The Iran Sanctions Act (ISA)

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

International pressure on Iran to curb its nuclear program is increasing the hesitation of major
foreign firms to invest in Iran’s energy sector, hindering Iran’s efforts to expand oil production
beyond 4.1 million barrels per day. Iran continues to attract preliminary energy investment
interest from firms primarily in Asia. The formal U.S. effort to curb energy investment in Iran
began in 1996 with the Iran Sanctions Act (ISA), although no firms have been sanctioned under it ^th
and the precise effects of that law on energy investment in Iran has been unclear. In the 110
Congress, two bills passed by the House (H.R. 1400 and H.R. 7112), and several others, add ISA ^th
provisions and are widely expected to be reintroduced in the 111 Congress.
This report will be updated regularly. See CRS Report RL32048, Iran: U.S. Concerns and Policy
Responses, by Kenneth Katzman.

Background and Original Passage...................................................................................................1
Key Provisions..........................................................................................................................1
Iran Freedom and Support Act Amendments............................................................................2
Effectiveness and Ongoing Challenges...........................................................................................3
Energy Routes and Refinery Investment...................................................................................4
Proposed Further Amendments in the 110^th Congress.....................................................................5
Table 1. Post-1999 Major Investments in Iran’s Energy Sector......................................................6
Author Contact Information............................................................................................................7

The Iran Sanctions Act (ISA) is one among many U.S. sanctions in place against Iran. Originally
called the Iran-Libya Sanctions Act (ILSA), it was enacted to complement other measures—
particularly Executive Order 12959 of May 6, 1995, that banned U.S. trade with and investment
in Iran—intended to deny Iran the resources to further its nuclear program and to support terrorist
organizations such as Hizbollah, Hamas, and Palestine Islamic Jihad. Iran’s petroleum sector
generates about 20% of Iran’s GDP, but its onshore oil fields and oil industry infrastructure are
aging and need substantial investment. Its large natural gas resources (940 trillion cubic feet,
exceeded only by Russia) were undeveloped when ISA was first enacted. Iran has 136.3 billion
barrels of proven oil reserves, the third largest after Saudi Arabia and Canada.
In 1995 and 1996, U.S. allies did not join the United States in enacting trade sanctions against
Iran, and the Clinton Administration and Congress believed that it might be necessary for the
United States to try to deter their investment in Iran. The opportunity to do so came in November
1995, when Iran opened its energy sector to foreign investment. To accommodate its ideology to
retain control of its national resources, Iran used a “buy-back” investment program in which
foreign firms recoup their investments from the proceeds of oil and gas discoveries but do not
receive equity. With input from the Administration, on September 8, 1995, Senator Alfonse
D’Amato introduced the “Iran Foreign Oil Sanctions Act” to sanction foreign firms’ exports to
Iran of energy technology. A revised version instead sanctioning investment in Iran’s energy
sector passed the Senate on December 18, 1995 (voice vote). On December 20, 1995, the Senate
passed a version applying the legislation to Libya as well, which was refusing to yield for trial the
two intelligence agents suspected in the December 21, 1988, bombing of Pan Am 103. The House
passed H.R. 3107, on June 19, 1996 (415-0), and then concurred on a slightly different Senate
version adopted on July 16, 1996 (unanimous consent). It was signed on August 5, 1996 (P.L.

104-172).

ISA requires the President to impose at least two out of a menu of seven sanctions on foreign
companies (entities, persons) that make an “investment” of more than $20 million in one year in ¹
Iran’s energy sector. The sanctions (Section 6) include (1) denial of Export-Import Bank loans,
credits, or credit guarantees for U.S. exports to the sanctioned entity; (2) denial of licenses for the
U.S. export of military or militarily-useful technology; (3) denial of U.S. bank loans exceeding
$10 million in one year; (4) if the entity is a financial institution, a prohibition on its service as a
primary dealer in U.S. government bonds; and/or a prohibition on its serving as a repository for
U.S. government funds (each counts as one sanction); (5) prohibition on U.S. government
procurement from the entity; and (6) restriction on imports from the entity, in accordance with the
International Emergency Economic Powers Act (IEEPA, 50 U.S.C. 1701). In the original law, the

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President may waive the sanctions on Iran if the parent country of the violating firm sanctions
Iran (a provision later made inapplicable), or if he certifies that doing so is important to the U.S.
national interest (Section 9(c)). Under the original version, ISA application to Iran would
terminate if Iran is determined by the Administration to have ceased its efforts to acquire WMD
and is removed from the U.S. list of state sponsors of terrorism. Application to Libya terminated
when the President determined on April 23, 2004, that Libya had fulfilled the requirements of all
U.N. resolutions on Pan Am 103.
Traditionally skeptical of imposing economic sanctions, the European Union opposed ISA as an
extraterritorial application of U.S. law. In April 1997, the United States and the EU agreed to
avoid a trade confrontation in the World Trade Organization (WTO) over it and a separate Cuba
sanctions law, (P.L. 104-114). The agreement contributed to a May 18, 1998, decision by the
Clinton Administration to waive ISA sanctions (“national interest”—Section 9(c) waiver) on the ²
first project determined to be in violation—a $2 billion contract (September 1997) for Total SA
of France and its partners, Gazprom of Russia and Petronas of Malaysia to develop phases 2 and
3 of the 25-phase South Pars gas field. The EU pledged to increase cooperation with the United
States on non-proliferation and counter-terrorism, and the Administration indicated future
investments by EU firms in Iran would not be sanctioned.
ISA was to sunset on August 5, 2001, in a climate of lessening tensions with Iran and Libya.
During 1999 and 2000, the Clinton Administration had eased the trade ban on Iran somewhat to
try to engage the relatively moderate Iranian President Mohammad Khatemi. In 1999, Libya
yielded for trial the Pan Am 103 suspects. However, some maintained that both countries would
view its expiration as a concession, and renewal legislation was enacted (P.L. 107-24, August 3,
2001). This law required an Administration report on ISA’s effectiveness within 24 to 30 months
of enactment; that report was submitted to Congress in January 2004 and did not recommend that
ISA be repealed.
With U.S. concern about Iran’s nuclear program increasing, ISA was to sunset on August 5, 2006.
Members, concerned that foreign companies were ignoring ISA, introduced the “Iran Freedom
and Support Act” (H.R. 282, S. 333) to extend ISA indefinitely, to increase the requirements to
justify waiving sanctions, to set a 90-day time limit for the Administration to determine whether
an investment is a violation (there is no time limit in the original law), and to authorize funding
for pro-democracy activists in Iran. H.R. 282 (passed by the House on April 26, 2006 by a vote of
397-21) would also have cut U.S. foreign assistance to countries whose companies violate ISA
and applied the U.S. trade ban on Iran to foreign subsidiaries of U.S. companies. After passage of
a temporary extension until September 29, 2006 (P.L. 109-267), the Iran Freedom and Support
Act version that ultimately passed was H.R. 6198, providing the flexibility demanded by the
Administration. It amends ISA by: (1) calling for, but not requiring, a 180-day time limit for a
violation determination; (2) making sanctionable sales to Iran of WMD-useful technology or
“destabilizing numbers and types of” advanced conventional weapons; (3) adding a required
determination that Iran “poses no significant threat” to terminate application to Iran; (4)
recommending against U.S. nuclear agreements with countries that supply nuclear technology to
Iran; (5) expanding provisions of the USA Patriot Act (P.L. 107-56) to curb money-laundering for

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use to further WMD programs; (6) extending ISA until December 31, 2011; and (7) formally
dropping Libya and changing the name to the Iran Sanctions Act. It was passed by the House and
Senate by voice vote and unanimous consent, respectively, and was signed on September 30,

2006 (P.L. 109-293).

The Bush Administration argues that, even without actually imposing ISA sanctions, the threat of
sanctions, coupled with Iran’s reputedly difficult negotiating behavior, and now compounded by
Iran’s growing isolation, is slowing Iran’s energy development. As shown in the table below,
some foreign investment has flowed into Iran since the 1998 Total consortium waiver, but many
projects are stalled. Some investors, such as Repsol, Royal Dutch Shell, and Total, have
announced pullouts or declined further investment. On July 12, 2008, Total and Petronas, the
original South Pars investors, pulled out of a deal to develop a liquified natural gas (LNG) export
capability at Phase 11 of South Pars, saying that investing in Iran at a time of growing
international pressure over its nuclear program is “too risky.” These trends are likely to constrain
Iran’s energy sector significantly; Iran’s deputy Oil Minister said in November 2008 that Iran
needs about $145 billion in new investment over the next ten years in order to build a thriving
energy sector. As a result of sanctions and the overall climate of international isolation of Iran, its
oil production has not grown—it remains at about 4.1 million barrels per day (mbd)—although it
has not fallen either. Some analyses, including by the National Academy of Sciences, say that,
partly because of growing domestic consumption, Iranian oil exports are declining to the point ³
where Iran might have negligible exports of oil by 2015. Others maintain that Iran’s gas sector
can more than compensate for declining oil exports, although it needs gas to reinject into its oil
fields and remains a relatively minor gas exporter. It exports about 3.6 trillion cubic feet of gas,
primarily to Turkey.
Some Members of Congress believe that ISA would have been even more effective if successive
Administrations had actually imposed sanctions. A GAO study of December 2007, (GAO-08-58),
contains a chart of post-2003 investments in Iran’s energy sector, totaling over $20 billion in
investment, although the chart includes petrochemical and refinery projects, as well as projects
that do not exceed the $20 million in one year threshold for ISA sanctionability. Some of the
projects listed in that report and in the table below may be under review by the State Department
(Bureau of Economic Affairs), but no publication of such deals has been placed in the Federal
Register (requirement of Section 5e of ISA), and no determinations of violation have been
announced. Undersecretary of State for Political Affairs William Burns testified on July 9, 2008
(House Foreign Affairs Committee) that the Statoil project (listed in the table) is under review for
ISA sanctions; he did not mention any of the other projects. State Department reports to Congress
on ISA, required every six months, state that U.S. diplomats raise U.S. policy concerns about Iran
with investing companies and their parent countries.

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ISA’s definition of “investment” has been interpreted by successive Administrations to include
construction of energy routes to or through Iran -- because such routes help Iran develop its
petroleum resources. The Clinton Administration used the threat of ISA sanctions to deter oil
routes involving Iran and thereby successfully promoted an alternate route from Azerbaijan
(Baku) to Turkey (Ceyhan), which became operational in 2005. However, no sanctions were
imposed on a 1997 project viewed as necessary to U.S. ally Turkey—an Iran-Turkey natural gas
pipeline in which each constructed the pipeline on its side of their border. The State Department
did not impose ISA sanctions on the grounds that Turkey would be importing gas originating in
Turkmenistan, not Iran. However, direct Iranian gas exports to Turkey began in 2001, and, as
shown in the table, in July 2007, a preliminary agreement was reached to build a second Iran-
Turkey pipeline, through which Iranian gas would also flow to Europe. However, that agreement
was not finalized during Iranian President Mahmoud Ahmadinejad’s visit to Turkey in August

2008 because of Turkish commercial concerns but the deal remains under active discussion.

Construction of oil refineries or petrochemical plants in Iran—included in the referenced GAO
report—might also constitute sanctionable projects. Iran has plans to build or expand, possibly
with foreign investment, at least eight refineries in an effort to ease gasoline imports that supply
about 25% - 30% of Iran’s needs. This dependency on gasoline imports is down from the 40%
that preceded the institution of gasoline rationing in Iran in June 2007. It is not clear whether or
not Iranian investments in energy projects in other countries, such as Iranian investment to help
build five oil refineries in Asia (China, Indonesia, Malaysia, and Singapore) and in Syria, reported
in June 2007, would constitute sanctionable investment under ISA.
Another pending deal is the construction of a gas pipeline from Iran to India, through Pakistan
(IPI pipeline). The three governments appeared committed to the $7 billion project, which would
take about three years to complete, but India did not sign a deal “finalization” that was signed by
Iran and Pakistan on November 11, 2007. India resumed discussions on the project following
Iranian President Mahmoud Ahmadinejad’s visit to India in April 2008, which also resulted in
Indian firms’ winning preliminary Iranian approval to take equity stakes in the Azadegan oil field
project and South Pars gas field Phase 12. India continues to raise concerns on security of the
pipeline, the location at which the gas would be officially transferred to India, pricing of the gas,
tariffs, and the source in Iran of the gas to be sold. U.S. officials, including Secretary of State
Rice, have on several occasions “expressed U.S. concern” about the pipeline deal or have called it
“unacceptable,” but no U.S. official has stated outright that it would be sanctioned. Coinciding
with the Ahmadinejad visit,
Other major energy deals with Iran are considered a blow to European solidarity. In March 2008,
Switzerland’s EGL utility agreed to buy 194 trillion cubic feet per year of Iranian gas for 25
years, through a Trans-Adriatic Pipeline (TAP) to be built by 2010, a deal valued at least $15
billion. The United States criticized the deal as sending the “wrong message” to Iran. However, as
testified by Assistant Secretary of State Burns on July 9, 2008, the deal appears to involve only
purchase of Iranian gas, not exploration, and likely does not violate ISA. In August 2008,
Germany’s Steiner-Prematechnik-Gastec Co. agreed to apply its method of turning gas into liquid
fuel at three Iranian plants. In early October 2008, Iran agreed to export 1 billion cu.ft./day of gas
to Oman, via a pipeline to be built that would end at Oman’s LNG export terminal facilities.
ISA is one of many mechanisms the United States and its European partners are using to try to
pressure Iran. U.S. officials, whose leverage has been enhanced by five U.N. Security Council

Resolutions passed since 2006 that sanction Iran, have persuaded many European and other banks
not to finance exports to Iran or to process dollar transactions with Iranian banks; and they have
persuaded European governments to reduce export credits guarantees to Iran. The actions have,
according to the International Monetary Fund, partly dried up financing for energy industry and
other projects in Iran, and have caused potential investors in the energy sector to withdraw from
or hesitate on finalizing pending projects. Some observers maintain that, over and above the
threat of ISA sanctions and the international pressure on Iran, it is Iran’s negotiating behavior that
has slowed international investment in Iran’s energy sector. Some international executives that
have negotiated with Iran say Iran insists on deals that leave little profit, and that Iran frequently
seeks to renegotiate provisions of a contract after it is ratified.

In the 110^th Congress, several bills contained numerous provisions that would further amend ISA. ^th
Observers say aspects of these bills are likely to be reintroduced in the 111 Congress. H.R. 1400,
which passed the House on September 25, 2007 (397-16), would remove the Administration’s
ability to waive ISA sanctions under Section 9(c), national interest grounds, but it would not
impose on the Administration a time limit to determine whether a project is sanctionable. That bill
and several others—including S. 970, S. 3227, S. 3445, H.R. 957 (passed the House on July 31,
2007), and H.R. 7112 (which passed the House on September 26, 2008)—(1) expand the
definition of sanctionable entities to official credit guarantee agencies, such as France’s COFACE
and Germany’s Hermes, and to financial institutions and insurers generally; and (2) sanction
investment to develop a liquified natural gas (LNG) sector in Iran. Iran has no LNG export
terminals, in part because the technology for such terminals is patented by U.S. firms and
unavailable for sale to Iran. Among other related bills, H.R. 2880 would apply ISA sanctions to
sales to Iran of refined petroleum resources, although some believe that a sanction such as this
would only be effective if it applied to all countries under a U.N. Security Council resolution
rather than a unilateral U.S. sanction. H.R. 2347, (passed the House on July 31, 2007), would
protect from lawsuits fund managers that divest from firms that make ISA-sanctionable
investments.

Table 1. Post-1999 Major Investments in Iran’s Energy Sector
^{($20 million +}^{investments in}^{oil and}^g^a^{s fiel}^{ds only;}^{refineries, petrochemica}^l^{plants, not i}ⁿ^cluded.)
^{Date Field}^Company(ies)^Value^Output/Goal
^Feb.^{Doroud (oi}^l)^{Totalfina Elf}^{$1 billi}^on^205,⁰⁰⁰^b^pd
¹⁹⁹⁹^(France)/ENI^(Italy)
^Apr.^{Balal (}^oil⁾^{Totalfina Elf/ Bow}^$30⁰^40,0^{00 bpd}
¹⁹⁹⁹^{Valley (Canada)/ENI}^mill^ion
^Nov.^{Soroush and Nowr}^{uz (oil)}^{Royal Dutch Shell}^$80⁰^190,⁰⁰^{0 b}^pd
¹⁹⁹⁹^mill^ion
^Apr.^{Anaran (oil)}^{Norsk Hydro}^{(Norway)/Lukoil}^$10⁰^100,⁰⁰^{0 (by}
²⁰⁰⁰^(Russia)^mill^ion²⁰¹⁰⁾
^July^{Phase 4 a}^{nd 5, South Par}^{s (gas)}^ENI^$1.9^billi^on^{2 billion}
²⁰⁰⁰^{cu.ft./day (cfd)}
^Mar.^{Caspian Sea oil exploration}^{GVA Consultants}^$22⁵^?
²⁰⁰¹^(Sweden)^mill^ion
^June^{Darkhovin (oil)}^ENI^$1^billi^on^160,⁰⁰^{0 b}^pd
²⁰⁰¹
^May^Masjid-e-S^{oleyman (oi}^l)^{Sheer E}^nergy^$80^million^25,0⁰⁰^bpd
²⁰⁰²^(Canada)
^Sep.^{Phase 9 +}¹^{0, South Pars (gas)}^{LG (South Korea)}^$1.6^billi^on^{2 billion cfd}
²⁰⁰²
^Oct.^{Phase 6, 7,}^{8, South Pars (gas)}^Statoi^{l (Norway)}^$2.65^{3 billion cfd}
²⁰⁰²^{(est. to begin producing late}⁰⁸⁾^billi^on
^$20⁰
^Jan.^{Azadegan (oil}⁾^Inpe^{x (Japa}^{n) 1}^0%^mill^ion^260,⁰⁰^{0 b}^pd
²⁰⁰⁴^stake^(Inpe^x
^stake)
^Aug.^{Tusan Block}^{Petrobras (Brazil)}^$34^million^?
²⁰⁰⁴
^Oct.^{Yadavaran (oil)}^{. Final}^{ized Decem}^ber^{9, 20}⁰⁷^{Sinopec (China)}^$2^billi^on^185,⁰⁰^{0 b}^{pd (by}
²⁰⁰⁴²⁰¹¹⁾
^June^Gamsar^{block (oil)}^{Sinopec (China)}^$20^million^?
²⁰⁰⁶
^Sept.^{Khorramabad block}^(oil⁾^{Norsk Hydro}^$49^million^?
²⁰⁰⁶^(Norway)
^Dec.^{Golshan and Fe}^{rdows onshore a}^{nd offshore}^{gas fields and LNG}^{plant; modified but}^{SKS Ventures}^$16^billion^{3.4 billion cfd}
²⁰⁰⁷^{reaffirmed Decem}^ber²⁰⁰⁸^(Malaysia)
^{$27.9 bil}^{lion investm}^ent
^Totals^{Oil: 1.}^{085 mi}^{llion bpd Gas: 10.4 bil}^{lion cfd}
^{Pending Deals/Preliminary Agreements}
^{Kharg and Bah}^regansa^{r fields (gas)}^{IRASCO (Italy)}^$1.6^billi^on^?

^{Date Field}^Company(ies)^Value^Output/Goal
^{Salkh and Southern}^Gas^hku^{fields (gas). Includes LN}^G^{LNG Ltd.}^(Australia)^?^?
^{plant (Nov. 20}⁰⁶⁾
^{North Pars}^{Gas Field (offshore g}^{as). Includes gas}^{China National}^$16^billion^{3.6 billion cfd}
^purc^{hases (Dec. 2}⁰⁰⁶⁾^Offshore^{Oil Co.}
^{Phase 1}^{3, 14 - Sout}^{h Pars (gas); (}^{Feb. 20}^{07). Firms}^{Royal Dutch Shell,}^{$4.3 billi}^on^?
^{decided not to proceed in May 2}⁰⁰⁸^{Repsol (Spain)}
^{Phase 1}²^{South Pars}^{(gas). Incl. LNG ter}^{minal and gas}^{OMV (Austria)}^$30^billion^?
^purc^{hases -}²⁵^{years (}^{May 2}⁰⁰⁷⁾
^{Phase 2}^{2, 23,}^{24 - South}^{Pars (gas}^{), incl. transport Ira}^nian^{Turkish Petroleum}
^{gas to Europ}^{e and}^{building three}^{power plants}^{in Ira}^n.^{Company (TPAO)}^$12.^billi^on^{2 billion cfd}
^{Initialed July 20}^07;^{not finalized t}^o^date.
^{Iran’s Kish gas}^{field (April 2008)}^Oman^$7^billi^on^{1 billion cfd}
^Kenⁿ^eth^Katz^m^aⁿ
^Specialis^{t i}ⁿ^{Middle Eas}^t^ern^Aff^a^irs
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