Order Code RS20871
Updated April 26, 2006
CRS Report for Congress
Received through the CRS Web
The Iran-Libya Sanctions Act (ILSA)
Kenneth Katzman
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Summary
No firms have been sanctioned under the Iran-Libya Sanctions Act (ILSA), and it
has terminated with respect to Libya. Renewed in August 2001 for another five years
(P.L. 107-24), ILSA is scheduled to expire in August 2006. In the 109th Congress, H.R.
282 (passed by the House on April 26, 2006) and S. 333 would extend it indefinitely and
modify it, including imposing a time limit for the Administration to determine whether
an investment violates ILSA. This report will be updated. See also CRS Report
RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman.
Background and Original Passage of ILSA
ILSA was introduced in the context of a tightening of U.S. sanctions on Iran during
the first term of the Clinton Administration. In response to Iran’s stepped up nuclear
program and its support to terrorist organizations (Hizbollah, Hamas, and Palestine
Islamic Jihad), President Clinton issued Executive Order 12957 (March 15, 1995), which
banned U.S. investment in Iran’s energy sector, and Executive Order 12959 (May 6,
1995), which banned U.S. trade with and investment in that country. The Clinton
Administration and many in Congress maintained that these sanctions would deprive Iran
of the ability to acquire weapons of mass destruction (WMD) and to fund terrorist groups
by hindering its ability to modernize its key petroleum sector. That sector generates
about 20%25 of Iran’s GDP. Iran’s onshore oil fields, as well as its oil industry
infrastructure, were aging and needed substantial investment, and its large natural gas
resources (940 trillion cubic feet, exceeded only by those of Russia) were not developed
at all at the time ILSA was first considered.
U.S. allies refused to sanction Iran in the mid-1990s, and the Clinton Administration
and Congress believed that it might be necessary for the United States to try to deter
foreign investment in Iran. The opportunity to do so came in November 1995, when Iran
launched its first major effort to open its energy sector to foreign investment, which Iran
had banned after the February 1979 Islamic revolution on the grounds that foreign firms
would gain undue control over Iran’s resources. To accommodate that philosophy while
attracting needed foreign help, Iran developed a %22buy-back%22 investment program
Congressional Research Service ˜ The Library of Congress

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under which foreign firms recoup their investments from the proceeds of oil and gas
discoveries but do not receive equity stakes.
As Iran was announcing its plans, some in Congress, with input from the Clinton
Administration, developed legislation to sanction such investment. On September 8,
1995, Senator Alfonse D’Amato introduced the Iran Foreign Oil Sanctions Act of 1995
to sanction foreign firms’ export to Iran of energy technology. The bill passed the Senate
on December 18, 1995 (voice vote) but, in contrast to the introduced version, imposed
sanctions on foreign investment in Iran’s energy sector. The Clinton Administration was
concerned that U.S. monitoring of foreign exports to Iran would be too difficult to
implement. On December 20, 1995, the Senate passed still another version with an
amendment, sponsored by Senator Edward Kennedy, that applied all provisions to Libya
as well, which at the time was still refusing to yield for trial the two suspects in the
December 21, 1988 bombing of Pan Am 103, both allegedly agents of Libyan
intelligence. The House passed its version of the bill, H.R. 3107, on June 19, 1996 (415-
0). The Senate passed a slightly different version on July 16, 1996 (unanimous consent);
the House concurred, and the President signed it into law (P.L. 104-172, August 5, 1996).
ILSA was to sunset on August 5, 2001 (5 years after enactment), 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 in response to the more
moderate policies of Iran’s President Mohammad Khatemi. In 1999, Libya yielded for
trial of the Libyan suspects in Pan Am 103. However, proponents of ILSA renewal
maintained that ILSA was slowing investment in both countries and that both would view
ILSA’s expiration as a concession, reducing their incentive for further moderation.
Legislation to renew ILSA (H.R. 1954) was enacted in the 107th Congress (P.L. 107-24,
August 3, 2001). The renewal law changed the definition of investment to treat any
additions to pre-existing investment as a new investment, and required an Administration
report on ILSA’s effectiveness within 24 to 30 months of enactment; that report was
submitted to Congress in January 2004 and did not recommend ILSA be repealed.
Key Provisions
ILSA requires the President to impose at least two out of a menu of six 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 six sanctions available (Section 6) are (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 that 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 service 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) a restriction on imports from the
entity, in accordance with the International Emergency Economic Powers Act (IEEPA,
50 U.S.C. 1701 and following).
1 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 was banned by Pan Am 103-
related Security Council Resolutions 748 (Mar. 31, 1992) and 883 (Nov. 11, 1993).

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Waiver/Expiration Provisions. The President may waive ILSA 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)). ILSA terminates for Iran if Iran ceases its efforts to acquire WMD and is
removed from the U.S. list of state sponsors of terrorism. For Libya, ILSA terminates if
the President determines that Libya has fulfilled the requirements of all U.N. resolutions
relating to the downing of Pan Am 103. (President Bush made that certification on April
23, 2004, terminating ILSA for Libya.)
Implementation and Effectiveness
Traditionally skeptical of economic sanctions as a policy tool, the European Union
states opposed ILSA as an extraterritorial application of U.S. law. The EU countries
threatened formal counter-action in the World Trade Organization (WTO), and in April
1997, the United States and the EU formally agreed to try to avoid a trade confrontation
over ILSA (and a separate “Helms-Burton” Cuba sanctions law, P.L. 104-114). The
agreement contributed to a decision by the Clinton Administration to waive ILSA
sanctions on the first project determined to be in violation: a $2 billion2 contract, signed
in September 1997, for Total SA of France and its minority partners, Gazprom of Russia
and Petronas of Malaysia to develop phases 2 and 3 of the 25-phase South Pars gas field.
The Administration announced the “national interest” waiver (Section 9(c) of ILSA) on
May 18, 1998, after the EU pledged to increase cooperation with the United States on
non-proliferation and counter-terrorism. The announcement indicated that EU firms
would likely receive waivers for future projects that were similar.
As did its predecessor, the Bush Administration sought to work cooperatively with
the EU to curb Iran’s nuclear program and limit its support for terrorism rather than risk
a rift by imposing sanctions on EU (or other) firms. Some believe ILSA did slow Iran’s
energy development initially, but, as shown by the projects agreed to below, its deterrent
effect weakened as foreign companies began to perceive that ILSA sanctions would not
likely be imposed. Since that sanctions waiver, about $11.5 billion in foreign investments
in Iran’s energy sector have been agreed to. The new investment has not boosted Iran’s
sustainable oil production significantly — it is still about 4 million barrels per day (mbd)3
— but the foreign investment apparently has slowed any deterioration. In addition,
Iran’s gas sector, non-existent prior to the late 1990s, is becoming an increasingly
important factor in Iran’s energy future as a result of foreign investment.
Since the South Pars case, a number of investments in Iran have been formally
placed under review for ILSA sanctions by the State Department (Bureau of Economic
Affairs). State Department reports to Congress on ILSA, required every six months, state
that U.S. diplomats raise U.S. policy concerns about Iran with both investing companies
and their parent countries. However, no sanctions determinations have been announced
since the South Pars case. Table 1 shows reported post-1999 energy investments in Iran.
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.
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.

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Table 1. Post-1999 Foreign Investment in Iran Energy Sector
Date
Field
Company(ies)
Value
Output Goal
Feb. 1999 Doroud (oil)
Totalfina Elf/ENI
$1 billion
205,000 bpd
Totalfina Elf/ Bow
Apr. 1999 Balal (oil)
$300 million
40,000 bpd
Valley (Canada)/ENI
Nov. 1999 Soroush and Nowruz (oil)
Royal Dutch Shell
$800 million
190,000 bpd
Apr. 2000 Anaran (oil)
Norsk Hydro (Norway)
July 2000
Phase 4 and 5, South Pars (gas)
ENI
$1.9 billion
2 billion cu.ft./day
GVA Consultants
Mar. 2001 Caspian Sea oil exploration
$225 million
(Sweden)
June 2001 Darkhovin (oil)
ENI
$1 billion
160,000 bpd
May 2002 Masjid-e-Soleyman (oil)
Sheer Energy (Canada)
$80 million
25,000 bpd
Sep. 2002 Phase 9 and 10, South Pars (gas) LG (South Korea)
$1.6 billion
Oct. 2002
Phase 6, 7, 8, South Pars (gas)
Statoil (Norway)
$2.65 billion
3 billion cu.ft./day
Feb. 2004 Azadegan (oil)
Inpex (Japan)
$2 billion
300,000 bpd
Oil: 920,000 bpd
Totals
$11.5 billion Gas: 5 billion cu.ft/day
ILSA and Emerging Energy Relationships. ILSA’s definition of “investment”
does not specifically mention as violations of ILSA long-term oil or gas purchases from
Iran, or the building of energy transit routes to or through Iran. However, the Clinton
Administration position was that the construction of energy routes might violate ILSA,
because these routes would “directly and significantly contribut[e] to the enhancement
of Iran’s ability to develop petroleum resources.”4 The Clinton Administration used that
argument to deter energy routes involving Iran and thereby successfully promote an
alternate Caspian energy route from Azerbaijan (Baku) to Turkey (Ceyhan). This route,
which became operational in 2005, bypasses both Iran and Russia.
At the same time, the Clinton and Bush Administrations have adopted flexible
interpretations of ILSA to accommodate the needs of key regional allies for energy
supplies. A few weeks after ILSA was enacted, Turkey and Iran agreed to construct a
natural gas pipeline from Iran to Turkey (each country constructing the pipeline on its
side of their border). Turkey later announced that, at least initially, it would import gas
only from Turkmenistan through this pipeline. In July 1997, the State Department said
that the project did not violate ILSA because Turkey would be importing gas from
Turkmenistan, not Iran, and the project would therefore not benefit Iran’s energy sector
directly. Direct Iranian gas exports to Turkey began in 2001, in apparent contravention
of Turkey’s pledges not to buy Iranian gas directly, but the Bush Administration has not
imposed ILSA sanctions on the project.
Further tests of ILSA are looming as Pakistan, India and China build energy ties to
Iran; some deals might include pipeline projects to Iran. In October 2004, Iran negotiated
a long-term agreement to allow China (Sinopec) and India (Oil and Natural Gas Corp.,
ONGC) to develop Iran’s Yadavaran oil field, which might be able to produce 300,000
4 This definition of sanctionable activity is contained in Section 5(a) of ILSA.

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barrels per day, in exchange for agreeing to purchase 10 million tons of Iranian LNG
annually for 25 years. Under the preliminary agreement, Sinopec would obtain a 51%
stake in Yadavaran and ONGC would get a 20% stake. Iran’s National Iranian Oil
Company would obtain the remaining stake. In February 2006, China and Iran tried to
finalize the deal in advance of any potential United Nations sanctions that might be
imposed on Iran for its nuclear program. A related deal would allow the state-owned
Indian Oil Company to develop part of South Pars and build an LNG plant in Iran. If
implemented for the full duration of the agreements, these deals could total over $100
billion, although some question whether such long-term deals would be pursued to
fruition or might instead be terminated much earlier.
The agreements to import Iranian LNG would not appear to constitute an
“investment” in Iran’s energy sector, as defined by ILSA. However, a related aspect of
these deals, particularly those involving Indian firms, is the construction of a gas pipeline
from Iran to India, through Pakistan, with a possible extension to China. All three
governments have repeatedly reiterated their commitment to the $4 billion - $7 billion
project, which is planned to begin construction in 2007 and be completed by 2010.
Pakistan’s President Musharraf said in January 2006 that there is enough demand in
Pakistan for Iranian gas to make the project feasible, even if India declines to join it.
During her visit to Asia in March 2005, Secretary of State Rice “expressed U.S. concern”
about the pipeline deal; other U.S. officials have called the project “unacceptable.”
However, no U.S. official has directly stated that it would be considered a violation of
ILSA.5 During his trip to India and Pakistan in March 2006, President Bush said the
United States “understand[s]” Pakistan’s need for gas, appearing to suggest he would not
oppose the pipeline, but Administration officials later said that there is no change in
Administration opposition to it. In part seeking to assure implementation of a U.S.-India
civilian nuclear cooperation agreement, India did vote for a U.S.-backed February 4, 2006,
IAEA Board resolution referring Iran’s nuclear activities to the U.N. Security Council in
March 2006, a move that could cause Iran to retaliate against India by excluding it from
the deal. In addition, the volatility of relations between India and Pakistan, particularly
the status of Jammu and Kashmir, could derail the project at any time. A House
resolution (H.Res. 353), introduced July 11, 2005, expresses support for the gas pipeline
project as a facilitator of India-Pakistan peace.
Proposed ILSA Modifications: H.R. 282 and S. 333
ILSA terminates on August 5, 2006, unless renewed by Congress. ILSA-related
legislative proposals in the 109th Congress would close some perceived ILSA loopholes:
The “Iran Freedom and Support Act of 2005,” H.R. 282 (Ros-Lehtinen) and a companion,
S. 333 (Santorum). H.R. 282 was marked up by the Middle East/Central Asia
Subcommittee of the House International Relations Committee (HIRC) on April 13, 2005,
and was reported out by the full committee on March 15, 2006,by a vote of 37-3, with
only slight amendment. The House passed it on April 26 by a vote of 397-21. At the
5 Some of the Indian companies that reportedly might take part in the pipeline project are 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
Journal, June 24, 2005, p. A4.

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time of passage, H.R. 282 had 360 co-sponsors. S. 333 has 57 as of April 26, 2006. The
most significant ILSA-related provisions in both bills are as follows:
! increasing the requirements on the Administration to justify waiving
sanctions on companies determined to have violated ILSA provisions
(under Section 4(c) of ILSA, referring to parent countries’ cooperation
with U.S. sanctions on Iran);
! removing the sunset provision;
! making exports to Iran of WMD-useful technology or “destabilizing
numbers and types of” advanced conventional weaponry sanctionable;
! setting a 90-day time limit for the Administration to determine whether
an investment constitutes a violation of ILSA. (There is no time limit in
ILSA currently); and
! increasing the threshold for terminating ILSA by requiring the
Administration to certify, in addition to existing termination
requirements, that Iran “poses no threat” to the United States, its
interests, and its allies.
H.R. 282, as marked up by the Middle East Subcommittee, also:
! cuts U.S. foreign assistance to countries whose companies have violated
ILSA’s energy investment provisions;
! applies ILSA’s provisions to foreign subsidiaries of U.S. companies; and
! requires public disclosure of investment funds that have investments in
companies that have invested in Iran’s energy sector.
Both bills have major provisions not only on ILSA but also to support a policy of
promoting democracy in Iran. Testifying before HIRC on March 8, 2006, Undersecretary
of State for Political Affairs Nicholas Burns said the Bush Administration does not
oppose those democracy-related provisions, which largely reinforce existing
Administration policy of increasing funding for pro-democracy activities in Iran. He
testified that the Administration opposes the ILSA-related provisions of the legislation
on the grounds that such new sanctions would likely affect European companies and in
so doing would hurt the U.S. effort to work with its allies to curb Iran’s nuclear program.
However, HIRC reported out the bill and the House passed it despite the Administration’s
testimony, and the Administration has not signaled it would veto the legislation.
Supporters of the proposed legislation believe that continued investment in Iran’s energy
sector undermines U.S. and European efforts to contain Iran’s nuclear program and that
stronger steps are needed to isolate Iran.

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