Economic Sanctions and Their Effect on the Energy Industry LORI A. FEATHERS†† SUMMARY I.

INTRODUCTION .......................................................................................................... 175

II.

IRAN .......................................................................................................................... 176

III.

LIBYA ........................................................................................................................ 177

IV.

IRAN AND LIBYA SANCTIONS ACT (ILSA)................................................................. 178

V.

IRAQ .......................................................................................................................... 179

VI.

EVASION AND FACILITATION ..................................................................................... 180

VII. CONCLUSION ............................................................................................................. 181

I.

INTRODUCTION

Economic sanctions have greatly restricted the ability of oil companies, particularly United States oil companies, to invest abroad and compete in the international arena. According to one estimate, about 40% of the world’’s population is subject to United States sanctions.1 Sanctions against Iran, Libya, and Iraq, in particular, stand as major obstacles as oil companies look to the Middle East for low-cost development in a time of unstable oil prices. The sanctions are intended to deprive these countries of their primary source of hard currency——oil export revenues. During the time that sanctions against Iran, Libya, and Iraq have been in place, there has been some evolution in their content and implementation. Recently, we have witnessed the suspension of UN sanctions against Libya, a UN resolution allowing Iraq to import more spare parts to repair its ailing export infrastructure, and the Clinton Administration’’s trade liberalization with Iran permitting the import of luxury goods, such as carpets and caviar, and the export of food and medicine. Although further liberalization in U.S. sanctions could occur this year, prospects for any major shift in U.S. policies are marginal due to upcoming presidential and congressional elections. The U.S. Treasury Department’’s Office of Foreign Asset Control (OFAC) is the agency charged with enforcing U.S. sanctions compliance through the issuance and administration of regulations. Ambiguities in the text of the regulations allow OFAC some discretion in implementation and enforcement of sanctions, and such discretion is colored †† Associate with Haynes & Boone, L.L.P. Dallas; M.A., American University (1993); J.D., American University (1993). 1. See USA*Engage——Statement of Position, at http://www.usaengage.org/studies/statement.html (last visited Nov. 20, 2000).

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by the directives of the Clinton Administration’’s foreign policy team. Thus, sanctions are very much the product of the domestic political climate and reaction to international events. As long as prohibitions to trade and investment in the petroleum sector of these countries remain in place, many U.S. oil companies will want to position themselves, today, to take advantage of any future relaxation in sanctions. This paper will address some of the steps that U.S. oil companies might take in order to gain a competitive position and prepare for opportunities when, and if, U.S. law permits investment in these important oil provinces. First, however, it is important to emphasize that the permissibility of any of the activities that will be discussed is very fact-dependent. The advice of legal counsel must be sought in order to determine if such activities would be permissible under current legislation.

II.

IRAN

Late last year, the Clinton Administration lifted the ban on exporting food and medicine to Iran;2 and just last March, in a sign of encouragement for the success of reformers in Iran’’s recent parliamentary election, the Administration announced that it was lifting the ban on imports of Iranian carpets, caviar, and other foods.3 While there has been no movement in the Administration’’s position on activities in Iran’’s petroleum industry, such steps are nonetheless encouraging. Unlike the sanctions imposed against Libya and Iraq, economic sanctions against Iran are unilateral——a product of U.S. law rather than of multilateral institutions such as the United Nations. Governing laws with respect to U.S. sanctions are the 1995 and 1997 Presidential Executive Orders4 and the Iranian Transactions Regulations,5 administered by OFAC, as well as the Iran Libya Sanctions Act. Under the Iran sanctions program, U.S. companies are prohibited from all trade, investment, and transactions affecting Iran’’s ability to develop its petroleum resources.6 Unlike the Libyan and Iraqi programs, U.S. sanctions against Iran do not prohibit travel to Iran by U.S. citizens. Thus, U.S. company representatives may meet Iranian oil officials in Iran and also, with the permission of the Iranian government, make site visits to some of the oil fields and facilities in which Iran is currently seeking investment. In addition, amendments to the OFAC regulations issued in April 1999 make it possible for U.S. travelers to pay for personal travel expenses, such as food and lodging, with credit cards issued by U.S. banks. Previous regulations required the use of cards issued by nonU.S. banks.7 In response to Iran’’s 1998 buy-back round of oil and gas project tenders, U.S. companies were permitted to purchase data packages from Iran under the informational materials exception. The Regulations define informational materials to include ““without limitation: [p]ublications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMS, artworks and news wire feeds.””8 Although 2. See Philip Shenon, U.S. Eases Some Sanctions, N.Y. TIMES, May 2, 1999, § 4, at 2; Press Release, Deputy Secretary of Treasury Stuart E. Eizenstat, Statement on Sanctions, at http://www.state.gov/www/issues/economic/990726_eizenstat_sanctions.html (last visited July 26, 1999). 3. See Press Release, Secretary of State Madeleine K. Albright, Remarks before the American-Iranian Council, at http:www.secretary.state.gov/www/statements/ (last visited Mar. 17, 2000). 4. Exec. Order No. 12,957, 3 C.F.R. 332 (1995), reprinted in 50 U.S.C. § 1701 (1995); Exec. Order No. 12,959, 3 C.F.R. 356 (1995), reprinted in 50 U.S.C. § 1701 (1995); Exec. Order No. 13,059, 3 C.F.R. 217 (1997), reprinted in 50 U.S.C. § 1701 (1997). 5. 31 C.F.R. § 560 (1999). 6. See Iranian Transactions Regulations, 31 C.F.R. § 560 (1997). 7. Compare 31 C.F.R. § 560 (1999) with 31 C.F.R. § 560 (1997). 8. 31 C.F.R. § 560.315(a)(1).

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not explicitly included in the enumeration of informational materials, written advice from the OFAC indicates that unprocessed seismic data from Iran also constitutes informational materials. It should be noted, however, that the Regulations state that the information material exception is not applicable to ““information and informational materials not fully created and in existence at the date of the transaction, or the substantive or artistic alteration or enhancement of information or informational materials.””9 Thus, the transfer of processed seismic data is prohibited. United States companies can share marketing and promotional materials with Iranian officials, as well as non-proprietary, public information that highlights special expertise in managing or implementing certain technologies and processes. Sometimes this is best done through descriptions of past successes in oil and gas fields analogous to those found in Iran. In addition, U.S. companies can acquire pre-packaged information from Iran on legal and commercial requirements for investment, provided the transfer of such information does not constitute the provision of a service by Iran. Although the scope of the sanctions permits U.S. companies to acquire data from Iran and to share non-technical information with their Iranian counterparts, the transfer of any technology or technical data to Iran is prohibited.10 In addition, there are significant restrictions on the use of non-technical data and informational materials. The exchange and sharing of data, interests, competencies, and expectations can quickly lead a company down the slippery slope to providing services and technology. Thus, even the most preliminary negotiations involve considerable risk of sanctions violations. Commitments on the part of a U.S. company, even if performance is subject to the future lifting of sanctions, are forbidden by prohibitions against investments and the entry into, or approval of, contracts for the development of petroleum resources.11

III.

LIBYA

United Nations and U.S. policy toward Libya is evolving as a result of the surrender of the two Libyan nationals suspected of responsibility in the bombing of Pan Am Flight 103 over Lockerbie, Scotland in 1988. Most significantly, the UN has suspended——but not lifted——its sanctions against Libya. Although the U.S. has refused to suspend its sanctions against Libya, the Clinton Administration has recently made some positive statements regarding Libya, including recognition of Libya’’s efforts to expel the alleged terrorist Abul Nidal Organization.12 In March, U.S. State Department officials traveled to Libya to investigate whether the ban should be lifted on travel to Libya by U.S. passport holders.13 The Libyan government has begun to renew ties with the West and, in April, invited the Secretary General of Israel’’s defense ministry to Tripoli.14 The U.S. has had sanctions against Libya in place in some form since 1978. With the Presidential Executive Order15 and the Regulations of 1986, prohibitions were placed on all

9. 31 C.F.R. § 560.210(c)(2). 10. See 31 C.F.R. § 560.204 (1998). 11. See 31 C.F.R. §§ 560.207, 560.209(a)(1) (1998). 12. See Colum Lynch & John Lancaster, U.S. Considers Easing Restrictions on Libya, WASH. POST, Feb. 27, 2000, at A29. 13. See Review of Libya Restraints, N.Y. TIMES, Mar. 22, 2000, at A5. 14. See Howard Schneider, Libya Seeks to Restore Broken Ties at Summit, WASH. POST, Apr. 4, 2000, at A18. 15. See Exec. Order No. 12,543, 3 C.F.R. 181 (1986).

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trade and contracts with Libya, travel to Libya, ““dealing”” in property, and transactions in property in which the government of Libya has an interest.16 Because of the current prohibition on travel to Libya for U.S. passport holders, meetings with Libyan oil officials must be held outside of Libya. As with the Iranian sanctions, U.S. companies may share marketing and promotional materials with their Libyan counterparts. General discussions regarding a company’’s interests and opportunities for future investment are permitted; however, negotiations on commercial terms would most likely be viewed as a prohibited dealing in property. Likewise, entering into any commitments, whether or not in writing, could be viewed as a prohibited transaction in property in which the Libyan government has an interest. In addition, it is important that companies put in place internal controls to ensure that any company-generated evaluations and studies are not shared or traded with Libyan persons or companies because, to the extent that the studies contain substantive alterations or enhancement of information, they probably would not be exempt under the informational materials exception.

IV.

IRAN AND LIBYA SANCTIONS ACT (ILSA)

The Iran and Libya Sanctions Act (ILSA) was passed by Congress in 1996. It applies to any company, U.S. or foreign, and limits investment in the petroleum industries of Iran and Libya.17 There are expenditure ceilings in the law——yearly investments in Iran’’s petroleum industry cannot exceed $20 million and in Libya’’s, $40 million.18 Because ILSA applies to U.S. persons, there is a great deal of confusion both in the U.S. and abroad regarding ILSA’’s effect on U.S. industry. Because the U.S. Iranian Transaction Regulations and the U.S. Libyan Sanctions Regulations contain more stringent prohibitions, ILSA spending limits are not relevant to U.S. persons. A U.S. company, by law, cannot invest one dollar in the Iranian or Libyan oil industry——not to mention $20 million or $40 million annually. It is well known and not surprising that the Clinton Administration has refrained from enforcing ILSA sanctions against foreign companies investing in Iran, even for investments well in excess of the spending ceilings. On May 18, 1998, Secretary of State Madeleine Albright announced that the Clinton Administration would waive the imposition of ILSA sanctions against Total, Gazprom, and Petronas for their investments in the South Pars field, pursuant to ILSA’’s national interest waiver.19 Although the Secretary refrained from granting country-wide waivers as permitted under ILSA,20 she stated that the Clinton Administration would expect to grant similar waivers to other EU firms investing in Iran’’s oil sector. This lack of muscle in enforcing ILSA has emboldened other foreign companies to test the limits of the Clinton Administration’’s restraint. For example, last fall, Royal Dutch Shell announced that it had signed a deal with Iran to invest $800 million, and France’’s Elf Aquitaine and Canada’’s Bow Valley have agreed to a $300 million investment in an Iranian off-shore field. ILSA expires on August 5, 2001.21 The prospects for its renewal depend on a number of factors: the composition of Congress after this year’’s elections; the progress of political reforms in Iran; and the pace of Middle East peace talks. Whether ILSA will be renewed 16. 17. 18. 19. 20. 21.

See Libyan Sanctions Regulations, 31 C.F.R. § 550 (1986). See Iran and Libya Sanctions Act of 1996, 50 U.S.C. § 1701 (1996). See id. §§ 4(d)(1), 5(a), 5(b)(2). See id. § 9(c). See id. § 4(c). See id. § 13(b).

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for an additional five years, re-enacted in a more or less stringent form, or erased totally from U.S. law, remains to be seen.

V. IRAQ In August 1990, the UN adopted Resolution 661, imposing sanctions on Iraq.22 Calls for the suspension of sanctions have been amplified by reports of humanitarian suffering, the ten-year duration of the sanctions program, and its inability to bring about a change in leadership in Iraq——a U.S. objective not shared by most members of the UN Security Council. In response, on March 31, 2000, the UN adopted Resolution 1293 increasing to $600 million the amount of approved oil spare parts and equipment that can be exported to Iraq to repair its oil infrastructure.23 The hallmark of the UN sanctions program is the oil-for-food program. It allows Iraq to export oil in exchange for humanitarian supplies and oil field spare parts and equipment. Companies that wish to purchase oil from Iraq need to negotiate an oil purchase agreement with Iraqi government’’s State Oil Marketing Organization. The proposed purchase then must be approved by the UN and, in the case of U.S. companies, OFAC. Once approved, the purchased oil is shipped from a designated port, and the proceeds of such sales are deposited in a specially designated UN account for the purchase of approved humanitarian goods for shipment to Iraq. The U.S. Iraqi Sanctions Regulations impose more rigorous restrictions than those required by the UN resolutions applicable to all UN member countries. United States sanctions prohibit all trade and contracts with Iraq, travel to Iraq by U.S. passport holders, ““dealing”” in property, and transactions in property in which the government of Iraq has an interest.24 In contrast, some of the laws of European countries do not expressly prohibit entering into contracts with the Iraqi government, even outside the context of the oil-forfood program. The sanctions’’ travel restrictions prohibit travel by U.S. passport holders; however, because U.S. companies are permitted to participate in the UN oil-for-food program, a U.S. company’’s non-U.S. passport personnel may travel to Baghdad to negotiate oil sale contracts with Iraqi officials. Furthermore, oil company representatives can meet with Iraqi oil officials outside of Iraq to make introductions, share company marketing and promotional materials, and discuss generally the types of opportunities that the company might be interested in if sanctions are lifted. The Iraqi Sanctions Regulations contain no informational materials exception; thus, the transfer of unprocessed seismic data between Iraq and the U.S. presumably is prohibited. In this respect, the prohibitions on Iraq are broader than their Iranian and Libyan counterparts. Furthermore, the Iraq program’’s broad ““dealing”” prohibition bars any transaction or handling of property from Iraq.25 Arguably the terms ““property”” and ““interests”” are defined so broadly in both the Iraq and Libya Regulations that transactions in property in which the government has an interest could encompass all business that even indirectly affects the sanctioned country.26 22. 23. 24. 25. 26. (1999).

See S.C. Res. 661, U.N. SCOR, 45th Sess., 2933d mtg. at 19, U.N. Doc. S/INF/46 (1990). See S.C. Res. 1293, U.N. SCOR, 55th Sess., 4123d mtg., U.N. Doc. S/RES/1293 (2000). See Iraqi Sanctions Regulations, 31 C.F.R. § 575 (1999). See id. § 575.206 (1999). See id. §§ 575.308, 575.315 (1999); Libyan Sanctions Regulations, 31 C.F.R. §§ 550.314, 550.315

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VI. EVASION AND FACILITATION Application of the prohibitions against facilitation and evasion to potential business practices can be quite complex. Under each of the Iranian, Libyan, and Iraqi programs, evasion is prohibited. The Iranian Transactions Regulations state: ““Any transaction by any United States person or within the United States that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions contained in this part is hereby prohibited.””27 Evasion risks are triggered when U.S. companies try to perform activities through their foreign subsidiaries that could not be performed by the parent. In this respect, it is worth noting that the U.S. sanctions and the OFAC regulations apply only to U.S. persons——that is, any U.S. citizen, permanent resident alien, or entity organized under the laws of the U.S. (including foreign branches).28 However, in order for a parent company to avoid being tainted by the activities of its foreign subsidiary, the subsidiary must have independent management and financial resources. In addition, investment opportunities, data, or employees of the parent cannot be used by the subsidiary. There may be additional factors that need to be considered as well in order to establish a foreign subsidiary’’s independence. In fact, the mere changing of corporate structures, board representation, or financing arrangements between a parent and its subsidiary with the intent to enable the subsidiary to invest in a sanctioned country may itself constitute evasion. Under the Iranian program, and less explicitly, the Iraqi program, facilitation is prohibited. Facilitation is not addressed in the Libyan program. Facilitation prohibitions cover the approval or facilitation by a United States person of the entry into or performance by an entity owned or controlled by a United States person of a transaction or contract prohibited by [these regulations], or relating to the financing of activities prohibited as to United States persons by . . . those sections, or of a guaranty of another person’’s performance of such transaction or contract.29 Facilitation prohibitions include assisting another related or unrelated entity to conduct activities in a sanctioned country. The prohibitions are quite broad and can raise concerns in a partnership or joint venture context. Substantial risks are raised when such joint arrangements are with a foreign entity, regardless of whether or not the foreign entity chooses to structure its activities to comply with ILSA. In this respect, in any joint venture or partnership agreement with a foreign company, the content of which contemplates activities with a sanctioned country, the U.S. partner must retain appropriate controls to ensure that no contributions made by it——whether in the form of assets, know-how, or technology——can be used on behalf of the partnership for activities in the sanctioned country. The issues of facilitation and evasion also become pertinent in a merger or acquisition context, particularly between U.S. and non-U.S. companies. Here, the question is whether a U.S. company must divest itself of sanctioned country assets and projects of the acquired company. What if the acquisition or merger is motivated, at least in part, by a desire to acquire such assets? And, what result if the sanctioned country assets of the newly acquired company constitute a substantial portion of the acquired company’’s global portfolio? The answers to these questions cannot be found in the law. Nonetheless, it seems probable that the acquisition by a U.S. company of an entity, the majority of whose assets are in sanctioned countries, could raise substantial evasion questions. Similarly, if the sanctioned 27. 28. 29.

Iranian Transactions Regulations, 31 C.F.R. § 560.203 (1999). See id. § 560.314 (1999). Id. § 560.208 (1998).

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country assets are spun off to an existing or new off-shore subsidiary, facilitation risks for the U.S. parent might also come into play.

VII.

CONCLUSION

Sanctions compliance requires diligence on the part of corporate management and a clear assessment of the legal risks of engaging in sanctioned country activities. Close consultation with legal counsel is necessary. Additionally, periodic meetings with the OFAC can help management maintain a realistic view of the risks of contemplated activities. To that end, it is also vitally important to keep abreast of the ““sanctions climate”” in Washington, D.C. The Regulations’’ ambiguous text and the large degree of discretion afforded the Administrative officials in administering sanctions mean that their interpretation and applicability is not a precise science. Domestic and international political events do affect the way that officials interpret and thereby enforce sanctions. Corporate management should also keep pressure on the U.S. government by protesting sanctions through published editorials, speeches, and participation in interest groups opposed to sanctions. Not only does such activity maintain the pressure for change here at home, but it also receives favorable attention by officials in Iran, Libya, and Iraq. This year, the prospects are poor for the total elimination of U.S. sanctions against Libya, Iran, or Iraq. First, because it is an election year, the Administration is unlikely to risk injuring the vice president’’s candidacy with proactive foreign policy measures. And given the U.S. position on Iraq, any sanctions relief could only follow the elimination or substantial roll-back of UN sanctions., which, of course, is unlikely given that it would require the U.S. to refrain from using its veto power on the Security Council. With respect to Iran and Libya, the best prospects for a U.S. sanctions overhaul would seem to be upon the expiration of ILSA in August 2001. Recent high oil prices, mounting pressure in the U.S. to decrease dependency on overseas oil, and the industry’’s attraction to Middle East supplies all provide additional justification to sanctions supporters to keep the current laws in place. Implementing a sanctions compliance strategy that includes actions that can be taken today, as well as investment targets for when, and if, sanctions are lifted, can create relationships and good-will with sanctioned country officials and may place a company in a competitive position in a post-sanctions environment.

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