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Halliburton's CEO says his company is pulling out of Iran. But a corporate subsidiary is still going ahead with a deal to develop Tehran's natural gas fields.

Published Feb 15, 2005 at 7:00 PM EST Updated Mar 13, 2010 at 5:00 PM EST

By Michael Isikoff

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Only weeks before Halliburton made headlines by announcing it was pulling out of Iran--a nation George W. Bush has labeled part of the "axis of evil"--the Texas-based oil services firm quietly signed a major new business deal to help develop Tehran's natural gas fields.

Halliburton's new Iran contract, moreover, appears to suggest a far closer connection with the country's hard-line government than the firm has ever acknowledged.

The deal, diplomatic sources tell NEWSWEEK, was signed with an Iranian oil company whose principals include Sirus Naseri, Tehran's chief international negotiator on matters relating to the country's hotly-disputed nuclear enrichment program--a project the Bush administration has charged is intended to develop nuclear weapons.

There are few matters more sensitive for Halliburton than its dealings with Iran. The company, formerly headed by Vice President Dick Cheney, last year disclosed that it had received a subpoena from a federal grand jury in Texas in connection with a Justice Department investigation into allegations that the firm violated U.S. sanctions law prohibiting American companies from directly doing business in Iran. (U.S. firms are barred from doing direct business in Iran, but under a confusing quilt of federal regulations, their foreign subsidiaries may do so as long as they operate "independently" from U.S. management.)

Documents disclosed by the company indicate that the Justice Department probe into Halliburton's Iran dealings, like a separate Justice investigation into alleged foreign bribes paid by a Halliburton-connected consortium to officials in Nigeria, cover the period that Cheney was Halliburton CEO.

There have been no allegations that Cheney was directly involved in any of the conduct that is under scrutiny by Justice, although as Halliburton CEO, Cheney repeatedly and forcefully criticized the U.S. sanctions laws restricting business in Iran, arguing that they caused U.S. firms like Halliburton to lose business to international competitors. (As it has in the past, Cheney's office today declined to say whether the vice president has been questioned by investigators on either the Iran or Nigerian matters.)

Halliburton's new deal, in which it will participate in a $308 million project to develop Iran's huge South Pars natural gas fields, was not at first publicly announced by the company. But after the South Pars project, and its role, was reported in the Iranian press in mid-Janury, Halliburton publicly confirmed that its Dubai-based subsidiary, Halliburton Products & Services Limited, had been awarded a subcontract on the project that, a Halliburton official told NEWSWEEK today, will net the parent firm between $30 million and $35 million over the next several years.

The new Halliburton project, congressional investigators say, raises substantial questions about the Jan. 28, 2005 public announcement by Halliburton CEO (and Cheney successor) David Lesar that the firm plans to cease doing business in Iran. Lesar made no reference to the South Pars project in his conference call with investment analysts that day, when he blamed "the political nature of the attacks on Halliburton" for the media attention given the company's Iranian business.

But overlooked in most of the press coverage of the announcement was that Lesar's statement contained enough wiggle room to permit Halliburton to continue participating in the new South Pars project. After telling the analysts that "we have decided to exit Iran and will wind down our operations there"--a decision he attributed to the current "business environment" in Iran--Lesar quickly added that the company would continue "fulfilling our existing contracts and commitments." He also added another caveat: "If the U.S. sanctions are lifted in the future, or more of our customers go there, we will return to this market."

Lesar's announcement was little more than "PR damage control," said one congressional investigator who has closely followed Halliburton's dealings. "They're still acting like the sanctions law are a big joke," the investigator added. Lesar's comments also raise another question that are central to questions about the Iran sanctions: How could Lesar, as Halliburton CEO, decide to pull out of the Iran market at all and then reserve the right to "return to this market" if all of its business in Iran is, as Halliburton has repeatedly argued, been conducted by a foreign subsidiary (Halliburton Products and Services) that is acting "independently" of management in Houston?

Halliburton has consistently argued that it is not in violation of U.S. sanctions law because Halliburton Products & Services Limited (which is registered in the Cayman Islands but located in Dubai) operates autonomously without direction from senior management in Houston. In documents the company has submitted to investigators, for example, Halliburton has stated that Halliburton Product & Services' 133 employes include no Americans and that its five-person board of directors includes four British citizens and one Canadian citizen; "none of them is a U.S. permanent resident alien" or green card holder. "Day to day management and decision-making responsibility at HPSL resides with the Management Director (who is a British citizen) and other local management, all of whom reside in Dubai."

But other company documents and sources familiar with the Justice Department investigation suggest that, at the very least, U.S. government officials have had questions about the Dubai-based subsidiary's "independence" for some time. Company disclosures show that the Treasury Department's Office of Foreign Assets Control first questioned Halliburton about whether it was in compliance of U.S. sanctions against Iran as early as mid-2001. In January, 2004, Treasury raised the issue again after a "60 Minutes" report that Halliburton Products & Services was located in, and receiving mail, in the same Dubai office tower address where another of the company's principal--and indisputably U.S.-controlled subsidiaries, Kellog Brown & Root--also had offices. This led, according to a company report filed with the Securities and Exchange Commission, to a referral of the matter by Treasury to the Justice Department for a criminal investigation. Halliburton then received its first a grand jury subpoena for documents on September 16, 2004, according to the firm's latest filing with the SEC.

A Halliburton official, who asked not to be identified, noted that a Congressional anti-Iran sanctions law--and Treasury Department regulations interpreting it--expressly allowed foreign subsidiaries of U.S. companies that "ran their own affairs" to continue doing business in Iran. This, the official said, is in contrast to U.S.-imposed sanctions on Cuba and North Korea, which explicitly cover all foreign subsidiaries of U.S. companies. (Sen. Frank Lautenberg, a New Jersey Democrat, is pushing legislation to close what he considers the current loophole in the law by prohibiting any foreign subsidiaries of U.S. companies from doing business in Iran.)

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