U.K., EU Lobby to Protect Gas Project From Iran Sanctions

WSJ — As Western governments push ahead with unprecedented sanctions on Iran, U.K. and European Union officials have lobbied U.S. lawmakers in recent weeks to ensure that any new Iran sanctions exempt a key BP PLC-led natural-gas project in Azerbaijan.

Officials from the British Foreign Office, the EU and BP have confirmed lobbying Capitol Hill lawmakers in recent weeks to ensure that new sanctions don't block a long-sought $20 billion Azerbaijan natural-gas project in which an Iranian company has a minority stake. The lobbying underscores the challenge Western governments face in seeking to isolate Iran without harming their own energy security and economic health.

At issue is Iranian national oil company Naftiran Intertrade Co.'s 10% stake in the Shah Deniz II natural-gas find, a BP PLC-led energy megaproject offshore Azerbaijan that is critical to EU energy security.

The EU and the U.S. are adopting new measures to isolate Iran and starve it of oil revenues. Yet, lobbying by the U.K. and the EU in December succeeded in persuading U.S. lawmakers to exempt Shah Deniz II from any new sanctions, people familiar with the matter say.

The U.K. supports a policy that "balances the desire to put pressure on Iran over its nuclear program and makes sure it does not have an adverse impact on European economies," said a British Foreign Office spokesman, who confirmed the lobbying. "It is not a contradiction" to want an exemption for Shah Deniz II and seek stringent sanctions at the same time, he said.

A BP spokesman acknowledged recent discussions on Shah Deniz II as part of the U.K.-based company's"routine engagement" with U.S. lawmakers. The company remains "in full compliance with applicable sanctions regimes," including EU regulations and U.S. law, the BP spokesman added.

A halt to the project would be a major blow to a multiyear EU campaign to boost EU energy security. Past payment disputes between Moscow and Ukraine—a transit country to Europe—have prompted the EU to seek with renewed vigor to diversify away from Russia, its largest gas supplier.

Shah Deniz II has been considered the first key supply source to a corridor via which to feed Central Asian gas to Europe. Naftiran is a Switzerland-based subsidiary of state-owned National Iranian Oil Co., with activities running the gamut from crude trading to oil and gas projects. A Naftiran official declined to comment.

Besides Naftiran, BP and Norway's Statoil ASA each hold a 25.5% stake. The State Oil Co. of Azerbaijan, or Socar; France's Total SA; and Russia's Lukoil Holdings each hold a further 10% stake and Turkish Petroleum owns the remaining 9%.

The project might have been hit by a bill by Rep. Ileana Ros-Lehtinen that would ban any company doing business with Iran from operating in the U.S. But lobbying by BP, the EU and the U.K. led lawmakers to tweak the bill. The current version includes language that says it won't affect efforts "to bring gas from Azerbaijan to Europe and Turkey," or to achieve "energy security and independence from Russia."

However, EU and U.K. officials are closely monitoring other congressional proposals that could hit Shah Deniz II in 2012, an election year in which targeting Iran could score political points.

"It's a continuous story," said an EU official. The fact that there is now an [proposed] exemption "doesn't mean that [the issue] won't come back further down," he explained. "You never know—it's not a short-term matter."

The Ros-Lehtinen bill is now with the Senate's committee on foreign affairs. Ms. Ros-Lehtinen's foreign-affairs spokesman didn't respond to requests for comment.

A senior congressional aide, who asked not to be named, said the exemption came largely in response to concerns from NATO allies in Central and Eastern Europe that a halt to Shah Deniz II would leave them dependent on Russia for fuel.

"There is broad-based consensus in the House and Senate that our sanctions policy should impose maximum economic pain on the Iranians without allowing Russia to hold Eastern Europe hostage for energy supplies," the aide said.

Mark Dubowitz, executive director of the Foundation for Defense of Democracies, said the December U.K. delegation in Washington comprised members of the Treasury, the Foreign Office and of the Cabinet Office, which coordinates U.K. policies of the prime minister and the other ministries.

"Despite congressional sympathy for the need to exempt Shah Deniz in the Iran Threat Reduction Act and the Senate companion bill, I assume that the British government didn't want to take any chances and dispatched Cabinet, FCO, Treasury and embassy people to speak to congress and think tanks to make their case," Mr. Dubowitz said.

The U.K. Cabinet Office said it stood by the comments of the Foreign Office. The Treasury didn't respond to a request for comment.

The U.K. lobbying push to protect Shah Deniz II came as Britain in November escalated sanctions over Tehran's nuclear program faster than the U.S. by becoming the first major nation to cut all ties with Iranian banks.

The lobbying underscores a dilemma at the heart of the Western push to sanction Iran—how to pressure the country, a key global energy player, with maximum efficiency while avoiding putting to Europe's economy at risk. The European Union, while agreeing in principle to a ban on Iranian oil, is still debating how much time to give refiners to switch to other oil suppliers. Some countries fear higher prices could result from the embargo, putting additional pressure on their economies.

"It is very important that the European Union take into account the impact of the sanctions on various European economies," said Gregory Delavekouras, a spokesman for the Greek Foreign Ministry, which has been the most vocal advocate for a slower time frame to implement the embargo.