Order Code RS20871
Updated June 27July 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), and a GAO
study in December 2007 said that the effects of ISA and other U.S. sanctions on Iran’s
economy are “difficult to determine.” Some foreign firms, particularly in Asia,
continue to finalize investment deals with Iran, while European firms seem hesitant. In
the 110th Congress, H.R. 1400 (passed by the House on September 25, 2007), S. 970,
and a similar Senate billHowever, with Iran under increasing U.N. and
other diplomatic pressure, many foreign firms now seem hesitant to finalize investment
deals with Iran. In the 110th Congress, several bills, including the House-passed H.R.
1400 would add ISA 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, in response to Iran’s stepped up nuclear program and
its support tointended to deny Iran the resources to further its
nuclear program and to support terrorist organizations such as Hizbollah, Hamas, and
Palestine Islamic
Jihad. For example, Executive Order 12959 of May 6, 1995, banned U.S. trade with and
investment in Iran. The sanctions were intended to curb the strategic threat from Iran by
hindering its attempts to modernize its
and investment in Iran. Iran’s petroleum sector, which generates about 20% of
Iran’s GDP. Iran’s, and
its onshore oil fields, as well as its oil industry infrastructure, are aging
and need
substantial investment, and its large natural gas resources (940 trillion cubic
feet,
exceeded only by Russia) were undeveloped when ISA was first considered. 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 its
philosophy of retainingideology to retain control of its national resources, Iran developedused a “buy-back”
investment investment
program in which foreign firms recoup their investments from the proceeds
of oil and gas
discoveries but do not receive equity stakes. With input from the
CRS-2
Administration, on
September 8, 1995, Senator Alfonse D’Amato introduced the “Iran
Foreign Oil Sanctions
CRS-2
Act” to sanction foreign firms’ exports to Iran of energy
technology. The billIt passed the Senate
on December 18, 1995 (voice vote), but instead
sanctioned 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
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 to the entity; (3) denial of U.S. 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)). Application to Iran terminates if Iran ceases 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, European Union states
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” grounds — Section 9(c)) 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
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).
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.
CRS-3
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 (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
investments by EU firms in Iran would not be penalized. Total and Petronas subsequently
negotiated to develop a liquified natural gas (LNG) export capability at Phase 11 of South
Pars, but, on July 12, 2008 Total pulled out on the grounds that investing in Iran at a time
of growing international pressure on it over its nuclear program is “too risky.”
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.
Iran Freedom and Support Act Modifications. With U.S. concern about
Iran’s nuclear program increasing, ISA was to sunset on August 5, 2006. Members,
concerned that foreign companies had begun to ignorewere ignoring ISA, introduced the “Iran Freedom
and and
Support Act” (H.R. 282, S. 333) to extend ISA indefinitely, to increase the
requirements 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. To prevent expiration while these bills
were being considered, there wasAfter passage of a temporary extension until September
29, 2006 (P.L.
109-267). The, the Iran Freedom and Support Act version that ultimately
passed was H.R.
6198, providing the flexibility demanded by the Administration; it recommends. It calls
for, but does
not require, a 180-day time limit for a violation determination. It makes sanctionable
; makes
sanctionable sales of WMD-useful technology or “destabilizing numbers and types of” advanced
advanced conventional weapons,; adds a required determination that Iran “poses no significant
significant threat” to terminate application to Iran,; changes the multi-lateral sanctions waiver
waiver provision (“4(c) waiver,” see above) to a national security interest waiver,; and
recommends against U.S. nuclear agreements with countries that supply nuclear
technology to Iran. It extends ISA until December 31, 2011, formally dropped Libya
(changing the name to the Iran Sanctions Act), and contained a provision to curb moneylaundering. H.R. 6198expand
provisions of the USA Patriot Act (P.L. 107-56) to curb money-laundering for use to
further WMD programs. It was passed by the House and Senate by voice vote and unanimous
unanimous consent, respectively, and was signed on September 30, 2006 (P.L. 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 do not exceed the $20
million/one year investment threshold. The projects listed in the table below and in the
GAO report are said to be under review by the State Department (Bureau of Economic
Affairs), but no publication of such deals has been placed in the Federal Register (Section
5e of ISA), and no determinations of violation have been announced. State Department
CRS-4
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 can
more than compensate for declining oil exports, although, because investment in the gas
sector has been slow and because Iran uses gas to reinject into its oil fields, Iran remains
a relatively minor gas exporter. It exports about 3.6 trillion cubic feet of gas, primarily
to TurkeyThe 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 some projects are stalled, and other
investors, such as Respol and Total, have announced pullouts or declined further
investment. Iran’s 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
CRS-4
negligible exports of oil by 2015.3 Others maintain that Iran’s gas sector can more than
compensate for declining oil exports, although, because investment in the gas sector has
been slow and because Iran uses gas to reinject into its oil fields, Iran remains a relatively
minor gas exporter. It exports about 3.6 trillion cubic feet of gas, primarily to Turkey.
(A GAO study of December 2007, Iran Sanctions: Impact in Furthering U.S. Objectives
Is Unclear and Should Be Reviewed, GAO-08-58, contains a chart of post-2003
investments in Iran’s energy sector, totaling over $20 billion in investment, but the chart
includes petrochemical and refinery projects, as well as projects that do not exceed the
$20 million in one year threshhold for ISA sanctionability.)
Some of the projects listed in the table below and in the GAO report 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 (Section 5e of ISA), and no determinations
of violation have been announced. On the other hand, 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 others 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 both investing companies and their parent countries.
ISA’s definition of “investment” does not include oil or gas purchases from Iran, but
does, as interpreted by successive Administrations, 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 energy routes involving
Iran and thereby successfully promoted an alternate route from Azerbaijan (Baku) to
Turkey (Ceyhan), which became operational in 2005. However, noNo sanctions were
imposed on a
1997 project viewed as beneficial to U.S. ally Turkey — a natural gas
pipeline from Iran
to Turkey, in which each country constructed the pipeline on its side
of their border. The
State Department had maintained that the project did not violate ISA
because 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 between Iran and Turkey would expand that arrangement
to trans-shipment to transshipment of Iranian gas to Europe, via the Iran-Turkey pipeline.
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 involving newwith foreign investment —, at least eight refineries
in an effort to
ease gasoline imports that have totaled as much assupply about 30% of Iran’s needs in
early 2007. However, it. 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 projects 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 exact proportions of exploration and production in these projects
are not always known. would constitute sanctionable investment under ISA.
A related deal, particularly those involving several Indian firms,
is the construction
of a gas pipeline from Iran to India, through Pakistan (IPI pipeline).
The three
governments initially appeared committed to the $4 billion to $7 billion project,
which which
would take about three years to complete after work begins, but India did not sign
a reported “finalization” of a deal on the project, signed by Iran and Pakistan on a
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.
CRS-5
November 11, 2007. India has reported “finalization” of a deal on the project, 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 late April 2008, but 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. In a possibly related
development, coincidingCoinciding with the Ahmadinejad visit the Hinduja-ONGCHindujaONGC Videsh group
won preliminary Iranian approval to take a 45% stake in the large
Azadegan oil field
project and a 60% stake in South Pars gas field Phase 12.
Another major energy deal with Iran is considered a blow to European solidarity. In
In March 2008, Switzerland’s EGL utility agreed to buy 194 trillion cubic feet per year of
of Iranian gas for 25 years, through a Trans-Adriatic Pipeline (TAP) to be built by 2010, a
a deal valued at at least $15 billion. The United States said it was launching a “legal
review” of the deal and criticized itcriticized 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 so many
would consider it unlikely to constitute a violation of
likely does not violate ISA.
ISA is one of many mechanisms the United States and its European partners are
using to try to squeeze Iran’s economy. U.S. officials are having some success persuading
European governments to limit new export credits guarantees to Iran, and to persuade
European and other banks not to provide letters of credit for exports to Iran or to process
dollar transactions for Iranian 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. U.N. Security Council
Resolution 1803, adopted March 3, 2008, calls for, but does not require, countries to
prohibit financial transactions with Iran’s Bank Melli and Bank Saderat, and the European
Union voted in June 2008 to cease transactions with Bank Melli. 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. It passed the House on September 25, 2007 by a vote of 397-16. It would
remove the Administration’s ability to waive application of sanctions under ISA 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, a Senate counterpart
S. 970, and another House bill, H.R. 957 (the latter and several others,
including S. 970, S. 3227, H.R. 957 (passed the House on July 31, 2007)
would expand the definition of , and a Senate
bill marked up by the Senate Banking Committee on July 17, 2008 (“Comprehensive Iran
Sanctions, Accountability, and Divestment Act of 2008) expand the definition of
sanctionable entities to official credit guarantee agencies,
such as France’s COFACE and
Germany’s Hermes, and. Most of these bills apply ISA sanctions to
investment to develop a
liquified natural gas (LNG) sector in Iran, which currently; it 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. 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. A Senate bill marked up by the Senate Finance
CRS-6
Committee on June 19, 2008, would
Iran. These bills would also add financial institutions and insurers to the
definition of
CRS-6
sanctionable entities. H.R. 2880 would apply ISA sanctions to 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
managers that
divest from firms that have made ISA-sanctionable investments.
Post-1999 Major Investments in Iran’s Energy Sector
($20 million + investments in oil and gas fields only; 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
Darkhovin (oil)
Masjid-e-Soleyman (oil)
Caspian Sea oil exploration
GVA Consultants
(Sweden)
ENI
Sheer Energy (Canada)
LG (South Korea)
June 2001 Darkhovin (oil)
May 2002 Masjid-e-Soleyman (oil)
Sep. 2002 Phase 9 + 10, South Pars (gas)
Phase 6, 7, 8, South Pars (gas)
GVA Consultants (Sweden)
ENI
Sheer Energy (Canada)
LG (South Korea)
Statoil (Norway)
Statoil (Norway)
Oct. 2002
(est. to begin producing late 08)
Jan. 2004 Azadegan (oil)
Inpex (Japan) 10% stake
Aug. 2004 Tusan Block
Yadavaran (oil). Finalized
Oct. 2004
December 9, 2007
June 2006 Gamsar block (oil)
Petrobras (Brazil)
Sept. 2006 Khorramabad block (oil)
Golshan and Ferdows onshore
Dec. 2007
and offshore gas fields
Value
Output/Goal
$1 billion
205,000 bpd
$300 million
40,000 bpd
$800 million
190,000 bpd
$100 million 100,000 (by 2010)
$1.9 billion
2 billion cu.ft./day
(cfd)
$225 million
$1 billion
$80 million
$1.6 billion
$2.65 billion
$200 million
(Inpex stake)
$34 million
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
?
$1 billion
$80 million
$1.6 billion
160,000 bpd
25,000 bpd
2 billion cfd
$2.65 billion
3 billion cfd
$200 million
(Inpex stake)
$34 million
260,000 bpd
Sinopec (China)
$2 billion
Sinopec (China)
$20 million
?
185,000 bpd (by
2011)
?
Norsk Hydro (Norway)
$49 million
?
SKS Ventures (Malaysia)
$16 billion
3.4 billion cfd
$27.9 billion investment
Oil: 1.085 million bpd Gas: 10.4
billion cfd
Pending Deals/Preliminary Agreements
Kharg and Bahregansar fields (gas)
IRASCO (Italy)
$1.6 billion
?
Salkh and Southern Gashku fields (gas).
LNG Ltd. (Australia)
?
?
Includes LNG plant (Nov. 2006)
$16 billion
3.6 billion
North Pars Gas Field (offshore gas)
China National Offshore
(includes gas
cu.ft/day
(Dec. 2006)
Oil Co.
purchases
Phase 13, 14 - South Pars (gas);(Feb.
2007). Royal Dutch Shell, Repsol
$4.3 billion
?
2007). Deadline to finalize: June 2008.
Repsol (Spain)
$30 billion (inc.
Phase 12 - South Pars (gas). Includes
OMV (Austria)
gas purchases
?
building LNG terminal (May 2007)
over 25 years
Phase 22, 23, 24 - South Pars (gas), plusincl.
Turkish Petroleum
$3 - $4 billion
2 billion cfd
agreement to transport Iranian gas to
Company (TPAO)
Europe (July 13, 2007)
Totals
crsphpgw Europe (July 2007) Company (TPAO)
Totals