Report to the Congress, Iran and
Libya Sanctions Act



The following report is made in accordance with Sections 9(c)(1) and 9(c)(2) of the Iran and Libya Sanctions Act of 1996.

The Secretary of State has determined, pursuant to the authority delegated to her by the President, that the investment by the firms Total (France), Gazprom (Russia), and Petronas (Malaysia) in the development of Iran's South Pars gas field constitutes activity covered by the Iran and Libya Sanctions Act of 1996, as described in Section 5(a) of the statute. This determination follows an extensive review of the facts of the case as they relate to the provisions of the law.

At the same time, the Secretary, exercising her authority under Section 9(c) of the Act, has determined that it is important to the national interest to waive the imposition of sanctions against the three firms involved. The Secretary did not believe that waivers under Section 4(c) were appropriate. In reaching this decision, the Secretary took into account a number of factors, particularly the Act's objectives with regard to building an effective multilateral regime to deny Iran the ability to acquire weapons of mass destruction (WMD) and the means to deliver them, and to support acts of international terrorism.

The Administration's policy on Iran seeks to convince Iran to abandon its objectionable policies. Although there are indications that the Iranian government may be seeking to improve its relationship with the West, Iran has not abandoned its policies of greatest concern. ILSA's focus on the dangers of Iranian WMD and terrorism thus remains a matter of important national interest.

ILSA has been a valuable tool in promoting international cooperation to combat the dangers of Iran's objectionable behavior. The Act urges the Administration to develop multilateral cooperation to deter Iran from acquiring weapons of mass destruction and supporting terrorism. Through vigorous diplomatic efforts, we have strengthened this multilateral cooperation, which will help us realize ILSA's central objectives.

Starting from an already-high level of cooperation with the United States on nonproliferation issues, our European allies have now agreed to pursue further steps to build on their commitments and to work even more closely with us in this area. We have agreed on a joint statement that includes an EU commitment to give high priority to proliferation concerns, including delivery systems, regarding Iran and a commitment to stepped up efforts to prevent dual-use technology transfers where there is a risk of diversion to WMD purposes.

We are also working with the EU to strengthen cooperation on controls over "intangible" (e.g., electronic) technology transfers, on closer coordination of export-control assistance to third countries, and on diplomatic efforts to stem technology exports by other countries to proliferators, including Iran.

As a result of our efforts, we have obtained new undertakings by Russia, including a January 22 Executive Order that strengthens the government's authority to control missile technology and other transfers of concern. Pursuant to a subsequent Executive Order issued May 14, the Russian Government is now taking significant steps to implement the January order. Together these two Executive Orders put in place Russia's first legal framework for "catch-all" export controls. This includes establishing supervisory bodies in all enterprises dealing with missile or nuclear technologies to ensure compliance; creating procedures for exporting enterprises to ensure proper controls; giving the Russian Space Agency responsibility for oversight of the space rocket industry; and formulating a range of measures for licensing military exports. Russian Prime Minister Kiriyenko and Foreign Minister Primakov have recently confirmed that Russia's commitments on Iran will be upheld, and President Yeltsin reaffirmed this to President Clinton during their bilateral meeting at the G-8 meeting in Birmingham, England on May 17.

The Russian security services have released a list of names of persons arrested for the illegal export of sensitive technology to Iran. This is a further indication that Russia is taking steps to crack down on export control violations. The positive steps in support of our joint U.S.-Russia export control working group is promising development. We will remain closely engaged with the Russian Government at all levels to ensure effective enforcement of their commitments.

On May 17, G-8 countries, including key European countries, Canada, Japan and Russia, made an important commitment to deny any kind of assistance to programs for weapons of mass destruction and their means of delivery. They also committed to enhance their cooperation on export controls, including the exchange of information.

Malaysia has not been a source of nonproliferation concern. It has acted as a force for moderation in Islamic circles. Malaysia is our partner for the upcoming session of the US-ASEAN Dialogue, where it was helpful in placing on the agenda the establishment of export control procedures by ASEAN members.

On counterterrorism, where we also have established a very high level of cooperation with our European partners, we have agreed on a new joint statement with the ELI that reaffirms the EU's commitment to cooperation and identifies specific common objectives. The EU has engaged to work with us to ensure ratification of all eleven counterterrorism conventions by current and future EU member states, as well as by other countries.

On another Iran-related matter, we have reached agreement with the EU on a joint statement on cooperation in encouraging multiple pipelines for the export of Caspian energy resources, including the East-West transportation corridor which the U.S. strongly supports. We have discussed Caspian energy issues with the Russian Government as well.

In Section 9(c) of the Act, Congress provided for a waiver to be granted when it is "important to the national interest" to do so. In this case, a waiver will (1) help consolidate the gains that we have made on strengthening international cooperation to oppose Iran's dangerous and objectionable efforts to acquire WMD and support terrorism; (2) lay the foundation for further progress in this vital area, and (3) enhance our ability to work with the Europeans, Russia, and Malaysia on a host of other bilateral and multilateral concerns of vital importance to U.S. national interests. For example:

-- Russia: Our decision will affect the prospects for ratification of START II, which President Yeltsin is attempting to get the Duma to ratify, and as well as for effective implementation of new, tougher measures that the Russian Government has just approved to prevent the export of goods, services and technology to foreign countries seeking to develop weapons of mass destruction and missile delivery systems. The Russian Government has made a number of commitments concerning the implementation of measures to restrict exports to countries of concern. Increased tensions between Russia and the United States at a promising juncture for Russian economic reform could make it more difficult for those seeking to move further ahead with market-oriented policies to overcome domestic opposition.

-- Cuba and Helms-Burton (The Libertad Act). ILSA waivers will strengthen our ability to encourage EU support far democratic change and respect for human rights in Cuba. It will also enable us to conclude a new U.S.-EU understanding on disciplines that will inhibit and deter investment in illegally expropriated property of U.S. nationals worldwide and in Cuba. The EU has firmly linked waivers under ILSA to implementation of their commitments in the April 11, 1997, understanding on Helms-Burton and in the new disciplines.

-- Trade: The U.S. and the EU have agreed to launch an important new trade liberalization initiative, the Transatlantic Economic Partnership. The initiative is intended to reduce trade barriers on billions of dollars in trade, maintain the highest health and safety standards, and promoted global liberalization in the WTO and other fora. Our ability to proceed will be facilitated by the resolution of U.S.-EU differences over ILSA and Helms-Burton.

-- Iraq: The support of Europe and Russia is essential to maintain isolation of Saddam Hussein and to bring about compliance with UNSCR obligations. We are particularly concerned that cooperation with ongoing UNSCOM/IAEA inspections should continue. A resolution of the issues associated with ILSA will facilitate cooperation in this area.

-- Kosovo and Bosnia: Cooperation with our NATO allies and the EU remains vital for implementing the Dayton peace accords, promoting reconciliation, and encouraging transition to democratic institutions. We are particularly concerned that differences with EU members not affect current high-priority efforts to resettle refugees, accelerate economic reconstruction, and encourage moderate elements in Republika Srpska. In Kosovo, where the situation remains volatile in the wake of continuing violence, the U.S., Europe and Russia are working closely together to ensure that Kosovar Albanian mid Serbian leaders focus on dialogue to resolve the crisis and avoid further bloodshed. Frontline states, particularly Albania and the Former Yugoslav Republic of Macedonia (FYROM), will be looking to firm and decisive Western action to maintain stability and prevent a spillover of the conflict. Resolution of the issue before us will strengthen our cooperation in furtherance of our common objectives.

-- Asian Financial Crisis: Addressing this crisis and the rapidly unfolding events in Indonesia requires the active and ongoing involvement of our Asian and European partners, including Malaysia. Malaysia is an important partner in responding to regional concerns. Sanctions against a major Malaysian company in the midst of the financial crisis could be detrimental to Malaysia and other countries in the region, and could harm our ability to address the crisis.

Granting waivers in this case will prevent retaliation against U.S. firms which the imposition of sanctions might engender, and avoid possible legal challenges based on claims related to treaties and other international obligations. These considerations buttress the view that a waiver in this case best serves our national interest.

Imposing sanctions, on the other hand, will not stop the South Pars deal or serve U.S. interests. Since the passage of ILSA, the Administration has made strenuous efforts to stop investments in Iran's petroleum sector (see Annex 13). We have engaged companies and governments at the highest levels to keep deals from going forward. The President, the Secretary of State and other senior officials in the U.S. Government have been directly involved in this process. Despite these efforts, we have not obtained the agreement of the companies to withdraw from the South Pars project, nor have we persuaded their governments to terminate these investment activities.

Partly as a result of our efforts, the Indonesian firm Bakrie has apparently decided not to proceed with the development of the Balal oilfield, though the impact of the Asian financial crisis was also important. Bakrie's Canadian partner, Bow Valley Energy, has announced that it is socking new partners to replace Bakrie and to provide the financial resources necessary to carry out the project.

We also believe in the case of South Pars that sanctions would be counterproductive to our ongoing efforts to broaden international cooperation to seek change in Iran's policies. In the case of EU member states, cooperation on these issues is already at a high level and through the commitments we have received, will be at an even higher level in the future. Assuming the EU continues this enhanced level of cooperation, we expect that a review of our national interests in future ILSA cases similar to South Pars involving the exploration for or production of Iranian oil and gas resources would result in like decisions with regard to waivers for EU companies. In the case of Russia, while we are encouraged by the recently agreed steps to combat the transfer of technology to countries of concerns, we will continue to monitor closely Russia's implementation of its policies on transfers of missile and other technologies of concern.

In announcing our decision in this case, we reiterated that we remain strongly opposed to oil and gas pipelines which transit Iran and that as a policy matter, we will continue to encourage alternative routes for the transport of Caspian energy resources, such as trans-Caspian pipelines and the Baku-Ceyhan route, and the Caspian Pipeline Consortium mute. We also will carefully examine the implications of any proposals for pipeline construction across Iran in taking future decisions under ILSA.

Given our continuing concern about Iranian behavior, we expect our friends and allies to take appropriate steps in response to Iranian involvement in terrorist activities. We will periodically review the impact of ILSA cases and our waiver policy on the national interest.

In making our determination, we made an exhaustive examination or the potential impact of ILSA sanctions on the three firms involved in the South Pars project. All three, for varying reasons, arc insulated from any practical negative impact of the imposition of sanctions. Total divested many of its U.S. assets prior to catering into the contract for South Pars. Gazprom canceled a $750 million line of credit with the U.S. Export-Import Bank. Petronas has only limited connections to the United States. The companies were therefore prepared to proceed with projects in Iran, even in the race of the potential penalties reflected in our laws. Thus, sanctions, are unlikely to concern the companies in question to abandon these investments.

We fully recognize the dangers to Israel posed by the potential development of weapons of mass destruction from its adversaries in the region. The Administration has worked closely with Israel to address possible missile threats and will continue to do so. Since 1988, the U.S. has jointly funded the ARROW missile defense system; provided Israel with space-based early warning notification of ballistic missile launches; and jointly funded a feasibility study of the Israeli Boost Phase Intercept Concept. We will continue to engage with Israel to assure that our cooperation supports Israel's ability to resist such threats.

Annex A: Description of the Conduct That Resulted in the Determination under Section 5(a)

The evidence outlined below supports the conclusion dial the South Pars investment by Total, Gazprom and Petronas involves sanctionable activity as defined by ILSA. A State Department team made several trips to the home countries of the three firms to verify the information provided here" as well as to attempt to determine if they would withdraw from the project.

A September 28, 1997 Total press release and extensive press reporting, generally confirmed by U.S. Government discussions with executives of each firm, indicate that well after the enactment date of ILSA all three firms knowingly entered into an agreement involving the National Iranian Oil Company (NIOC), an Iranian state-owned enterprise, to develop the South Pam field. The primary contract with NIOC may have been signed only by Total, which subsequently signed farm-in agreements with Gazprom and Petronas, though each of the three companies may also have signed "guarantees and letters of intent" directly with NIOC. Even if Gazprom and Petronas did not sign a contract directly with NIOC, an agreement signed by the companies with Total could be captured under ILSA as a contract that includes responsibility for the development of Iran's petroleum resources, undertaken pursuant to Total's agreement with NIOC. According to Total, it holds a 40-percent share of the deal, while Gazprom and Petronas each hold 30-percent shares.

We have not seen the basic South Pars contract, despite our requests for it However, indications are that the agreement is in the form of a "buy-back" contract. Under this form of contract, the contractor assumes all responsibility for completion of the project. The language of the Total press statement describing the activities the consortion will perform -- "delineation," "development," and "start-up" of production of the South Pars field -- indicates that the Total/Gazprom/Petronas contract involves responsibility for the development of Iran's petroleum resources as defined by ILSA.

The value of the investment (i.e., the full value of the contract at the time it was entered into) clearly exceeds the investment threshold. Sources indicate the companies have agreed to make a capital investment of $2 billion. The consortium will lie reimbursed for these costs following the start-up of production. The consortium also reportedly will be entitled to recover approximately $600 million in finance charges and receive a remuneration fee of $1.4 billion.

This investment directly and significantly contribute to the enhancement of Iran's ability to develop its petroleum resources. ILSA, like other similar sanctions statutes, does not define "directly and significantly." However, since South Pars is one of the largest gas fields in the world, its development will have a substantial impact on Iran's petroleum sector. The development phases of South Pars covered in this contract will produce 2 million cubic feet of gas and 80,000 barrels of condensates per day from a currently undeveloped field. Completion of these phases is a major goal of Iran's current five-year energy development plan, and would approximately double current Iranian gas output.

Annex B: Efforts to Prevent the South Pars Investment from Proceeding

Alerted by press and other reporting to the possibility of Total's investment in the South Pars deal, we made extensive and continuous attempts to head it off before it took place.

For example, Ambassador Rohatyn raised the issue at Ministerial level in Paris, asking the GOF to help persuade Total not to go forward with the project. Similar representations were made by senior Department officials to the French Ambassador in Washington.

Our Embassies in Paris and Kuala Lumpur also talked directly with Total and Petronas, cautioning against investment in Iranian petroleum projects. The issue was also raised directly with the Russian government.

Once the contract was announced, we made strenuous efforts with the governments of France, Russia, and Malaysia to seek their help in getting the companies involved to withdraw. President Clinton wrote directly to French President Chirac and Russian President Yeltsin.

The Secretary of State has repeatedly raised ILSA and the South Pars case with French officials, including the Prime Minister and Foreign Minister. Under Secretaries Eizenstat and Pickering also raised the matter with senior French officials in Paris and Washington; and the Embassy has actively pursued it in Paris.

With Russia, in addition to the President's letter, both the Secretary and Deputy Secretary raised our concerns about this deal with Foreign Minister Primakov and, early on, Ambassador Collins raised our objections with Gazprom CEO Vyakirev. Energy Secretary Pena urged Gazprom's withdrawal with then-Fuels and Energy Minister (now Prime Minister) Kiriyenko in November 1997.

In Kuala Lumpur, we delivered similar messages to the Government of Malaysia. EB Deputy Assistant Secretary William Ramsay visited all of the South Pars capitals to talk with governments about getting the companies to pull out of the deal, and to persuade the companies not to go forward. In April, he met again with officials of the Government of Malaysia in Kuala Lumpur to determine if the Asian financial crisis would persuade Petronas to withdraw from the project.

Annex C: An Assessment of the Significance of the Investment

There is little question that Phases 2 and 3 of the South Pars project, which are the subject of the Total, Gazprom, Petronas contract, arc significant in the development of Iran's petroleum resources. As indicated in Attachment A, the contract contemplates a capital investment of $2 billion, and the eventual production of 2 million cubic feet of gas and 80,000 barrels of condensates per day from a currently undeveloped field. Under current plans, this gas is intended for use internally within Iran, both as fuel and to maintain pressure in oilfields, though it could also be used for export if planned export pipelines are realized. Completion of the phases of South Pars covered in this contract is a major goal of Iran's current five-year energy development plan, and would approximately double current Iranian gas output. A successful launch of Phases 2 and 3 could also encourage the further development of South Pars resources that the Iranians are planning. However, as explained in the body of the report, it is clear that the imposition of ILSA sanctions in this case would not prevent or delay the implementation of this project. Despite the acknowledged importance of South Pars, US interests in developing international cooperation to deter Iranian acquisition of weapons of mass destruction and support for terrorism are better served by waiving, rather than imposing, sanctions which would be ineffectual.

Annex D: Response in the Event the Parties Engage in Other Sanctionable Activities

Future investments in Iran's petroleum sector by the firms involved in South Pars or other companies will be assessed on the basis the factors laid out in detail in this report. In the case of firms from EU member states, assuming the EU continues its enhanced level of cooperation on WMD, counterterrorism and other important matters, we would expect that a review of our national interests in future cases similar to South Pars involving the exploration and production of Iranian oil and gas resources would result in like decisions with regard to waivers.

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