Both the UK and US have, for some time, enforced sanctions against Iran as a result of its breaches of international law in relation to nuclear activity, but recent changes are likely to significantly increase the impact of these sanctions on the oil industry.
As far as the UK is concerned, domestic sanctions have, until now, had a relatively limited impact on the oil sector as they do not prevent petroleum companies or the supply chain doing business with Iran provided that those dealings do not involve materials or technology which could contribute to Iran’s nuclear activities.
There are also restrictions on dealings with a limited list of persons who are, or have been, linked with these activities, and licensing requirements in relation to so called “dual-use” goods.
US sanctions have tended to go further than UK sanctions in restricting almost any dealings by US residents, nationals and companies with Iranian entities.
There have also been attempts to inhibit investment in Iran by non-US companies through a statute, the Iran Sanctions Act, which enables the US president to impose sanctions on any person who makes an investment of $20million or more which directly and significantly contributes to the development of Iranian petroleum resources. This “long-arm” statute has not, in fact, ever been enforced, largely due to pressure from other governments on the US not to do so, but may nevertheless have influenced commercial investment decisions.
In June, the UN Security Council imposed a fresh round of sanctions on Iran.
This has provided the impetus for further US and EU sanctions. The general aim of the latest developments is to prevent petroleum imports and cripple Iranian petroleum refining capabilities and thereby impact the Iranian economy, which is very dependent on imported petroleum.
On July 1, following overwhelming support for the draft bill (99 to none in the Senate and 408 to eight in the House of Representatives), President Obama signed the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (the “act”) into law.
The act appears aimed primarily at non-US persons (since US persons would already be prohibited from these activities). It amends the Iran Sanctions Act to allow sanctions to be imposed on persons engaged in the supply of refined petroleum products to Iran or any business activities which might directly or significantly facilitate the maintenance or improvement of Iran’s petroleum refinery capabilities.
This includes not only supplying petroleum products, but also providing brokering or financing for such supplies; arranging shipping, or insuring or underwriting such shipments. As a result, insurers will be reviewing their contracts to ensure that they do not inadvertently find themselves insuring such business, and owners will be seeking express restrictions on charterers taking tankers to Iran.
The act includes new sanctions which can be applied to persons who engage in these activities, including prohibiting foreign-exchange transactions and banking transactions, and freezing assets – in each case where these are subject to US jurisdiction.
These new sanctions come on top of the sanctions under the existing legislation, including the denial of export-import bank assistance for exports and of some US export licences; banning of certain loans from US financial institutions, and a ban on US government procurement of goods and services from, or entering into, contracts with the sanctioned company.
The president must impose at least three of the sanctions on any person engaging in the prohibited conduct. Moreover, sanctions can be applied not only to the entity committing a prohibited act, but also its parents and affiliates if they had knowledge of the sanctioned activity.
Congress seems to have determined that, this time, the act will be enforced by including provisions requiring the president to investigate potential sanctionable conduct with limited power to grant waivers.
In addition, both US and non-US companies seeking US government procurement contracts must provide evidence that they do not engage in the prohibited activities.
Finally, the act also encourages US state and local governments (including, significantly, their pension funds) to divest from companies involved in the supply of refined petroleum products to Iran, and requires the president to investigate countries which may be facilitating the diversion of exports to Iran.
The regime is thus very far-reaching. As the Senate subcommittee chairman, Senator Joe Lieberman, stated during the passage of the bill, the sanctions would give companies doing business with Iran “a choice between doing business with us or doing business with Iran”.
The EU has awaited the UN sanctions as a legal launching pad for its own sanctions regime, which is currently under discussion. The general aim is to prohibit European investment or technical assistance for Iran’s refineries and liquid natural gas facilities, together with further actions against banks.
In the UK, as an immediate response to the new UN sanctions, HM Treasury issued a notification on June 10 that individuals and entities covered by the UN sanctions will fall under the UK sanctions regime.
HM Treasury provides a searchable list of all entities targeted by the UN sanctions (see >).
The UK Government has also stated that it is committed to the “rapid and rigorous” enforcement of the measures adopted under UN sanctions and is currently working with the EU for harmonised sanctions.
The clear trend is for ever-tougher sanctions against Iran, which is likely to have a particular impact on the energy sector and may result in a significant change of policy by oil companies and oil service companies regarding business with Iran.
It is notable that the French energy company, Total, has already announced that it stopped its petrol deliveries to Iran in late-May.
Penelope Warne is a partner, head of energy and practice group manager for energy projects and construction at international law firm CMS Cameron McKenna LLP