It was reported last month that Iraq had signed an agreement to import natural gas from Iran for power generation. This briefing considers the potential sanctions issues which may arise for companies involved with Iraqi power plants supplied by this pipeline and, in particular the risk of contravening the EU restrictions on dealing with Iranian natural gas.

The EU prohibits the purchase or transport of Iranian-origin natural gas and the financing of such activities, together with any measures with the object or effect of circumventing these restrictions. Depending on the precise structure of the relevant Iraqi power projects, there is therefore a risk that companies involved may contravene the EU Iranian gas embargo and/or the US restrictions on dealings with Iran.

1. Iran/Iraq pipeline

Reports indicate that, under a contract between the Iranian and Iraqi governments, Iran will supply Iraq with 850 million cubic feet of gas per day for a period of four years. The current intention appears to be that the gas will be imported by pipeline for use in Iraq's Mansuriya, Quds and Sadr power plants and that the imported gas will eventually be replaced by production from Iraq's Mansuriya gas field, which is scheduled to begin in 2016.

However, Iraq is facing challenges in developing its domestic gas production capacity and transportation infrastructure while simultaneously tendering for the development of several new power projects. The contractual arrangements and sources of fuel for the proposed power projects, have not yet been finalised. In relation to fuel supply, regardless of source, it is likely that the projects will be structured in one of two ways:

  • The "sale" model whereby the project buys gas from a supplier and sells the electricity produced in the power plant to a different offtaker entity; or
  • The "tolling" model under which the offtaker entity will buy the gas itself and make it available for the project to convert it into electricity in return for a fee.

Companies involved in or considering an involvement in any power projects, whether existing or proposed, that are to be fuelled by Iranian gas should consider whether the scope of their activities may create risks under applicable sanctions regimes.

2. EU gas embargo

We commented in a previous briefing on the EU's introduction in December 2012 of an embargo on Iranian-origin natural gas. In summary, EU Regulation 267/2012 (as amended by Regulation 1263/2012) applies to natural gas which originates in Iran or has been imported from Iran and prohibits:

  • purchasing, transporting or importing Iranian gas into the EU;
  • swapping Iranian gas; and
  • providing, directly or indirectly brokering services, financing or financial assistance, including financial derivatives, as well as insurance and re-insurance and brokering services relating to insurance and re-insurance, in respect of the above activities.

The EU sanctions apply to any acts done in the territory of the EU and to EU-incorporated companies and EU nationals in respect of their acts worldwide. Penalties for breach are set by each Member State; in the case of the UK, breach of the gas embargo provisions carries a maximum sentence of two years' imprisonment and/or a fine.

Any companies considering involvement in Iraqi power projects to be fuelled by Iranian gas may therefore wish to seek advice on whether they are at risk of breaching sanctions. We set out below a summary list of the sanctions prohibitions that could be engaged in the construction or operation of the plants; however, we recommend that specific advice is sought on the application of sanctions to any particular project.

  • Any EU company or EU nationals involved in the purchase of natural gas under the "sale" model could well contravene the prohibition on purchasing Iranian natural gas.
  • Similarly, parties involved in the operation of the plants may also be involved in the prohibited activity of transporting Iranian natural gas.
  • Even if the "tolling" model is used, there is a risk that partners in the project could be seen to broker the purchase of Iranian natural gas. Structuring a project in this way so as to avoid the ban on purchasing Iranian natural gas could also contravene the circumvention provisions referred to in more detail below.
  • Financial institutions involved in the project may be at risk of financing or providing financial assistance in relation to the purchase/transport of Iranian natural gas.
  • Insurers are also prohibited from insuring these activities.

3. Circumvention and secondary/accessory liability under UK law

As alluded to above, it could be argued that the "tolling" model would not engage the restrictions on the purchase of Iranian natural gas since the project itself does not purchase the gas. However, there is a risk that, if a project is deliberately structured in this way, it could be said to contravene the circumvention provisions of the sanctions regime. These prohibit the participation, knowingly and intentionally, in activities the object or effect of which is to circumvent the EU sanctions. Therefore if a project is structured under the "tolling" model (or other steps are taken) to avoid the application of EU sanctions, there is a risk that this may itself breach the sanctions.

UK companies and individuals should also be aware of the risk of incurring secondary liability under UK law, in particular of committing an "assisting" offence under the Serious Crime Act 2007. This offence can be committed by a UK company or individual who assists a non-UK person to do something which the UK person could not itself do (such as purchase Iranian gas).

4. US sanctions on Iran

As many companies will be aware, the US imposes the most sweeping sanctions on Iran of virtually any country in the world, including certain measures with extraterritorial effect. Although full details of the US regime are beyond the scope of this briefing, we note that purchases of Iranian natural gas are specifically excluded from US sanctions that prohibit dealings with the Iranian energy sector.

However, due to the broad nature of US sanctions, many US companies, in particular US banks, may be reluctant to be involved in any project involving Iran, such as the construction and operation of power plants using Iranian natural gas. A recent report into Iran sanctions by the Congressional Research Service notes that the construction of the Pipeline itself may involve activity that is sanctionable under the US regime, indicating that the US authorities will be likely to keep a close eye on the Pipeline and associated projects.

5. EU sanctions on Iraq

As companies with operations in the region will be aware, the EU's sanctions against Iraq are much less restrictive than those against Iran. However we note that the EU still maintains an asset freeze in relation to 86 individuals and 208 entities associated with Saddam Hussein's regime. Companies considering projects in Iraq such as the power plants would therefore be well advised to carry out thorough due diligence on any business partners to ensure that they are not dealing with designated persons.