Following the lifting of a number of sanctions by the U.S., and the EU, in connection with the Joint Comprehensive Plan of Action (JCPOA), Iran was seen as a significant opportunity for the European oil and gas industry. But the so-called “snapback” of U.S. sanctions, following its JCPOA withdrawal, has dashed these hopes.
At present, the Trump administration exerts more economic pressure on Iran than almost any previous administration, severely disrupting Iranian cross-border investment. While the U.S. has reluctantly issued licences that limit the effect of the sanctions on existing projects, any new involvement by Iran in the North Sea is hard to imagine. The extension of the EU Blocking Regulation to the extra-territorial aspects of the U.S. Iranian sanctions has made little difference.
While lots of attention has been paid to the effect of U.S. sanctions on international companies looking to buy Iranian oil, less has been paid to the effect on Iranian investments in international oil and gas. In both cases, the U.S. has sought to soften the sanctions blow by issuing some licences, albeit subject to stringent conditions that ensure the overarching U.S. policy aim of confronting Iran with mounting “financial isolation and economic stagnation” is not thwarted.
One example of the U.S. approach in terms of Iranian investment relates to the North Sea Rhum field. Iranian Oil Company (U.K.) Limited (IOC) holds a 50% interest in the Rhum field. In October 2018, Serica Energy plc announced that its subsidiary, Serica Energy (UK) Limited, and BP had received a conditional licence from the U.S. Office of Foreign Assets Control. This would allow U.S.-owned or controlled entities to provide services to Rhum. Serica reported that it also allows Serica UK to complete the acquisition of BP’s interests in Rhum. The licence is conditional on all benefits accruing from IOC’s interest in the Rhum field being held in escrow while the U.S. sanctions apply and ensuring no parent of IOC will derive any economic benefit from the field during this time. Therefore, although the licence helps Serica and BP, it does not offer a way for IOC to obtain cashflow from its investment.
A particular headache faced by the UK oil and gas industry relates to the EU Blocking Regulation, which prohibits EU companies from complying with the U.S. sanctions as they apply to business between the EU and Iran. Therefore, these companies risk severe penalties under U.S. sanctions if they do business with Iran, but could also risk breaching the EU Blocking Regulation if they comply with the U.S. sanctions. Given the strong U.S. track record on sanctions enforcement and its uncompromising language, threatening those doing business with Iran, most European companies want to steer clear. Companies are looking carefully at how they can police their counterparties and their sanctioned dealings, but without attracting the risk of breach the Blocking Regulation.
Sanctions compliance is increasingly important for all energy businesses, but what do you do when the sanctions regimes that affect you are in conflict? This is becoming a particular headache for oil and gas companies because of the EU Blocking Regulation. Dating from 1996, the EU Blocking Regulation originally applied to prohibit EU companies from complying with certain extra-territorial US sanctions dating from that time applying to Cuba, Iran and Libya. For 20 years, the Blocking Regulation was a legal backwater, of limited concern to companies and the basis for very few enforcement cases. Earlier this year, the EU extended the scope of the Blocking Regulation in response to the “snapback” of US sanctions following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA). It now prohibits EU companies from complying with “snapped-back” US sanctions as they apply to business between the EU and Iran
Oil and gas companies risk severe penalties under US sanctions if they do business with Iran, but could also risk breaching the Blocking Regulation if they comply with US sanctions. The Trump administration’s uncompromising stance on Iran and the US’s history of levying heavy penalties for sanctions breaches mean that most companies want avoid Iranian business. As a result, companies need to think carefully and creatively about how they can avoid Iranian exposure without attracting the risk of breach the Blocking Regulation. Country-risk policies that look beyond sanctions to other areas of business risk can form a useful part of this.
In the light of Iran’s recent ballistic missile test, and alleged involvement in various assassination plots on European soil, companies need to be prepared for the tough Iranian sanctions environment to continue.