Report to the Congress, Iran and
Libya Sanctions Act
REPORT TO THE CONGRESS
IRAN AND LIBYA SANCTIONS ACT:
DECISION TO WAIVE IMPOSITION OF SANCTIONS
ON THE FIRMS TOTAL, GAZPROM, AND PETRONAS
FOR ACTIVITIES FOUND SANCTIONABLE UNDER THE 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
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
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
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
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
Annex D: Response in the Event the Parties Engage in Other
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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