On 14 July 2015, after months of negotiations, China, France, Germany, Russia, the United Kingdom, and the United States (the E3/EU+3, also known as the P5+1) and Iran reached an agreement, the Joint Comprehensive Plan of Action (JCPOA), regarding Iran’s nuclear program. The JCPOA creates a detailed and complex process by which Iran must take certain steps to ensure the peaceful nature of its nuclear program, while the United States and the European Union (EU) cease the application of nuclear-related sanctions and ultimately repeal them.
The JCPOA does not provide any immediate impact on the Iran sanctions that have been in place during the recent negotiations.
Until Implementation Day—the day that the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures described in the JCPOA, expected to occur in six to nine months—only the limited relief under the interim Joint Plan of Action (Interim JPOA), in effect since November 2013 to encourage negotiations, remains available. On Implementation Day, the JCPOA anticipates that the United States and the EU will provide sanctions relief beyond the scope of the Interim JPOA in a number of areas, including the energy sector.
Hogan Lovells has prepared a full briefing on the impact of the JCPOA across a range of industries.
There are a number of important points that companies in the energy sector may want to assess from a legal point of view and discuss at this stage with their relevant home governments. For example, as described below, non-U.S. subsidiaries of U.S. companies may want to begin a dialogue with the U.S. government regarding the nature and scope of any future authorization described in the JCPOA, particularly with respect to the energy sector.
Overview of implications for the energy sector
The sanctions relief, if implemented, represents a significant opportunity for non-U.S. energy companies.
European sanctions: The agreement currently anticipates removing entirely the EU economic and financial sanctions on the oil, gas, petrochemical, and civilian nuclear sectors, opening the Iranian market to non-U.S. companies to the extent those companies are not also subject to U.S. primary sanctions.
U.S. primary sanctions: It remains to be seen what impact the deal will have on U.S. companies and their non-U.S. subsidiaries, given the agreement’s limited impact on U.S. primary sanctions. It is not likely that U.S. companies will be able to directly engage in energy-related activities involving Iran. However, their non-U.S. subsidiaries may benefit from certain authorizations that are expected to be issued on or after the Implementation Day (the scope of such authorizations, however, remains unclear at this point).
U.S. secondary sanctions: With regard to the U.S. secondary sanctions in the energy sector which target certain Iran-related activities of non-U.S. companies, the JCPOA anticipates that the United States would cease efforts to reduce Iran’s crude oil sales, including limitations on the quantities of Iranian crude oil sold and the nations that can purchase Iranian crude oil. In addition, many secondary sanctions restrictions that currently target Iran's energy industry would be permanently removed.
Therefore, the expected easing of U.S. secondary sanctions primarily would benefit non-U.S. energy companies that will engage in activities with Iran provided that such activities have no U.S. nexus.
Overview of U.S. sanctions relief
Annex II to the JCPOA commits the United States to take certain steps with respect to both U.S. primary sanctions and nuclear-related secondary sanctions on Implementation Day, although the commitments with respect to primary sanctions are more limited and in the form of certain licensing commitments.
With respect to secondary sanctions, U.S. sanctions relief will occur in a number of sectors in addition to the energy sector,including the finance and banking, insurance, shipping, and automotive sectors. In the energy sector, in addition to sanctions relief on crude oil exports mentioned above, many secondary sanctions restrictions would be permanently removed. These include sanctions on:
- investment, including participation in joint ventures, goods, services, information, technology, and technical expertise and support for Iran’s oil, gas, and petrochemical sectors;
- the purchase, acquisition, sale, transportation, or marketing of petroleum, petrochemical products, and natural gas from Iran;
- the export, sale, or provision of refined petroleum products and petrochemical products to Iran; and
- transactions with Iran’s energy sector, including with the National Iranian Oil Company (NIOC), Naftiran Intertrade Company, and National Iranian Tanker Company.
The impact on primary sanctions under the Iranian Transactions and Sanctions Regulations (ITSR) is more limited. The U.S. government has made a commitment in the JCPOA to issuespecific licenses for certain activities. OFAC has advised thatmore detailed guidance will be provided in the future.
These areas include, but are not limited to, easing primary sanctions measures relevant to subsidiaries of U.S. entities located outside the United States. The wording of the JCPOA states that the U.S. will “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.” The JCPOA defines an entity as owned or controlled by a U.S. person “if the U.S. person: (i) holds a 50 percent or greater equity interest by vote or value in the entity; (ii) holds a majority of seats on the board of directors of the entity; or (iii) otherwise controls the actions, policies, or personnel decisions of the entity.” The JCPOA further clarifies that “U.S. persons and U.S.-owned or -controlled foreign entities will continue to be generally prohibited from conducting transactions of the type permitted pursuant to this JCPOA, unless authorized to do so by the U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC).” It remains to be seen how this licensing commitment will be implemented by OFAC.
Finally, the JCPOA provides for the removal of certain individuals and entities on the SDN List, the Foreign Sanctions Evaders List, and/or the Non-SDN Iran Sanctions List with connections to Iran’s nuclear program. Under the JCPOA, individuals and entities listed in Attachment 3 to Annex II will be removed from the relevant lists on Implementation Day. Individuals and entities listed in Attachment 4 to Annex II will be removed from the relevant lists on or after Transition Day, which occurs eight years from the adoption of the JCPOA or after the IAEA certifies that all nuclear material in Iran remains in peaceful activities.
Overview of easing of EU sanctions
The EU has agreed to lift all of its nuclear-related sanctions and restrictive measures. Annex V to the JCPOA sets out the precise detail and timing for the sanctions’ lifting. As a result, the following activities relevant to the energy industry which are now prohibited will be permitted:
- import, purchase, swap, and transport of Iranian oil, petroleum products, gas and petrochemical products, and related financing;
- export of key equipment or technology and technical assistance (including training) for the oil, gas, and petrochemical sectors, covering exploration, production, and refining of oil and natural gas, including liquefaction of natural gas;
- investment in, and financing of, the oil, gas, and petrochemical sectors;
- transfers of funds between EU persons and entities, including financial institutions, and Iranian persons and entities, including financial institutions;
- banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the territories of EU Member States;
- provision of insurance and reinsurance;
- supply of specialized financial messaging services, including SWIFT, for designated persons and entities, including the Central Bank of Iran and Iranian financial institutions;
- financial support for trade with Iran (export credit, guarantees, or insurance);
- design and construction of cargo vessels and oil tankers;
- provision of vessels and of flagging and classification services, including in respect of vessels to be used to transport or store oil and petrochemical products;
- provision of bunkering or ship supply services to Iranian-owned or Iranian-contracted vessels not carrying prohibited items; and
- designation of persons, entities, and bodies (asset freeze and visa ban).
On Implementation Day, the EU will remove listed persons and entities subject to asset freezing measures from Annexes VIII to IX to Council Regulation 267/2012, as well as suspend the provisions of Council Decision 2010/413/CFSP in relation to such persons and entities.
In addition, we note the following:
- The EU political sanctions imposed in response to human rights violations in Iran will remain in place. In practice, the ban on the supply of certain goods used for internal repression will continue in addition to the asset freezing measures on designated persons and entities.
- Opportunities for EU companies:
- Civil nuclear cooperation
The E3/EU+3 have proposed several areas of cooperation with Iran, in particular in the civil nuclear sector. The E3/EU+3 have agreed to facilitate particular activities relating to, among others, the construction and operation of civilian nuclear power plants.
- Export credit support
More broadly, the EU has also committed to further explore possible areas for cooperation between the EU, its Member States, and Iran. In particular, the EU will consider the use of available instruments, such as export credits to facilitate trade, project financing, and investment in Iran. The EU provides an overarching framework for export credit principles, but export credit agencies are run at a Member State level, potentially providing a range of different opportunities for EU investors.
- Civil nuclear cooperation
UN Security Council resolution
On 20 July 2015, the United Nations (UN) Security Council adopted Resolution 2231 (2015) endorsing the JCPOA. The resolution agrees to terminate on Implementation Day the seven current UN resolutions on Iran. The UN Security Council will then replace these with specific restrictions on an arms embargo and missile technology. The resolution has an end date of 10 years after the JCPOA Adoption Day (18 October 2015, being 90 days after the date of the resolution). By this end date the E3/EU+3 and Iran parties aspire to the conclusion of the Iran nuclear issue by the UN Security Council.
Next steps on implementation
Under U.S. law, Congress has 60 days to review the JCPOA from the date the President submits the agreement to Congress. In theory, Congress could enact legislation to attempt to disapprove the JCPOA and interrupt the progression of the terms agreed. President Obama has indicated he would veto any such legislation, requiring a veto-proof majority, two-thirds of the House and Senate, to override the President’s veto.
Within ninety days of the UN Security Council Resolution, the JCPOA comes into effect (Adoption Day). This will be 18 October 2015, unless the parties agree on an earlier date. The parties then become legally obligated to commence preparations to implement their JCPOA commitments.
On Implementation Day, the EU will terminate specified provisions of Council Regulation 267/2012 and suspend Council Decision 2010/413/CFSP, while the United States will cease the application of specified sanctions. That said, it remains to be seen how the agreement will be implemented in practice given the complexities of the various provisions.
On Transition Day, eight years from the adoption of the Security Council Resolution, the European Union and the United States will take further steps to terminate the sanctions specified.
As the parties work to meet their obligations, the JCPOA also contemplates the “snap-back” of Iran sanctions in the event that Iran fails to comply with the agreement.
Impact on Iran and oil and gas companies
According to the BP Statistical Review of World Energy, June 2015, Iran accounts for 9.3 percent of the world's proven oil reserves (fourth), and 18.2 percent of its proven gas reserves (first). Increased production and sales of gas and, in particular, crude oil will be seen as a source of much needed revenues for Iran, even if it would put further downward pressure on already low global oil prices.
Iran will want to encourage further exploration, however, the immediate opportunities may be in those projects which offer a quicker route to commercializing production and securing market share; enhanced recovery projects to improve existing production; resumption of projects stalled due to sanctions; and commencing development of known but untapped fields.
NIOC has announced a list of 49 upstream projects divided into 21 'top priority' projects, and 28 'second priority' projects. The top priority projects focus on those fields which straddle international boundaries, such as the South Azadegan (Phase 1), North Azadegan (Phase 2), Yadavaran (Phase 2), South Pars (Phase 11), Arvand and Forouzan fields, and the South Pars Oil Layer (Phase 1), among others. The intention appears to be to commence or increase production at these fields as soon as possible as, in the absence of an international unitization and unit operating agreement, the neighboring country can compete for production under the 'rule of capture' principle.
With respect to upstream investment, NIOC has also announced the impending release of a new form of Iranian Petroleum Contract (IPC) to replace the third-generation buy-back contracts that were most recently formulated for contracting with foreign investors. Only limited information has been publicly released on the IPC, and we understand it remains subject to further consideration and revision. Consistent with the requirements of Iran's Constitutional Law, we expect foreign investors will not be able to acquire any ownership of in-situ petroleum. However, contrary to the buy-back contracts, it may be possible for foreign investors to acquire title to petroleum at designated delivery points, in a similar manner as under a typical production sharing contract formulation. That development might open the prospect of oil and gas companies booking reserves. The term of the IPC is also expected to be 20-25 years, substantially longer than the standard buy-back contract. In fact the general description of the IPC that has been provided, suggests it will look similar to a production sharing contract.
Further details of the new Iranian Petroleum Contract, and of the 49 priority upstream projects, are expected to be released later this year—possibly in September.
Regarding the downstream sector, re-launching the development of the mega LNG liquefaction projects would also be high on the priority list, although it is a difficult market for these projects to enter. The Ministry of Petroleum has also announced planned developments of, among others:
- a terminal and oil tanks at Jask, Lavan and Siri;
- a pipeline from Goreh in Bushehr to Jask; and
- the Bahregan oil terminal.
Expansion of refinery and petrochemical facilities should also be expected.
What can be done now
As mentioned above, the JCPOA does not provide any immediate impact on the Iran sanctions that are currently in place.
Until Implementation Day, all existing sanctions remain in place and are fully operational, subject only to the limited relief provided under the Interim JPOA. We note that the UK Department for Business, Innovation, and Skills has published a Notice to Exporters 2015/20, which states that "while sanctions remain in place they will continue to be enforced robustly."
The sanctions relief specified in the Interim JPOA allows limited activity in connection with Iran's oil and gas industry. This includes allowing:
- transactions by non-U.S. persons for the export from Iran of petrochemical products, and for associated services (including the provision of transportation, financial, underwriting, insurance, or re-insurance services); and
- continued export of Iranian crude oil to existing customers in China, India, Japan, South Korea, Taiwan, and Turkey, and for associated insurance and transportation services, provided that the volumes purchased do not exceed the average levels set under the Interim JPOA,
provided the transactions do not involve persons who are included on the SDN list and not expressly permitted by the sanctions relief.
While energy companies are not immediately able to launch into new transactions with or relating to Iran, companies can assess whether discussions or other activities are permissible. Any discussions or other activities should, however, be planned and performed with caution to ensure they do not contravene any current sanctions and restrictions. Further, U.S. companies should remember that even after the Implementation Date they are likely to remain under strong restrictions imposed by U.S. primary sanctions. Finally, all companies should also remain cognizant of the “snap-back” provisions to immediately reinstate sanctions should Iran fail to meet the commitments it made under the JCPOA, and the risk this could present to new investments made that would fall outside the scope of the reinstated sanctions.