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Iran Sanctions

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Order Code RS20871 Updated November 15, 2007January 23, 2008 The Iran Sanctions Act (ISA) Kenneth Katzman Specialist in Middle Eastern Affairs Foreign Affairs, Defense, and Trade Division Summary No firms have been sanctioned under the Iran Sanctions Act (ISA). Set to expire in August 2006, legislation in the 109th Congress (the “Iran Freedom Support Act, P.L. 109-293) extended it, although the GAO reported in December 2007 said that the effects on Iran’s economy of ISA and of other US sanctions are “difficult to determine.” Legislation in the 109th Congress (P.L. 109-293) extended ISA until December 31, 2011, terminated application to Libya, and added provisions, although with Administration flexibility in implementation. Proposed ISA-related legislation and added provisions. Legislation in the 110th Congress, such as H.R. 1400 (passed by the House on September 25, 2007), would remove some flexibilityadd still more provisions. See CRS Report RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman. Background and Original Passage The Iran Sanctions Act (ISA), originally called the Iran-Libya Sanctions Act (ILSA), is one among many U.S. sanctions in place against Iran. It was enacted in a context of tightening U.S. sanctions on Iran during the Clinton Administration. In, in response to Iran’s stepped up nuclear program and its support to terrorist organizations such as Hizbollah, Hamas, and Palestine Islamic Jihad, President Clinton issued Jihad. The year before enactment, an Executive Order, 12959 (of May 6, 1995), banning , banned U.S. trade with and investment in Iran. The rationale was that these sanctions would curb the strategic threat from Iran by hindering its attempts to modernize its petroleum sector, which generates about 20% of Iran’s GDP. Iran’s onshore oil fields, as well as its oil industry industry infrastructure, are aging and need substantial investment, and its large natural gas gas resources (940 trillion cubic feet, exceeded only by Russia) were undeveloped when ISA ISA was first considered. U.S. allies refused to join the U.S. sanction, and the Clinton Administration and Iran has 136.3 billion barrels of proven oil reserves, the third largest after Saudi Arabia and Canada (according to Oil and Gas Journal, January 2007). In 1995 and 1996, U.S. allies refused to impose sanctions on 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 first opened its energy sector to foreign investment. To accommodate Iran’s philosophy to retainits philosophy of retaining control of its national resources, Iran developed 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 stakes. CRS-2 With input from the Clinton Administration, some in Congress developed legislation to to sanction such investment. On September 8, 1995, Senator Alfonse D’Amato introduced introduced the “Iran Foreign Oil Sanctions Act” to sanction foreign firms’ exports to Iran of energy technology. The bill passed the Senate on December 18, 1995 (voice vote) but, acknowledging the difficulty of monitoring all trade with Iran, this version instead sanctioned foreign investment in Iran’s energy sector. 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 Libyan intelligence agents suspected in the December 21, 1988, bombing of Pan Am 103. The House passed its version of the bill, 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). Key Provisions. 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 sanctions menu (Section 6) includes (1) denial of Export-Import Bank loans, credits, or credit 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 to the entity; (3) denial of U.S. bank bank loans exceeding $10 million in one year to the entity; (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 President may waive the sanctions on Iran if the parent country of the violating firm agrees to impose economic sanctions on Iran (Section 4(c)), or if he certifies that doing so is important to the U.S. national interest (Section 9(c)). It terminates application to Iran if Iran ceases its efforts to acquire WMD and is removed from the U.S. list of state sponsors of terrorism. Its applicationApplication 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, European Union states opposed ISA as an extraterritorial application of U.S. law and threatened counter-action in the World Trade Organization (WTO). 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. 104114104-114). The agreement contributed to a May 18, 1998, decision by the Clinton Administration to waive ILSA ISA sanctions (“national interest” grounds — Section 9(c)) on the first project determined to be in violation: a $2 billion2 contract, signed in September 1997, (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, 1 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 also any contract that includes “responsibility for the development of petroleum resources” of 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 exportation to Libya of a broad range of technology of which the export to Libya wasexport to Libya of technology banned by Pan Am 103related103-related Security Council Resolutions 748 (March 31, 1992) and 883 (November 11, 1993). 2 Dollar figures for energy investment contracts with Iran represent public estimates of the amounts investing firms are expected to spend during the life of the project, which might in some cases be several decades. CRS-3 and the Administration indicated no penalties would be imposed on future similar investments by EU firms in Iran25-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 penalized. ISA was to sunset on August 5, 2001, in the context of somewhat improved U.S. relations with both 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, proponents of renewal maintained that both countries would view its expiration as a concession, and renewal legislation was enacted in the 107th Congress (P.L. 107-24, August 3, 2001); it changed the definition of investment to treat any additions to pre-existing investment as new investment, and. This law required an Administration report on ISA’s effectiveness within 24 to 30 months of enactment. That; that report was submitted to Congress in January 2004 and did not recommend that ISA be repealed. Modifications in the 109th Congress. During the 109th Congress, withWith U.S. concern about Iran’s nuclear program increasing, ISA was again to sunset on August 5, 2006. Some Members, concerned that foreign companies had begun to openly ignore ignore ISA, introduced the “Iran Freedom and Support Act” (H.R. 282, S. 333) to extend ISA indefinitely, close some perceived loopholes, and to authorize funding for pro-democracy activists in Iran. These bills increased indefinitely, to increase the requirements to justify waiving sanctions on violators and, most notably, would have, to set a 90-day time limit for the Administration to determine whether an investment constitutesis a violation of ISA (there is no time limit in the original law). H.R. 282 also, 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 have cut U.S. foreign assistance to countries whose companies have violated whose companies violate ISA and applied the U.S. trade ban on Iran to foreign subsidiaries of U.S. companies. H.R. 282 was passed by the House on April 26, 397-21. To prevent ISA To prevent expiration while these bills were being considered, there was a temporary extension until September 29, 2006 (P.L. 109-267, signed August 4, 2006). Toward the end of the 109th Congress, H.R. 6198 (a modification of H.R. 282), was introduced to address Administration concerns that H.R. 282 and S. 333 did not allow sufficient Administration flexibility. As did H.R. 282, it made sanctionable sales of WMD-useful technology or ). The version that ultimately was passed was H.R. 6198, which addressed Administration demands for flexibility; H.R. 6198 recommended, but did not require, a 180-day time limit for a determination of violation. It made sanctionable sales of WMD-useful technology or “destabilizing numbers and types of” advanced conventional weapons, and added a required determination that Iran “poses no significant threat” in order to terminate application to Iran. Unlike H.R. 282, it recommended, but did not require, a 180-day time limit for a determination of violation and , changed the multi-lateral sanctions waiver provision (“4(c) waiver,” see above) to a national security interest waiver. The law also waiver, and recommended against U.S. nuclear agreements with countries that have supplied supply nuclear technology to Iran,. It extended ISA until December 31, 2011, dropped Libya from ISA, and 2011, formally dropped Libya, contained a provision to try to preventcurb money-laundering by criminal criminal groups, terrorists, or proliferators. It, and formally changed the name of the law to the Iran Sanctions Act. H.R. 6198 was passed by the House and Senate by voice vote and and unanimous consent, respectively, and was signed on September 30, 2006 (P.L. 109293). It changed the name of ILSA to the Iran Sanctions Act (ISA). Effectiveness and Ongoing Challenges Some believe ISA has slowed Iran’s energy development, but, as shown by the projects agreed to below, its deterrent effect has been relatively limited. The projects listed in the table, all drawn from mainstream press reports, are said to be under review for ISA sanctions by the State Department (Bureau of Economic Affairs), but no determinations of violation have been announced. State Department reports to Congress CRS-4 on ISA, required every six months, state that U.S. diplomats raise U.S. policy concerns about Iran with both investing companies and their parent countries. Most of the projects agreed before 2004 are now producing gas or oil. Some experts believe that what investment has been deterred has been caused more by Iran’s aggressive negotiating style than by ISA. The investment has not boosted Iran’s sustainable oil production significantly — it is still about 4 million barrels per day (mbd)3 — and an analysis published by the National Academy of Sciences says that Iranian oil exports are declining to the point where Iran might have negligible exports of oil by 2015.4 Others maintain that Iran’s gas sector, virtually non-existent in 1998, is becoming an increasingly important factor in Iran’s energy future because of foreign investment. ISA’s definition of “investment” does not provide for sanctions on oil or gas purchases from Iran. However, the Clinton and Bush Administration interpretations have been that the construction of energy routes to or through Iran would constitute sanctionable activity because, as stated in the ISA definition of “investment” (Section 14 (9)(A)), such routes would help Iran develop its petroleum resources. The Clinton Administration used that argument to deter energy routes involving Iran and thereby successfully promote an alternate route from Azerbaijan (Baku) to Turkey (Ceyhan); this route became operational in 2005. However, neither Administration imposed sanctions on a 1997 project viewed as beneficial to U.S. ally Turkey: a natural gas pipeline from Iran to Turkey (each country constructing the pipeline on its side of their border). The State Department said that the project did not violate ISA because Turkey would be importing gas from Turkmenistan, not Iran, and would therefore not benefit Iran’s energy sector directly. However, direct Iranian gas exports to Turkey began in 2001, in apparent contravention of Turkey’s pledges 109-293). Effectiveness and Ongoing Challenges Successive Administrations have argued that ISA has slowed Iran’s energy development, but, as shown by the projects agreed to below and as discussed in a December 2007 report by the GAO, its effect on Iran is difficult to determine. The GAO report (Iran Sanctions: Impact in Furthering U.S. Objectives in Unclear and Should be Reviewed. GAO-08-58, December 2007) contains a chart of post 2003 investments in Iran’s energy sector, totaling over $20 billion in investment, but the GAO table includes petrochemical and refinery projects, as well as projects that might not exceed the $20 million/one year investment threshold. The table below lists oil and gas exploration and development investments only. The projects listed in the table and in the GAO report are said to be under review for ISA sanctions by the State Department (Bureau of Economic CRS-4 Affairs), but no determinations of violation have been announced. State Department reports to Congress on ISA, required every six months, state that U.S. diplomats raise U.S. policy concerns about Iran with both investing companies and their parent countries. Many of the projects agreed before 2004 are now producing gas or oil. Some experts believe that what investment has been deterred has been caused more by Iran’s aggressive negotiating style than by ISA. The investment has not boosted Iran’s sustainable oil production significantly — it is still about 4.1 million barrels per day (mbd) — and 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, virtually non-existent in 1998, is becoming an increasingly important factor in Iran’s energy future because of foreign investment. ISA’s definition of “investment” does not include oil or gas purchases from Iran, but does include construction of energy routes to or through Iran because such routes help Iran develop its petroleum resources. The Clinton Administration used that argument to deter energy routes involving Iran and thereby successfully promoted an alternate route from Azerbaijan (Baku) to Turkey (Ceyhan), which became operational in 2005. However, no sanctions have been imposed on a 1997 project viewed as beneficial to U.S. ally Turkey: a natural gas pipeline from Iran to Turkey (each country constructing the pipeline on its side of their border). The State Department said that the project did not violate ISA because Turkey would be importing gas from Turkmenistan, not Iran, and would therefore not benefit Iran’s energy sector directly. However, direct Iranian gas exports to Turkey began in 2001, and, as shown in the table, in July 2007 a preliminary agreement between Iran and Turkey would expand that arrangement to transshipment of Iranian gas to Europe, via the Iran-Turkey pipeline. Construction of oil refineries or petrochemical plants in Iran would appear – included in the referenced GAO report – would also appear to constitute projects that develop Iran’s petroleum resources. petroleum resources. Iran has plans to build or expand — possibly involving new foreign investment — at least eight refineries in an effort to ease gasoline imports that have totaled as much as 30% of Iran’s needs in early 2007. However, it is not clear whether or not Iranian investments in energy projects in other countries, such as reputed 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. Further major tests loom, and some of the large, long-term (preliminary) deals between Iran and Indian, Chinese, and Malaysian firms, listed below, have the potential todeals between Iran and several Asian countries, listed below, could significantly enhance Iran’s energy export prospects. Most of the value of these agreements includes long-term contracts to purchase Iranian oil and gas, and the exact investment amounts for the exploration and production phases of these projects are not known. A related deal, particularly those involving several Indian firms,5 is the construction of 3 Testimony of Deputy Assistant Secretary of State Anna Borg before the House International Relations Committee, Subcommittee on the Middle East and Central Asia. June 17, 2003. 4 is the construction of a gas pipeline from Iran to India, through Pakistan, with a possible extension to China.4 The three governments appeared 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. 5 Some of the Indian companies that reportedly might take part in the pipeline project are ONGC 4 The Indian companies reportedly include ONGC Corp.; GAIL Ltd.; Indian Oil Corp.; and Bharat Petroleum Corp. Some large European companies have also expressed interest. See Solomon, Jay and Neil King. “U.S. Tries to Balance Encouraging India-Pakistan Rapprochement With Isolating Tehran.” Wall Street (continued...) CRS-5 a gas pipeline from Iran to India, through Pakistan, with a possible extension to China. All three governments have appeared (continued...) CRS-5 committed to the $4 billion to $7 billion project, which will take about three years to complete after work begins. Press reports say India , but India did not sign a reported “finalization” of a deal on the project, signed by Iran and Pakistan on November 11, 2007. The two countries reportedly are requiring that India decide within a few months whether or not it will join the project; previously, the three countries had difficulty agreeing on such issues as a pricing formula, pipeline routing, transportation tariffs, pipeline security, and the Indian and Pakistani split of the gas supplies. 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. ISA is not the only mechanism available toone of many mechanisms the United States is using to try to squeeze Iran’s economy to try to limit investment in Iran. U.S. officials are having some success persuading European governments to limit new export credits guarantees to Iran, and to persuade European banks not to provide letters of credit for exports to Iran or to process dollar transactions for Iranian banks. This result is due not only to U.S. diplomacy but also to U.S. presentations of the financial risk posed by providing credit to Iran. The restrictions on financing are, according to Iranian and outside observers, making it more difficult to fund energy industry and other projects in Iran. British Prime Minister Gordon Brown said on November 12, 2007 that Britain might propose, as part of a new U.N. Security Council Resolution addressing Iran’s nuclear program, a worldwide ban on financing of energy projects in Iran – the equivalent of a worldwide adoption of the principles of ISA – and possibly a banks. Forty banks worldwide have thus far agreed to end their business in Iran, according to the Administration, by many accounts making it more difficult to fund energy industry and other projects in Iran and causing potential investors in the energy sector to hesitate on finalizing pending projects. In addition, prior to the December 3, 2007 release of a U.S. intelligence estimate on Iran’s nuclear program that dampened the international threat perception of Iran, there were reports that a new U.N. Security Council Resolution might include a worldwide ban on financing of energy projects in Iran and a ban on all financial dealings with Iran’s banks. Some have speculated that the U.N. Security Council — or a coalition of countries acting outside the Council — might impose at some point a worldwide ban on gasoline sales to Iran, although industry experts say that there are so many gasoline suppliers near Iran that any such embargo could be skirted. On . On October 25, 2007, several major Iranian banks (Saderat, Melli, Mellat, and related banks) were designated by the Bush Administration, along with Revolutionary Guard and Guard business entities, as ineligible to deal with U.S. persons (or banks) under Executive order 13224 (terrorism supporting entities) and Executive order 13382 (proliferation entities). Proposed Further Amendments in the 110th Congress In the 110th Congress, H.R. 1400 contains numerous provisions, some of which pertain to ISA, others of which do not. The billIt passed the House on September 25, 2007 by a vote of 397-16. Among ISA-related provisions, H.R. 1400It would remove the Administration’s ability to waive application of sanctions under ISA under Section 9(c), national interest grounds. However, the bill, but it would not impose on the Administration a time limit to determine whether a project is sanctionable. Both it and other bills, its its Senate counterpart S. 970, and another House bill, H.R. 957 (the latter passed the House on July 31, 2007) would expand the definitions of sanctionable entities to official credit guarantee agencies, such as France’s COFACE and Germany’s Hermes, and apply ISA sanctions to investment to develop a liquified natural gas (LNG) sector in Iran, which currently has no LNG export terminals. H.R. 1400 also would require the President to impose the ban on U.S. procurement from any entity sanctioned under ISA, and impose one other of the menu of sanctions. H.R. 2880 would apply ISA sanctions to sales to Iran 5 (...continued) Journal, June 24, 2005, p. A4. CRS-6 sales to Iran of refined petroleum resources after December 31, 2007. Another bill, H.R. 2347, which passed the House on July 31, 2007, would protect from shareholder lawsuits fund 4 (...continued) With Isolating Tehran.” Wall Street Journal, June 24, 2005, p. A4. CRS-6 fund managers that divest from firms that have made ISA-sanctionable investments. (For all all the major provisions of H.R. 1400, see CRS Report RL32048, Iran: U.S. Concerns and Policy Responsesreferenced above.) Post-1999 Foreign Investment in Iran’s Energy Sector Major Investments in Iran’s Energy Sector (Oil and gas fields only; pure infrastructure projects such refineries, petrochemical plants, not included.) Date Field Feb. 1999 Doroud (oil) Apr. 1999 Balal (oil) Nov. 1999 Soroush and Nowruz (oil) Apr. 2000 Anaran (oil) Company(ies) Totalfina Elf (France)/ENI (Italy) Totalfina Elf/ Bow Valley (Canada)/ENI Royal Dutch Shell Norsk Hydro (Norway)/Lukoil (Russia) July 2000 Phase 4 and 5, South Pars (gas) ENI Mar. 2001 June 2001 May 2002 Sep. 2002 Oct. 2002 Caspian Sea oil exploration June 2001 Darkhovin (oil) May 2002 Masjid-e-Soleyman (oil) Phase 9 and+ 10, South Pars Sep. 2002 (gas) (gas) Phase 6, 7, 8, South Pars (gas) Jan. 2004 Azadegan (oil) Yadavaran (oil). Finalized December 9, 2007 June 2006 Gamsar block (oil) Oct. 2004 GVA Consultants (Sweden) ENI Sheer Energy (Canada) LG (South Korea) Oct. 2002 Phase 6, 7, 8, South Pars (gas) Statoil (Norway) Value Output Statoil (Norway) Inpex (Japan) 10% stake Output/Goal $1 billion 205,000 bpd $300 million 40,000 bpd $800 million $225 million $1 billion $80 million 190,000 bpd ? 2 billion cu.ft./day ? 160,000 bpd 25,000 bpd $1.6 billion ? $2.65 billion 3 billion cu.ft./day $1.9 billion $200 million Japan stake $70 billion (value Yadavaran (oil); deal includes Sinopec (China) and ONGC of exploration not Oct. 2004 gas purchases for 30 years (India) known) June 2006 Gamsar block (oil) Sinopec (China) $50 million Feb. 2004 Azadegan (oil) Inpex (Japan) 10% stake Pending Deals/Preliminary Agreements Golshan and Ferdows (offshore gas, SKS Ventures (Malaysia) includes downstream development) Phase 13 and 14 - South Pars (gas); includes building a liquified natural gas (LNG) terminal Phase 22, 23, 24 - South Pars (gas), plus agreement to transport Iranian gas to Europe (signed July 13, 2007) Construction of a petrochemicals plant in Iran, near South Pars gas field. Might produce rubber, plastics, other petroleumderived products. (Announced Sept. 2007) Construction of oil refinery in Iran. Announced October 2007, just after Essar deal to acquire Minnesota Steel LLC 300,000 bpd ? Oil: 1.2 million bpd $80 billion+ Gas: 5 billion cu.ft/day+ Totals North Pars Gas Field (offshore gas) 260,000 bpd China National Offshore Oil Co. Royal Dutch Shell and Repsol (Spain) Turkish Petroleum Company (TPAO) GAIL-India, Jaipan Industries Ltd. (India) Essar Steel (India) $20 billion 100 million cu.ft/day $16 billion (includes gas purchases 3.6 billion cu.ft/day $10 billion ? $3 - $4 billion 2 billion cu. ft/day $2.3 billion $8 billion 300,000 bpd refined190,000 bpd $100 million 100,000 (by 2010) $1.9 billion $225 million $1 billion $80 million $1.6 billion $2.65 billion $200 million (Inpex stake) 2 billion cu.ft./day (cfd) ? 160,000 bpd 25,000 bpd 2 billion cfd 3 billion cfd 260,000 bpd Sinopec (China) $2 billion Sinopec (China) $20 million 185,000 bpd (by 2011) ? $49 million ? $16 billion 3.4 billion cfd Sept. 2006 Khorramabad block (oil) Norsk Hydro (Norway) Golshan and Ferdows onshore Dec. 2007 SKS Ventures (Malaysia) and offshore gas fields Oil: 1.085 million $27.9 billion bpd Gas: 10.4 billion cfd Totals Pending Deals/Preliminary Agreements Kharg and Bahregansar fields (gas) IRASCO (Italy) Salkh and Southern Gashku fields (gas). LNG Ltd. (Australia) Includes LNG plant (Nov. 2006) North Pars Gas Field (offshore gas) (Dec. 2006) China National Offshore Oil Co. Phase 13, 14 - South Pars (gas);(Feb. 2007). Deadline to finalize: June 2008. Royal Dutch Shell, Repsol (Spain) Phase 12 - South Pars (gas). Includes building LNG terminal (May 2007) Phase 22, 23, 24 - South Pars (gas), plus agreement to transport Iranian gas to Europe (July 13, 2007) Value OMV (Austria) Turkish Petroleum Company (TPAO) $1.6 billion ? ? ? $16 billion (includes gas purchases 3.6 billion cu.ft/day $4.3 billion ? ? ? $3 - $4 billion 2 billion cfd