For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20871 ------------------------------------------------------------------------------ £ Prepared for Members and Committees of Congress ¢ International pressure on Iran to curb its nuclear program is increasing the hesitation of major foreign firms to invest in Iran's energy sector, hindering Iran's efforts to expand oil production beyond 4.1 million barrels per day. Iran continues to attract preliminary energy investment interest from firms primarily in Asia. The formal U.S. effort to curb energy investment in Iran began in 1996 with the Iran Sanctions Act (ISA), although no firms have been sanctioned under it and the precise effects of that law on energy investment in Iran has been unclear. In the 110th Congress, two bills passed by the House (H.R. 1400 and H.R. 7112), and several others, add ISA provisions and are widely expected to be reintroduced in the 111th Congress. This report will be updated regularly. See CRS Report RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman. Background and Original Passage................................................................................................... 1 Key Provisions .......................................................................................................................... 1 Iran Freedom and Support Act Amendments ............................................................................ 2 Effectiveness and Ongoing Challenges ........................................................................................... 3 Energy Routes and Refinery Investment................................................................................... 4 Proposed Further Amendments in the 110th Congress..................................................................... 5 Table 1. Post-1999 Major Investments in Iran's Energy Sector ...................................................... 6 Author Contact Information ............................................................................................................ 7 The Iran Sanctions Act (ISA) is one among many U.S. sanctions in place against Iran. Originally called the Iran-Libya Sanctions Act (ILSA), it was enacted to complement other measures-- particularly Executive Order 12959 of May 6, 1995, that banned U.S. trade with and investment in Iran--intended to deny Iran the resources to further its nuclear program and to support terrorist organizations such as Hizbollah, Hamas, and Palestine Islamic Jihad. Iran's petroleum sector generates about 20% of Iran's GDP, but its onshore oil fields and oil industry infrastructure are aging and need substantial investment. Its large natural gas resources (940 trillion cubic feet, exceeded only by Russia) were undeveloped when ISA was first enacted. Iran has 136.3 billion barrels of proven oil reserves, the third largest after Saudi Arabia and Canada. In 1995 and 1996, U.S. allies did not join the United States in enacting trade sanctions against Iran, and the Clinton Administration and Congress believed that it might be necessary for the United States to try to deter their investment in Iran. The opportunity to do so came in November 1995, when Iran opened its energy sector to foreign investment. To accommodate its ideology to retain control of its national resources, Iran used a "buy-back" investment program in which foreign firms recoup their investments from the proceeds of oil and gas discoveries but do not receive equity. With input from the Administration, on September 8, 1995, Senator Alfonse D'Amato introduced the "Iran Foreign Oil Sanctions Act" to sanction foreign firms' exports to Iran of energy technology. A revised version instead sanctioning investment in Iran's energy sector passed the Senate on December 18, 1995 (voice vote). On December 20, 1995, the Senate passed a version applying the legislation to Libya as well, which was refusing to yield for trial the two intelligence agents suspected in the December 21, 1988, bombing of Pan Am 103. The House passed H.R. 3107, on June 19, 1996 (415-0), and then concurred on a slightly different Senate version adopted on July 16, 1996 (unanimous consent). It was signed on August 5, 1996 (P.L. 104-172). ¢ ISA requires the President to impose at least two out of a menu of seven sanctions on foreign companies (entities, persons) that make an "investment" of more than $20 million in one year in Iran's energy sector.1 The sanctions (Section 6) include (1) denial of Export-Import Bank loans, credits, or credit guarantees for U.S. exports to the sanctioned entity; (2) denial of licenses for the U.S. export of military or militarily-useful technology; (3) denial of U.S. bank loans exceeding $10 million in one year; (4) if the entity is a financial institution, a prohibition on its service as a primary dealer in U.S. government bonds; and/or a prohibition on its serving as a repository for U.S. government funds (each counts as one sanction); (5) prohibition on U.S. government procurement from the entity; and (6) restriction on imports from the entity, in accordance with the International Emergency Economic Powers Act (IEEPA, 50 U.S.C. 1701). In the original law, the 1 The definition of "investment" in ISA (Section 14 (9)) includes not only equity and royalty arrangements (including additions to existing investment, as added by P.L. 107-24) but any contract that includes "responsibility for the development of petroleum resources" of Iran, interpreted to include pipelines to or through Iran. The definition excludes sales of technology, goods, or services for such projects, and excludes financing of such purchases. For Libya, the threshold was $40 million, and sanctionable activity included export to Libya of technology banned by Pan Am 103-related Security Council Resolutions 748 (March 31, 1992) and 883 (November 11, 1993). President may waive the sanctions on Iran if the parent country of the violating firm sanctions Iran (a provision later made inapplicable), or if he certifies that doing so is important to the U.S. national interest (Section 9(c)). Under the original version, ISA application to Iran would terminate if Iran is determined by the Administration to have ceased its efforts to acquire WMD and is removed from the U.S. list of state sponsors of terrorism. Application to Libya terminated when the President determined on April 23, 2004, that Libya had fulfilled the requirements of all U.N. resolutions on Pan Am 103. Traditionally skeptical of imposing economic sanctions, the European Union opposed ISA as an extraterritorial application of U.S. law. In April 1997, the United States and the EU agreed to avoid a trade confrontation in the World Trade Organization (WTO) over it and a separate Cuba sanctions law, (P.L. 104-114). The agreement contributed to a May 18, 1998, decision by the Clinton Administration to waive ISA sanctions ("national interest"--Section 9(c) waiver) on the first project determined to be in violation--a $2 billion2 contract (September 1997) for Total SA of France and its partners, Gazprom of Russia and Petronas of Malaysia to develop phases 2 and 3 of the 25-phase South Pars gas field. The EU pledged to increase cooperation with the United States on non-proliferation and counter-terrorism, and the Administration indicated future investments by EU firms in Iran would not be sanctioned. ISA was to sunset on August 5, 2001, in a climate of lessening tensions with Iran and Libya. During 1999 and 2000, the Clinton Administration had eased the trade ban on Iran somewhat to try to engage the relatively moderate Iranian President Mohammad Khatemi. In 1999, Libya yielded for trial the Pan Am 103 suspects. However, some maintained that both countries would view its expiration as a concession, and renewal legislation was enacted (P.L. 107-24, August 3, 2001). This law required an Administration report on ISA's effectiveness within 24 to 30 months of enactment; that report was submitted to Congress in January 2004 and did not recommend that ISA be repealed. With U.S. concern about Iran's nuclear program increasing, ISA was to sunset on August 5, 2006. Members, concerned that foreign companies were ignoring ISA, introduced the "Iran Freedom and Support Act" (H.R. 282, S. 333) to extend ISA indefinitely, to increase the requirements to justify waiving sanctions, to set a 90-day time limit for the Administration to determine whether an investment is a violation (there is no time limit in the original law), and to authorize funding for pro-democracy activists in Iran. H.R. 282 (passed by the House on April 26, 2006 by a vote of 397-21) would also have cut U.S. foreign assistance to countries whose companies violate ISA and applied the U.S. trade ban on Iran to foreign subsidiaries of U.S. companies. After passage of a temporary extension until September 29, 2006 (P.L. 109-267), the Iran Freedom and Support Act version that ultimately passed was H.R. 6198, providing the flexibility demanded by the Administration. It amends ISA by: (1) calling for, but not requiring, a 180-day time limit for a violation determination; (2) making sanctionable sales to Iran of WMD-useful technology or "destabilizing numbers and types of" advanced conventional weapons; (3) adding a required determination that Iran "poses no significant threat" to terminate application to Iran; (4) recommending against U.S. nuclear agreements with countries that supply nuclear technology to Iran; (5) expanding provisions of the USA Patriot Act (P.L. 107-56) to curb money-laundering for 2 Dollar figures for investments in Iran represent public estimates of the amounts investing firms are expected to spend over the life of a project, which might in some cases be several decades. use to further WMD programs; (6) extending ISA until December 31, 2011; and (7) formally dropping Libya and changing the name to the Iran Sanctions Act. It was passed by the House and Senate by voice vote and unanimous consent, respectively, and was signed on September 30, 2006 (P.L. 109-293). The Bush Administration argues that, even without actually imposing ISA sanctions, the threat of sanctions, coupled with Iran's reputedly difficult negotiating behavior, and now compounded by Iran's growing isolation, is slowing Iran's energy development. As shown in the table below, some foreign investment has flowed into Iran since the 1998 Total consortium waiver, but many projects are stalled. Some investors, such as Repsol, Royal Dutch Shell, and Total, have announced pullouts or declined further investment. On July 12, 2008, Total and Petronas, the original South Pars investors, pulled out of a deal to develop a liquified natural gas (LNG) export capability at Phase 11 of South Pars, saying that investing in Iran at a time of growing international pressure over its nuclear program is "too risky." These trends are likely to constrain Iran's energy sector significantly; Iran's deputy Oil Minister said in November 2008 that Iran needs about $145 billion in new investment over the next ten years in order to build a thriving energy sector. As a result of sanctions and the overall climate of international isolation of Iran, its oil production has not grown--it remains at about 4.1 million barrels per day (mbd)--although it has not fallen either. Some analyses, including by the National Academy of Sciences, say that, partly because of growing domestic consumption, Iranian oil exports are declining to the point where Iran might have negligible exports of oil by 2015.3 Others maintain that Iran's gas sector can more than compensate for declining oil exports, although it needs gas to reinject into its oil fields and remains a relatively minor gas exporter. It exports about 3.6 trillion cubic feet of gas, primarily to Turkey. Some Members of Congress believe that ISA would have been even more effective if successive Administrations had actually imposed sanctions. A GAO study of December 2007, (GAO-08-58), contains a chart of post-2003 investments in Iran's energy sector, totaling over $20 billion in investment, although the chart includes petrochemical and refinery projects, as well as projects that do not exceed the $20 million in one year threshold for ISA sanctionability. Some of the projects listed in that report and in the table below may be under review by the State Department (Bureau of Economic Affairs), but no publication of such deals has been placed in the Federal Register (requirement of Section 5e of ISA), and no determinations of violation have been announced. Undersecretary of State for Political Affairs William Burns testified on July 9, 2008 (House Foreign Affairs Committee) that the Statoil project (listed in the table) is under review for ISA sanctions; he did not mention any of the other projects. State Department reports to Congress on ISA, required every six months, state that U.S. diplomats raise U.S. policy concerns about Iran with investing companies and their parent countries. 3 Stern, Roger. "The Iranian Petroleum Crisis and United States National Security," Proceedings of the National Academy of Sciences of the United States of America. December 26, 2006. ¢ ¢ ISA's definition of "investment" has been interpreted by successive Administrations to include construction of energy routes to or through Iran -- because such routes help Iran develop its petroleum resources. The Clinton Administration used the threat of ISA sanctions to deter oil routes involving Iran and thereby successfully promoted an alternate route from Azerbaijan (Baku) to Turkey (Ceyhan), which became operational in 2005. However, no sanctions were imposed on a 1997 project viewed as necessary to U.S. ally Turkey--an Iran-Turkey natural gas pipeline in which each constructed the pipeline on its side of their border. The State Department did not impose ISA sanctions on the grounds that Turkey would be importing gas originating in Turkmenistan, not Iran. However, direct Iranian gas exports to Turkey began in 2001, and, as shown in the table, in July 2007, a preliminary agreement was reached to build a second Iran- Turkey pipeline, through which Iranian gas would also flow to Europe. However, that agreement was not finalized during Iranian President Mahmoud Ahmadinejad's visit to Turkey in August 2008 because of Turkish commercial concerns but the deal remains under active discussion. Construction of oil refineries or petrochemical plants in Iran--included in the referenced GAO report--might also constitute sanctionable projects. Iran has plans to build or expand, possibly with foreign investment, at least eight refineries in an effort to ease gasoline imports that supply about 25% - 30% of Iran's needs. This dependency on gasoline imports is down from the 40% that preceded the institution of gasoline rationing in Iran in June 2007. It is not clear whether or not Iranian investments in energy projects in other countries, such as Iranian investment to help build five oil refineries in Asia (China, Indonesia, Malaysia, and Singapore) and in Syria, reported in June 2007, would constitute sanctionable investment under ISA. Another pending deal is the construction of a gas pipeline from Iran to India, through Pakistan (IPI pipeline). The three governments appeared committed to the $7 billion project, which would take about three years to complete, but India did not sign a deal "finalization" that was signed by Iran and Pakistan on November 11, 2007. India resumed discussions on the project following Iranian President Mahmoud Ahmadinejad's visit to India in April 2008, which also resulted in Indian firms' winning preliminary Iranian approval to take equity stakes in the Azadegan oil field project and South Pars gas field Phase 12. India continues to raise concerns on security of the pipeline, the location at which the gas would be officially transferred to India, pricing of the gas, tariffs, and the source in Iran of the gas to be sold. U.S. officials, including Secretary of State Rice, have on several occasions "expressed U.S. concern" about the pipeline deal or have called it "unacceptable," but no U.S. official has stated outright that it would be sanctioned. Coinciding with the Ahmadinejad visit, Other major energy deals with Iran are considered a blow to European solidarity. In March 2008, Switzerland's EGL utility agreed to buy 194 trillion cubic feet per year of Iranian gas for 25 years, through a Trans-Adriatic Pipeline (TAP) to be built by 2010, a deal valued at least $15 billion. The United States criticized the deal as sending the "wrong message" to Iran. However, as testified by Assistant Secretary of State Burns on July 9, 2008, the deal appears to involve only purchase of Iranian gas, not exploration, and likely does not violate ISA. In August 2008, Germany's Steiner-Prematechnik-Gastec Co. agreed to apply its method of turning gas into liquid fuel at three Iranian plants. In early October 2008, Iran agreed to export 1 billion cu.ft./day of gas to Oman, via a pipeline to be built that would end at Oman's LNG export terminal facilities. ISA is one of many mechanisms the United States and its European partners are using to try to pressure Iran. U.S. officials, whose leverage has been enhanced by five U.N. Security Council Resolutions passed since 2006 that sanction Iran, have persuaded many European and other banks not to finance exports to Iran or to process dollar transactions with Iranian banks; and they have persuaded European governments to reduce export credits guarantees to Iran. The actions have, according to the International Monetary Fund, partly dried up financing for energy industry and other projects in Iran, and have caused potential investors in the energy sector to withdraw from or hesitate on finalizing pending projects. Some observers maintain that, over and above the threat of ISA sanctions and the international pressure on Iran, it is Iran's negotiating behavior that has slowed international investment in Iran's energy sector. Some international executives that have negotiated with Iran say Iran insists on deals that leave little profit, and that Iran frequently seeks to renegotiate provisions of a contract after it is ratified. In the 110th Congress, several bills contained numerous provisions that would further amend ISA. Observers say aspects of these bills are likely to be reintroduced in the 111th Congress. H.R. 1400, which passed the House on September 25, 2007 (397-16), would remove the Administration's ability to waive ISA sanctions under Section 9(c), national interest grounds, but it would not impose on the Administration a time limit to determine whether a project is sanctionable. That bill and several others--including S. 970, S. 3227, S. 3445, H.R. 957 (passed the House on July 31, 2007), and H.R. 7112 (which passed the House on September 26, 2008)--(1) expand the definition of sanctionable entities to official credit guarantee agencies, such as France's COFACE and Germany's Hermes, and to financial institutions and insurers generally; and (2) sanction investment to develop a liquified natural gas (LNG) sector in Iran. Iran has no LNG export terminals, in part because the technology for such terminals is patented by U.S. firms and unavailable for sale to Iran. Among other related bills, H.R. 2880 would apply ISA sanctions to sales to Iran of refined petroleum resources, although some believe that a sanction such as this would only be effective if it applied to all countries under a U.N. Security Council resolution rather than a unilateral U.S. sanction. H.R. 2347, (passed the House on July 31, 2007), would protect from lawsuits fund managers that divest from firms that make ISA-sanctionable investments. ? noillib 6.1$ )ylatI( OCSARI )sag( sdleif rasnagerhaB dna grahK stnemeergA yranimilerP/slaeD gnidneP dfc noillib 4.01 :saG dpb noillim 580.1 :liO slatoT tnemtsevni noillib 9.72$ )aisyalaM( 8002 rebmeceD demriffaer 7002 dfc noillib 4.3 noillib 61$ serutneV SKS tub deifidom ;tnalp GNL dna sdleif sag .ceD erohsffo dna erohsno swodreF dna nahsloG ? noillim 94$ )yawroN( )lio( kcolb dabamarrohK 6002 ordyH ksroN .tpeS ? noillim 02$ )anihC( ceponiS )lio( kcolb rasmaG 6002 enuJ )1102 noillib 2$ )anihC( ceponiS 7002 ,9 rebmeceD dezilaniF .)lio( naravadaY 4002 yb( dpb 000,581 .tcO ? noillim 43$ )lizarB( sarborteP kcolB nasuT 4002 .guA )ekats dpb 000,062 xepnI( ekats )lio( nagedazA 4002 noillim %01 )napaJ( xepnI .naJ 002$ noillib )80 etal gnicudorp nigeb ot .tse( 2002 dfc noillib 3 56.2$ )yawroN( liotatS .tcO )sag( sraP htuoS ,8 ,7 ,6 esahP dfc noillib 2 noillib 6.1$ )aeroK htuoS( GL )sag( sraP htuoS ,01 + 9 esahP 2002 .peS dpb 000,52 noillim 08$ )adanaC( )lio( namyeloS-e-dijsaM 2002 ygrenE reehS yaM dpb 000,061 noillib 1$ INE )lio( nivohkraD 1002 enuJ ? noillim )nedewS( noitarolpxe lio aeS naipsaC 1002 522$ stnatlusnoC AVG .raM )dfc( yad/.tf.uc noillib 9.1$ INE )sag( sraP htuoS ,5 dna 4 esahP 0002 noillib 2 yluJ )0102 noillim )aissuR( 0002 yb( 000,001 001$ liokuL/)yawroN( )lio( naranA .rpA ordyH ksroN dpb 000,091 noillim llehS hctuD layoR )lio( zurwoN dna hsuoroS 9991 008$ .voN dpb 000,04 noillim INE/)adanaC( yellaV )lio( lalaB 9991 003$ woB /flE aniflatoT .rpA dpb 000,502 noillib 1$ )ylatI( INE/)ecnarF( )lio( duoroD 9991 flE aniflatoT .beF laoG/tuptuO eulaV )sei(ynapmoC dleiF etaD ).dedulcn i ton ,stnalp l acimehcortep ,seirenifer ;ylno sd leif sa g dna lio ni stnemtsevni + noillim 02$( rotceS ygrenE s'narI ni stnemtsevnI rojaM 9991 -tsoP .1 elbaT kkatzman@crs.loc.gov, 7-7612 Specialist in Middle Eastern Affairs Kenneth Katzman dfc noillib 1 noillib 7$ namO )8002 lirpA( dleif sag hsiK s'narI )OAPT( ynapmoC .etad ot dezilanif ton ;7002 yluJ delaitinI dfc noillib 2 noillib .21$ muelorteP hsikruT .narI ni stnalp rewop eerht gnidliub dna eporuE ot sag nainarI tropsnart .lcni ,)sag( sraP htuoS - 42 ,32 ,22 esahP ? noillib 03$ )airtsuA( VMO )7002 yaM( sraey 52 - sesahcrup sag dna lanimret GNL .lcnI .)sag( sraP htuoS 21 esahP ? noillib 3.4$ )niapS( lospeR 8002 yaM ni deecorp ot ton dediced ,llehS hctuD layoR smriF .)7002 .beF( ;)sag( sraP htuoS - 41 ,31 esahP dfc noillib 6.3 noillib 61$ .oC liO erohsffO )6002 .ceD( sesahcrup lanoitaN anihC sag sedulcnI .)sag erohsffo( dleiF saG sraP htroN ? ? )ailartsuA( .dtL GNL )6002 .voN( tnalp GNL sedulcnI .)sag( sdleif ukhsaG nrehtuoS dna hklaS laoG/tuptuO eulaV )sei(ynapmoC dleiF etaD ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RS20871