ENERPO JOURNAL

European University at St. Petersburg

The History and Impact of U.S. and EU Energy-related Sanctions Against Iran

by Trey Giesen

The designation of the Islamic Republic of Iran as a state sponsor of terrorism by the United States on January 23, 1984 began a thirty-year long sanctions regime against the Islamic nation. Initially serving the twofold purpose of pressuring the Islamic republic to discontinue its support of terrorism and curbing Iran’s growth as a regional power, the sanctions regime in the mid 1990’s evolved into an initiative to limit the development of the Iranian nuclear program. The advancement of this program became the primary impetus for the complex, multilateral sanctions system which exists today. These sanctions mainly focus on the nation’s energy and financial sectors. The energy sector plays a particularly significant role in the Iranian economy, contributing a large percentage of export and budgetary revenues, 80% and 50-60% respectively. However, the United States’ sanctions saw limited success. Only in 2010, after successive resolutions by the United Nations Security Council (UNSC), did the European Union itself begin to impose sanctions, and sanctions saw more success. This culminated in an agreement being signed in November 2013 between Iran, the United States, and the other member of the United Nations Security Council (P5+1) which provides for an “easing” of sanctions for six months. These sanctions seem to have more greatly hindered the development of Iran’s energy sector than its nuclear program.

Iran’s Hydrocarbon Reserves

Sanctions on Iran may have been meant to force change in the short-term, but they also have consequences not so directly related to Iran itself. After all, Iran is endowed with significant hydrocarbon resources. According to the U.S. Energy Information Administration (EIA), with 157.3 billion barrels of proven crude oil reserves, Iran constitutes the fourth largest holder of crude oil in the world, with only Canada, Saudi Arabia, and Venezuela holding more. In addition, the proven conventional natural gas reserves of the Islamic nation, at 33.4 trillion cubic meters (TCM) (17.3% share of world total), make Iran the second largest holder worldwide. Only Russia has larger reserves with 47.26 TCM (24.7% share of world total). These reserves, coupled with the strategic location of the nation, ensure Iran is capable of being a large-scale oil and natural gas provider to major hydrocarbon consumers nearby, specifically Europe, India, and China. In this context, Iran’s hydrocarbon capabilities provide it with the potential to become a strong, influential player regionally as well as on global energy market. Hurting Iran’s energy industry through sanctions, therefore, allows for a measure of Western control over this potential influence.

The energy sector plays a particularly significant role in the Iranian economy, contributing a large percentage of export and budgetary revenues, 80% and 50-60% respectively.

Sanctions Related to Energy

As previously mentioned, United States’ sanctions against Iran began in the 1980’s and the UNSC and the European Union did not get involved in sanctions until two decades later. Given the extensive list of imposed sanctions, I will not list each individual sanction. Instead, I have chosen to include below a number of energy-related U.S. sanctions as well as those of the European Union. The UNSC, though sanctioning Iran through four resolutions, has not targeted the energy sector specifically, but concentrated on nuclear-related sanctions. U.S. sanctions are the most comprehensive; however, when applied unilaterally, they are not very effective. It should be noted that the European Union in the 1990’s “opposed the Iran Sanctions Act as an extraterritorial application of U.S. law.” Nevertheless, the EU followed the U.S. in implementing sanctions against Iran, but only after a 2010 UNSC resolution.

It should be noted that the European Union in the 1990’s “opposed the Iran Sanctions Act as an extraterritorial application of U.S. law.”

List of U.S. Sanctions

  • Iran Sanctions Act (ISA) (formerly known as the Iran and Libya Sanctions Act) (1996) – Addresses key energy-sector activities which will “trigger” U.S. sanctions against non-Iranian entities. Includes:
    • Investment of more than $20 million/year in Iran’s energy sector
  • Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) (2010) – Codifies and amends ISA.
    • Adds to ISA definition of energy sector to include pipelines to or through Iran and contracts related to the construction, upgrading, or expansions of energy projects, liquefied natural gas (LNG), oil or LNG tankers, and products to make or transport pipelines that transport oil or LNG

    • Sales of gasoline over $1 million ($5 million/year) and related equipment and services

  • Executive Order 13590 (2011) – Allows imposition of sanctions on persons involved in certain activities in Iran’s energy and petrochemical sectors.
  • Executive Order 13622 (Iran Threat Reduction and Syria Human Rights Act, ITRSHA) (2012) – Further amends and codifies CISADA, Executive Order 13590.
    • Sales of energy sector equipment, services, and petrochemicals
    • Purchasing of Iranian crude oil and petrochemical products
    • Insurance Iranian oil entities and purchases of Iranian bonds
  • Iran Freedom and Counter-Proliferation Act (IFCA) (2013)
    • Dealings with energy, shipbuilding, or shipping sector
    • Dealings in precious metals in exchange for oil or any other product (Starr and Ighani, 2014), (CRS, 2014)

List of European Union Sanctions

  • Council Regulation (EU) 961/2010 (2010) – Enacts a number of restrictive measures against Iran, particularly related to Iranian energy sector, including:
    • Selling, supplying, or transferring key equipment or technology in relation to crude oil and natural gas sectors to Iran
    • Provision of insurance, reinsurance, and transportation of Iranian crude oil, primarily concerned with shipping of oil and Iranian tankers
    • Grants, financial assistance, and concessional loans to Iranian persons or entities related to exploration of crude oil, natural gas, refining of fuels, or the liquefaction of natural gas
  • Council Regulation (EU) 267/2012 (2012) – Repeals and replaces Council Regulation (EU) 961/2010, amending restrictions to include:
    • Import of Iranian crude oil, petroleum products and petrochemical products
    • Investment in the petrochemical industry
    • Cooperation with Iranian person or entity engaged in the transmission of natural gas, including investing in liquefied natural gas facilities (Council of the European Union, 2010) (Council of the European Union, 2012)

Joint Plan Agreement: Easing of Sanctions

A six month easing of sanctions began on January 20th, 2014 after a Joint Plan of Action (JPA) agreement between Iran and the P5+1 (the United States, Russia, China, France, United Kingdom, and Germany) was signed on November 24, 2013. The main measures of the JPA require Iran to cease the development of its uranium enrichment program, to neutralize specific aspects of its program, including diluting half its stockpile of 20% enriched uranium hexafluoride to 5% and converting the rest into fuel, to allow for increased international monitoring of Iran’s nuclear program, and to halt its activities at the Arak reactor. In return for Iran’s cooperation, the P5+1 will grant a number of concessions for the agreement’s duration. These concessions pertain primarily to Iran’s energy sector. The agreement allows Iran to maintain an export maximum of one million barrels per day throughout the duration of the sanctions. This stems from importing countries no longer being required to decrease their imports during this duration. However, an increase in imports is also prohibited. Also, as part of the JPA, approximately $4.2 billion in frozen oil funds will become available to Iran over the course of the six month sanctions ease. In this regard, by April 17th, South Korea and Japan accounted for a combined total of $2.55 billion in five payments, one from South Korea and four from Japan. Soon, Indian refiners, owing $3.6 billion, will allocate $1.65 billion in three installments from May-July 2014. Another major measure suspends U.S. and EU sanctions on Iran’s petrochemical exports, gold, and precious metals as well as on their respective associated services. The EU includes a measure which suspends sanctions against the provisions of insurance, reinsurance, and transportation of Iranian crude oil. Furthermore, the UN Security Council and EU will not enact new nuclear-related sanctions. The U.S. Administration will abstain from imposing new nuclear-related sanctions. Other P5+1 concessions in the agreement include licensing the supply and installation in Iran of spare parts for Iranian civil aviation and associated services, and developing a financial medium to allow humanitarian trade needed in Iran domestically.

Damaged Iranian Energy Sector in Need of Investment

The impacts of sanctions on Iran’s energy sector are varied and considerable. What follows is only a small illustration of the sanctions’ major impacts. More specifically, briefly detailed are crude oil production and export levels, crude oil export revenues, current importers of Iranian oil and their import amounts, the effects on foreign direct investment in Iran’s energy sector, and the lack of significant international gas pipelines and LNG facilities.

The European Union’s July 2012 embargo on oil imports and insurance coverage for Iranian oil carriers had a significant impact because, by July 2013, Iran’s exports totaled only 1.1 million bbl/d.

According to EIA statistics, Iran’s crude oil production peaked in 2005 at 4.14 million bbl/d, but remained around the 4 million bbl/d mark until 2012. The 2011 production level constituted 4.05 million bbl/d. Following sanctions in 2012, and a decline of almost 700,000 bbl/d, the total stood at 3.37 million bbl/d. In 2013 crude oil production averaged 3.2 million bbl/d. Oil exports have been similarly affected. Iran’s crude oil exports in June 2011 reached almost 3 million bbl/d. Sanctions implemented throughout 2011 and 2012 by the United States and Europe, however, caused a sharp decline. The European Union’s July 2012 embargo on oil imports and insurance coverage for Iranian oil carriers had a significant impact because, by July 2013, Iran’s exports totaled only 1.1 million bbl/d. By the time the join plan agreement between Iran and the P5+1 was signed in November 2013, crude oil exports resided at approximately 800,000 bbl/d.

Iran’s export levels dropped because importers were required to stop buying Iranian oil or risk the U.S. sanctioning them. Europe averaged approximately 600,000 bbl/d imports in 2011, but a subsequent ban on oil imports in 2012 decreased imports to a negligible amount by January 2014. Many countries no longer import Iranian oil. Several countries were able to obtain exceptions to the ban. However, they are required to take substantive measures to decrease their imports. Those countries include South Korea, China, Japan, Turkey, India, and Taiwan. China, a major importer of Iranian crude, decreased its imports almost 25% from 550,000 bbl/d to 420,000 bbl/d by January 2014. Sanctioning imports of Iranian has cost Iran its European market and is pushing it out of several others.

According to the Iranian Deputy Oil Minister for International Affairs and Commerce Ali Majedi, Iran’s oil and gas industries will need $230 billion in investment, with $150 billion for the upstream oil sector to increase development of the production of oil and gas fields.

As a consequence of consumer countries decreasing their imports, Iran’s revenues have suffered. As just mentioned, the enacted sanctions require Iran’s major energy traders to decrease their oil imports or face sanctions themselves. Iran’s oil exports constitute 50-60% of its budgetary revenue; therefore, sanctions on oil trading have been particularly effective. In 2010, revenue from Iranian crude oil and oil products amounted to $150 billion. This total fell in 2011 to $95 billion and fell once more in 2012 to $69 billion. Within the first nine months of 2013, before the JPA was signed, oil revenues only constituted $32 billion. Decreasing oil exports cost Iran approximately $5 billion a month, and within the duration of the JPA, Iran will have lost $30 billion in potential revenue. Indeed, the U.S. Department of State emphasized succinctly the impact of oil sanctions on the Iranian economy in a teleconference on January 20, 2014. Specifically noted was the comparatively small amount of $6-7 billion that Iran will earn during the JPA – $4.2 billion in oil revenue and a potential $2 billion more from trade – in comparison to what sanctions are costing the nation economically. “Iran needs between $60 to $70 billion a year to finance its foreign imports…$6 to $7 billion will not fill that hole. Inflation in Iran remains near 40 percent, one of the highest inflation rates in the world, and its economy, which contracted 6 percent in the last Persian year, is expected to contract again this year”. (U.S. Department of State, 2014) As well as contributing to the economic development of the nation, these revenues provide funds for needed energy sector investment. With less revenue comes a smaller capability to reinvest in its own energy sector – a gap not being filled by foreigners either, due to sanctions.

In addition to export sanction losses, Iran is losing out on foreign direct investment in its energy sector. If we assume that one intention of sanctions is to curb the nation’s global strategic importance, then controlling foreign investment in its energy sector is an extremely effective means of doing so. A U.S. Congressional Research Service report about Iranian sanctions updated recently states that Iran needs $130-145 billion in investment by 2020 to keep its crude oil production capacity from falling. Also, the total potential investments the Islamic nation could have received by 2011 amounted to $60 billion. According to the Iranian Deputy Oil Minister for International Affairs and Commerce Ali Majedi, Iran’s oil and gas industries will need $230 billion in investment, with $150 billion for the upstream oil sector to increase development of the production of oil and gas fields. $15-20 billion of the remainder will be needed to upgrade Iran’s domestic natural gas pipeline network in order to build a spare pipeline and to expand its carrying capacity to account for domestic consumption and exports simultaneously. As a response to the need for investment, a new petroleum contract has been designed to interest foreign companies in investing. This contract depends on the success of negotiations between Iran and P5+1 and the continuing easing of sanctions, but it could potentially bring in about $100 billion over the next four years. Unfortunately, even if the Iranian energy sector acquires the projected $100 billion investment, the sector will be short $30-130 billion. In this case, the country would need to increase its oil exports substantially to offset the imbalance.

Assuming sanctions continue to lighten and Iran continues to cooperate, foreigners’ enthusiasm to invest will increase, and this, coupled with the Iranian petroleum contract changes and the industry’s own readiness to accept foreign involvement, will help the Iranian energy bounce back significantly in the coming decades.

Sanctions against investment in Iran’s energy sector have also hindered the development of Iran’s natural gas industry. As crude oil pipelines are unnecessary given the nation’s location between other large oil-producing countries, natural gas pipelines could have been an asset to the Iranian energy sector and its revenues. Iran is located between several regions which require natural gas imports, including Europe, Pakistan, India, and China. Therefore, construction of a large-capacity natural gas pipeline would be greatly beneficial to Iran. Having the second largest reserves of natural gas in the world, Iran has significant potential for exporting natural gas regionally and globally. However, the nation’s export amount from 2008-2012 averaged a minuscule 7.35 billion cubic meters (bcm) and its natural gas imports over the same period totaled 7.25 bcm (U.S. Energy Information Administration, 2014b). Such a small disparity can be construed as a telling indication of the impact sanctions have had on Iran’s gas industry. One aspect of the gas industry’s development that has been hindered particularly is the nation’s lack of a complete LNG liquefaction facility. One project, Iran LNG, is at varying stages of construction, according to the website of the Iranian Liquefied Natural Gas Company. This project has been in the works for several years and should have been completed in 2012; however, the lack of LNG technology has delayed its completion. Due to sanctions, LNG technology, which would have come from foreign investors, particularly European, has been difficult to come by. At least two other LNG projects, Persian LNG and Pars LNG, were ultimately dropped due to sanctions. Thus, while nearby countries in the Persian Gulf have developed facilities and are thriving, the Iranian LNG market is still in its infancy.

Conclusion

The impacts of sanctions on the Iranian energy sector go beyond the limited scope just previously mentioned. These represent only a brief, shallow examination of some of sanctions’ consequences. Overall, the energy sector has taken a huge setback in its development. Production is down. Export revenues are decreasing. Investment is low when it should be high. Iran lacks a well developed natural gas industry, including LNG capabilities. Sanctions have certainly made it difficult for Iran’s energy sector to function. The United States earlier sanctions brought only minor success. Only in the 2000’s, when Europe also became involved, did sanctions become extensively effective. Given Iran’s energy endowment, the sanctions only hinder development of the sector in the short to mid-term. Assuming sanctions continue to lighten and Iran continues to cooperate, foreigners’ enthusiasm to invest will increase, and this, coupled with the Iranian petroleum contract changes and the industry’s own readiness to accept foreign involvement, will help the Iranian energy bounce back significantly in the coming decades.

Trey Giesen is an MA student in the ENERPO program at European University at St. Petersburg.

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