World Energy Sanctions

Global Energy Sanctions
Over the past several years, U.S. and/or multilateral sanctions have been placed on several significant oil-producing countries, including Iran, Iraq, Libya, Sudan, and Syria. In addition, North Korea has faced energy sanctions by the European Union and the United States, while Cuba and Burma (Myanmar) remain subject to comprehensive U.S. trade sanctions, including energy. The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) maintains a complete list of U.S. sanctions.

Note: this report is based upon the latest available information as of July 2004 and is subject to change.

President Bush Extends Sanctions on IRAN for Another Year; IAEA Investigating Nuclear Weapons Program
In late June 2004, U.S. Secretary of State Colin Powell suggested that Iran may face U.N. economic sanctions if its government fails to prove that it is not pursuing a nuclear weapons program. In mid-June 2004, the International Atomic Energy Agency (IAEA), which oversees the Nuclear Non-Proliferation Treaty, adopted a resolution urging Iran to cooperate with ongoing investigations and urged Iran to build a heavy-water reactor rather than a uranium conversion facility (that can produce weapons-grade materials). The IAEA is scheduled to meet again in September 2004, to discuss appropriate action concerning Iran. The June 2004 IAEA resolution followed a statement from Iran's Supreme leader, Ayatollah Ali Khamenei, that although Iran was not seeking nuclear weapons, it nonetheless would not give up its uranium enrichment program in accordance with the Non-Proliferation Treaty.

The United States has maintained various sanctions against Iran since 1979, following the seizure of the U.S. embassy in Tehran, on November 4 of that year. In March 2003, President Bush extended sanctions originally imposed in 1995 for another year, citing Iran's "support for international terrorism, efforts to undermine the Middle East peace process, and acquisition of weapons of mass destruction." In March and May 1995, President Clinton had signed two Executive Orders prohibiting U.S. companies and their foreign subsidiaries from conducting business with Iran. Executive Order 12957 specifically banned any "contract for the financing of the development of petroleum resources located in Iran."

In August 1996, the Iran-Libya Sanctions Act (ILSA) was passed unanimously by the U.S. Congress and signed into law by President Clinton. ILSA provided for the imposition of sanctions on companies, irrespective of their corporate "nationality," that invest more than $20 million annually (in August 1997, this was lowered from $40 million) in the Iranian oil and gas sectors. ILSA's initial five-year term expired in August 2001, and many U.S. energy firms pressed for non-renewal of the sanctions. Energy companies were encouraged by the March 2000, U.S. decision to permit the importation of certain Iranian products -- carpets, caviar, pistachios, and dried fruit - - as an exception to the general prohibition on the importation of Iranian goods. However, in late July 2001, the U.S. Congress voted overwhelmingly to renew ILSA for five more years, and President Bush signed the bill into law. Since 2000, the only relaxation of Iranian sanctions followed the December 2003 earthquake in Bam. In response to that event, the United States temporarily suspended sanctions against the export of humanitarian items and money transfers to Iran. In March 2004, the selective suspension was extended for an additional three months.

The concept that under ILSA legislation, the United States could seek to penalize foreign companies for investing in Iran, has run into opposition from a number of foreign governments. To date, Iran has attracted an estimated $30 billion in foreign investment in its petroleum sector since ILSA was enacted. The European Union (EU) opposes the application of ILSA sanctions to companies in member countries, and on November 22, 1996 passed resolution 2271 directing EU companies not to comply with ILSA. Although ILSA sanctions have not thus far been imposed, the threat of such sanctions has also deterred some multinationals from investing in Iran. U.S. Secretary of State Madeleine K. Albright noted that U.S. efforts to discourage the Indonesian firm Bakrie from proceeding with the development of the Balal oilfield contributed to Bakrie's apparent decision to withdraw, although the impact of the Asian financial crisis was also important.

Meanwhile, in July 2000, the U.S. State Department announced that it would consider sanctions against Italy's Eni after that company signed a $3.8 billion deal for the South Pars fourth and fifth development phases. Despite ILSA, in July 2001, Italy's Eni signed a nearly $1 billion, 5 1/2-year buy-back deal to develop the 3-5 billion-barrel Darkhovein onshore oilfield. Also, as of July 2002, Australia's BHP Billiton Ltd. reportedly was considering whether or not to participate in a project to develop the Foroozan-Esfandiar oilfields (this project was eventually awarded to an Iranian firm). In May 2002, the United States announced that it would review a contract by Canada's Sheer Energy to develop an Iranian oilfield to determine whether or not it violates ILSA. To date, no action has been taken on this matter.

In September 2000, the U.S. Treasury Department announced that it was investigating Conoco to determine whether or not the company had violated U.S. sanctions in helping to analyze information on the field collected by the National Iranian Oil Company (NIOC) regarding the enormous, 26-billion-barrel Azadegan oilfield (the largest oil discovery in Iran in many years). Conoco has denied that it circumvented sanctions, although it has also stated that it remains interested in helping develop Azadegan when sanctions are lifted (ExxonMobil has also expressed interest). On November 1, 2000, Iran granted Japan first negotiating rights over Azadegan, and on November 1, 2000, agreement was reached between Japan and Iran for Japanese firms (Japex and Indonesia Petroleum, both majority-owned at the time by the Japan National Oil Company -- JNOC) to have priority negotiating rights to develop the field. In January 2001, the Majlis (Iranian Parliament) approved development of Azadegan by foreign investors using the so-called "buyback" model. Although negotiations stalled through 2003, a $2 billion agreement was signed early in 2004. Most recently, a wave of activity relating to the Caspian Sea region has increased Iran's ability to engage in oil "swap" transactions. In 2004, PetroKhazakstan and Russia's U.S.-listed Lukoil made exploration bids on Iranian oil blocks.

U.N. and U.S. Sanctions Against IRAQ Lifted; Oil Exports Allowed; Iraqi Sovereignty Transferred on June 28th 2004
On May 27, 2003, following a war between Iraq and U.S.-led coalition forces, the U.S. Treasury Department lifted most of the twelve-year-old sanctions against Iraq. Following the lifting of the sanctions, companies and individuals could now engage in most trade and investment activities with Iraq. In addition, Iraq (under provisional authority) could freely export oil to finance reconstruction and humanitarian needs and import goods and services. On June 28, 2004, sovereignty was transferred to an Iraqi interim government, ending more than a year of administration by the coalition forces.

The lifting of U.S. sanctions followed a U.N. Security Council vote on May 22, 2003 removing all multilateral trade and financial sanctions restrictions on Iraq that were imposed after its 1990 invasion of Kuwait. Among other things, the U.N. resolution called for the creation of the “Development Fund for Iraq" (DFI), to receive proceeds from oil sales and distribute them “at the direction” of the “Authority” (the United States and Britain). The resolution also phased out the $67 billion “Oil-for-Food” program and immediately transferred around $1 billion from that program to the DFI.

Prior to Iraq's invasion of Kuwait in 1990, Iraq was producing around 3.2-3.4 million barrels per day (bbl/d) and exporting and estimated 2.8 million bbl/d. Following the invasion, Iraqi oil exports were prohibited by United Nations (UN) Security Council Resolution 661. In April 1995, the U.N. Security Council passed Resolution 986, which allowed limited Iraqi oil exports for humanitarian and other purposes ("Oil-For-Food"). Iraq began limited export of oil in December 1996. Proceeds from the program were used to pay for compensation to Gulf War victims, pipeline transit fees, U.N. weapons monitoring activities, operational costs of the the Iraqi oil industry, and U.N.-approved goods to Iraq. In December 1999, with Iraq steadily increasing its oil export revenues, the U.N. Security Council voted (Resolution 1284) to remove any quantitative limits on the amount of oil Iraq could export, although revenue was still to be controlled through the "Oil-For-Food" program.

Beginning in 1996, there were persistent reports that Iraq was smuggling significant volumes of crude oil and products (possibly as much as 300,000 bbl/d), through Turkey, Jordan, and Syria via truck; through Iran (and onward to Pakistan and India) along the Gulf coast and via Qeys Island off Iran's southern coast; and to Dubai with the use of small tankers sailing from Umm Qasr. These illegal shipments reportedly provided Saddam Hussein's regime with billions of dollars in illegal revenues.

In January 2004, the independent Iraqi newspaper Al-Mada reported, based on documents claimed to have been found in the former Oil Ministry, a list of 270 persons, businesses, religious and political groups, and politicians who allegedly received oil vouchers from the former regime. It is alleged that vouchers may have been issued by the former regime for two reasons: 1) as payment for goods and services that fell under U.N. Security Council sanctions and could not be financed under the "Oil for Food" program; and 2) as gifts in exchange for political support. The vouchers reportedly were sold to oil traders, who then purchased the oil at cut-rate prices from the Kirkuk-Banias (Syria) pipeline terminal (which was operating in contravention of U.N. Security Council sanctions). Recently, the U.N. Security Council appointed former Federal Reserve Chairman Paul Volcker to lead an independent investigation into the corruption allegations. Beginning in April 2004, U.S. Congress also began to investigate the "Oil-for-Food" program. Both the Senate Foreign Relations Committee and the House International Relations Committee have held hearings. In addition, the Iraqi interim government has begun its own investigation into the alleged corruption.

U.N. Sanctions Against LIBYA Eased; U.S. and Libya Re-establish Direct Diplomatic Ties After 24 Years
On June 28, 2004, direct diplomatic relations between the United States and Libya were restored after 24 years. In February and April 2004, U.S. economic sanctions against Libya were eased, eliminating travel restrictions and allowing investment by U.S. corporations, including in Libya's petroleum sector, as well as Libyan investment in the United States. The application to Libya of the Iran and Libya Sanctions Act (ILSA) was terminated in April, 2004.This followed fulfillment of the Libyan commitments to rid itself of weapons of mass destruction (WMD) and Missile Technology Control Regime (MTCR)-class missile programs, and to renounce terrorism. Despite the improvement in U.S. Libyan relations as of July 2004, the United State has not reinstated full diplomatic and economic ties, including the opening of embassies in Washington, D.C. and Tripoli. Libya also remains on the State Sponsors of Terrorism List.

After years of U.S. and U.N. sanctions, Libya's oil sector is in critical need of foreign investment. U.S. corporations are eager to return to Libya, given its estimated 36 billion barrels of high-quality oil reserves as well as geographic proximity to western markets. Occidental Petroleum, ConocoPhillips, Marathon Oil, and Amerada Hess have begun negotiations with Libya's National Oil Corporation to resume operations from which they withdrew in 1986, when U.S. sanctions forced their departure. The companies had standstill agreements that froze their stakes in Libya's petroleum sector while sanctions were in place. While Libya reportedly would like production to resume under the old conditions, U.S. companies aim to renegotiate the terms of contract. According to press reports, Occidental is looking to improve profit margins by reducing royalties and taxes, in line with other international investments. More importantly, Occidental and other U.S. energy firms are said to want a stake in exploring and developing new concessions. The U.S. companies will have to compete with foreign firms already established in Libya, including Spain's Repsol, France's Total, and Norway's Norsk Hydro. Even after the imposition of now defunct U.N. sanctions, non-U.S. firms could still legally conduct many business activities in Libya.

Libya's relations with the international community at-large have been strained since the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland. On April 15, 1992, U.N. Security Council Resolution 748 imposed economic sanctions on Libya for refusing to extradite two Libyan nationals (Abdelbaset Ali Mohmed al Megrahi and Al-Amin Khalifa Fhimah) accused of carrying out the attack, and for not cooperating in the investigations of other bombings. In November 1993, U.N. Security Council Resolution 883 extended the sanctions to include a freeze on Libyan funds overseas, a ban on the sale of oil equipment for oil and gas export terminals and refineries, and tougher restrictions on civil aviation and the supply of arms.

On April 5, 1999, U.N. sanctions on Libya were suspended (although not permanently lifted) after the U.N. Security Council received confirmation that: 1) the two suspects in the 1988 bombing of Pan Am Flight 103 arrived in the Netherlands to stand trial before a Scottish Court; and 2) the Libyan Government had satisfied the French authorities investigating the 1989 bombing of Union de Transports Aeriens (UTA) Flight 772 over Niger. In April 2000, Japan was the first country to announce that it was lifting all unilateral sanctions it had imposed on Libya. In August 2003, Libya's Foreign Minister, Mohammed Abderrahmane Shalgam, stated that Libya had "taken...responsibility for [the Lockerbie] case on the basis of international law" and that "the provisioning of that [$2.7 billion compensation] fund with the decided amount has started. In September 2003, U.N. Security Council Resolution 1506 formally lifted U.N. sanctions against Libya, after the country addressed the requirements for the lifting of sanctions as established by earlier UNSC resolutions.

U.S. Sanctions Remain Against NORTH KOREA; Ongoing Talks Discuss Terms of North Korea's Nuclear Disarmament
North Korea's nuclear program is a major concern for regional security, since its graphite reactor technology produces fissionable materials that can be used in nuclear weapons. In June 2004, North Korea, the United States, and four other countries (South Korea, China, Japan and Russia) met for the third time to discuss the terms of North Korea's freezing and possible dismantling of nuclear facilities. According to a March 2003 statement from U.S. Department of State Policy Planning Director, Mitchell B. Reiss, the United States and partners want North Korea's commitment "to permanent non-nuclear weapons status," while being "prepared to completely dismantle all its programs, subject to international verification."

North Korea has laid out a "freeze-for-compensation" plan that demands the United States remove North Korea from the State Sponsors of Terrorism List, lift five-decade old economic sanctions, and provide increased energy aid. The United States has offered economic and political rewards, including "security assurance" and long-term energy aid in return for North Korea's halting and sealing of uranium and plutonium weapons facilities within a three-month timeframe. North Korea denies having uranium enrichment facilities, which can be used to make nuclear weapons. Talks will continue in September 2004. The International Atomic Energy Agency (IAEA), the U.N. nuclear weapons inspectorate body, issued a statement in support of the meetings, but is a not a party to the talks.

The most recent U.S.-North Korean standoff began in October 2002, when the White House announced that North Korea had re-started its nuclear weapons program in violation of international agreements. North Korea immediately expelled all U.N. nuclear weapons inspectors and invalidated the 1994 "Agreed Framework," negotiated with the United States in 1994. On January 10, 2003, North Korea withdrew from the Nuclear Non-Proliferation Treaty and warned that any retaliation would constitute the declaration of a "Third World War." On February 12, 2003, the International Atomic Energy Agency (IAEA) declared North Korea to be in breach of atomic safeguards and referred the case to the UN Security Council.

In June 2000, the United States eased some of the economic sanctions in place against North Korea since 1950, pursuant to the Trading With the Enemy Act. The changes lifted the ban on exports to North Korea, provided that all exports or reexports to North Korea are licensed or otherwise authorized by the Department of Commerce or other appropriate agencies. Licenses also are still required from the Treasury Department's Office of Foreign Assets Control (OFAC) for many transactions, including imports, while sales of military and "dual-use" (chemicals, nuclear technology, propulsion equipment) items remain restricted.

SUDAN "Peace Act" Signed into Law, U.S. Considering "Targeted" Sanctions Against the Sudanese Government
In June 2004, U.N. Secretary-General Kofi Annan announced possible Security Council action against the Sudanese government for alleged human rights violations in the western Darfur region of the country. The human rights crisis continues despite a June 5, 2005 peace agreement signed between the government of Sudan and the Sudan People's Liberation Army (SPLA). The two factions have been involved in a civil war for over 24 years.

According to several news agencies, U.S. Secretary of State Colin Powell is pressing the U.N. for international sanctions against Sudan. A draft U.N. Security Council resolution would include an arms embargo against the pro-government Janjaweed militia and a travel ban on militia leaders. The draft resolution also gives the Sudanese government 30 days to halt militia activities and required unrestricted access for foreign aid workers. The United States is considering imposing a series of "targeted" sanctions against Sudan, including financial sanctions against certain Sudanese individuals.

In November 1997, the United States first imposed economic sanctions against Sudan through Executive Order 13067 in response to Sudan's "support for international terrorism, ongoing efforts to destabilize neighboring governments, and the prevalence of human rights violations, including slavery and the denial of religious freedom." The Executive order prohibits trade between the two countries, as well as investment by U.S.-owned businesses in Sudan. Former Secretary of State Madeleine Albright stated that the sanctions were intended to "deprive the regime in Khartoum of the financial and material benefits of U.S. trade and investment, including investment in Sudan's petroleum sector."

In March 2003, Talisman Energy, the largest foreign oil company in Sudan, sold its Sudanese oil assets to ONGC Videsh, a subsidiary of India's state oil company. Talisman held a 25% stake in GNPOC. Malaysia's Petronas and China's CNPC also are involved in Sudan's oil sector.

U.S. Sanctions Against SYRIA Enacted in May 2004; Considered a "Firm" implementation of the Syrian Accountability Act
On May 12, 2004, new economic sanctions against Syria were implemented through Executive Order 13338, as required by the Syrian Accountability and Lebanese Sovereignty Restoration Act of 2003 (SAA). Alleging ties with terrorist groups in the Middle East, illegal importation of Iraqi oil and harboring Iraqi fugitives, the presence of Syrian armed forces in Lebanon in violation of U.N. Security Council Resolution 520, and efforts to gain access to weapons of mass destruction (WMD) and missile technology, the SAA immediately banned the transfer of "dual-use" technology (chemicals, nuclear technology, propulsion equipment) to Syria. The SAA, which was signed by President Bush, also listed five other penalties, two of which President Bush was required to implement after the bill was passed by Congress. A May 2004 Executive Order issued by President Bush then: 1) banned nearly all American exports to Syria, except food and medicine (pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000); 2) barred flights between Syria and the United States, except in emergencies; and 3) enabled the U.S. Department of the the Treasury to freeze the assets of Syrians with known ties to terrorism, WMD, Lebanese occupation or illegal activities in Iraq. In March 2004, William Burns, the assistant Secretary of State for Near Eastern Affairs called the sanctions a "very firm implementation of the Syrian Accountability Act."

Current investments by U.S. energy companies will not be greatly affected by the May 2004 sanctions, as the trade ban does not necessarily prohibit investment in Syria. Rather, U.S. energy firms operating in Syria such as ConocoPhillips, ChevronTexaco, U.S. Occidental, Devon Energy, and Veritas, will be required to contract with non-American suppliers for replacement parts. The overall impact on the U.S. economy as a result of the sanctions is likely to be minimal as trade between Syria and the United States amounts to just $300 million annually.

Syria has been subject to U.S. economic sanctions for several decades, stemming from Syria's inclusion on the State Sponsors of Terrorism List in 1979. Syria was one of the original countries to be placed on the list pursuant to Section 6 of the Export Administration Act. The original sanctions were largely authorized under the Anti-Terrorism and Arms Export Control Act of 1989, which consolidated many of the previously enacted counterterrorism sanctions in legislation. The original sanctions included: 1) prohibitions on U.S. economic assistance and military sales; 2) controls on dual-use equipment which could support terrorism or military activities; and 3) prohibitions on U.S. Government support for multilateral economic assistance to Syria. On April 24, 1996, President Clinton signed Public Law 104-132, making it a criminal offense for U.S. citizens to engage in financial transactions with governments supporting international terrorism. This bill curtailed U.S. involvement with the Syrian petroleum sector, as the state-owned Syria Petroleum Company (SPC) controls all Syrian oil resources, and directly produces about one-fourth of Syrian output.

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