or companies are involved in the tool's transfer, he said.

Harris also said Schlumberger is careful to follow international regulations regarding the transfer and maintenance of the tool's radioactive components.

But oil field service companies have had close calls with their radioactive tools. Last year, Schlumberger lost track of a canister of radioactive material used for mining in Australia.

The canister, which had been imported from the United States, was found along the side of a road in western Australia two months after it vanished, according to news reports.

In 2003, Halliburton was banned by the Nigerian government from receiving additional oil contracts after a radioactive component in the company's oil-drilling machinery disappeared. The ban was removed in 2005, after the missing component was found in a German steel recycling plant.

Scientists say that if the five curies of americium-241 used in Schlumberger's tool were to be lost or stolen, the material could be combined with TNT to create a crude nuclear device known as a "dirty bomb" that could contaminate an area of many city blocks.

As with most dirty bombs, any fatalities would most likely be caused by the initial explosion, but the spread of radiation across a large swath of a major city could cause panic and fear, followed by health risks to those exposed to the radiation.

"If someone wanted to use this material to ill effect, you could end up declaring a substantial area contaminated, based on current guidelines," said Michael A. Levi, a physicist and senior fellow at the Council on Foreign Relations who has studied the potential use of oil field machinery for dirty bombs. "Cleaning this stuff up is quite difficult."

Because of its radioactive content, Schlumberger's tool is subject to oversight by the US Nuclear Regulatory Commission, which maintains its own ban on sending such devices to Iran without special permission. But spokesman David McIntyre acknowledged that nothing prevents Schlumberger from sending the tool to another country where special permission is not required and then on to Iran.

Therefore, Schlumberger is probably not violating either the NRC regulations or the federal ban on sending goods and services to Iran, sanctions specialists said. But smaller companies with no overseas subsidiaries have faced criminal penalties for sending far less sensitive equipment to Iran.

Earlier this year, a California resident was sentenced to 18 months in prison and a $200,000 criminal fine for exporting textile goods to Iran. Last year, a California man was sentenced to 17 months in prison and a $10,000 criminal fine for "aiding and abetting" the export of US-origin gas valves to Iran via Australia. A Kentucky man received 18 months probation for arranging the sale of forklift parts to Iran via Dubai.

"For little companies, once the embargo hit, there was no loophole for them," said Modesette, the former export investigator.

The American inventors whose research helped develop the azimuthal density neutron tool say they did not know it would be sent to Iran, but were not surprised that it has turned up there.

"I'm sure that whatever they did to get it there was legal," said Kurkoski. "It may have been morally repugnant to people in the States, but they found a way to make it legal."

Minette, who had developed the similar tool for a Schlumberger rival and who now owns his own consulting company, said he, too, was not surprised that Schlumberger has brought the device to Iran.

"These folks have got lots of lawyers," he said.

Even if Congress were to find a way to close the loophole in the sanctions law, he said, Schlumberger could simply shift the manufacturing of the tool to its production centers overseas, beyond the reach of US laws. And, indeed, Schlumberger already has shifted some of its oil-service manufacturing to a production center in France, where US sanctions do not apply.

"Would it be possible to stop Iran from getting that particular tool?" Minette pondered. "If the world wanted to, yes, but the world doesn't want to. The United States does not have control." 

http://www.boston.com/news/world/middleeast/articles/2008/12/07/oil_firm_sidesteps_sanctions_on_iran?mode=PF