U.S.-Iran Foreign Policy: Global Energy Independence From Iran is Not the Solution

1
U.S.-Iran Foreign Policy Global Energy
Independence From Iran is Not the Solution

• By Adnan Bohri
• April 25, 2007

2
Agenda

• Background
• Iranian Revolution, why sanctions exist
• The Iran-Libya Sanctions Act of 1996
• Do sanctions apply to the IPI pipeline?
• Why sanctions and energy independence from Iran
  are not the solution.

3
Background and Fun Facts

• Capital Tehran
• Population 70,049,262
• GDP 610.4 billion
• Language Persian (Farsi)

Source http//encarta.msn.com/encyclopedia_761567
300/Iran.html
4
Iran Pre-1979

• Ruled by the Shah, Mohammad Raza Pahlavi
• Allies with U.S. during the Cold War
• Regime fell in the Iranian revolution of 1979

Source http//encarta.msn.com/encyclopedia_761567
300/Iran.html
5
Iranian Revolution

• After the overthrow of the Shah, Aytollah
  Ruhollah Khomeini came to power
• Known as the Supreme Leader of Iran
• Established Islamic Republic of Iran

Source http//encarta.msn.com/encyclopedia_761567
300/Iran.html
6
Iran Hostage Crisis

• U.S. Embassy in Tehran seized on 11/4/1979
• 63 American citizens taken hostage
• 50 hostages held prisoner for 444 days
• Supported by Khomeini under the slogan America
  cant do a damn thing

Source http//encarta.msn.com/encyclopedia_761567
300/Iran.html
7
Overview of sanctions against Iran

• Began after 1979 Iran Hostage Crisis
• Iranian Transactions Regulations - 31 C.F.R.
  560
• Import embargo on Iranian-origin goods and
  services
• No direct trade with the U.S. since 1995, when
  the U.S. government banned all commercial and
  financial transactions between U.S. companies and
  Iranian public and private entities
• Iran-Libya Sanctions Act of 1996
• Current Nuclear Standoff with Iran
• Could lead to additional sanctions by U.N.

• Source http//www.treas.gov/offices/enforcement/
  ofac/programs/iran/iran.pdf

8
How Much Energy Does Iran Have?

• Possesses worlds 2nd largest natural gas
  reserves
• 10 of worlds known oil reserves (4th largest)
• 2nd largest oil producer in OPEC

Source http//www.eia.doe.gov/emeu/cabs/Iran/Back
ground.html
9
Iran-Libya Sanctions Act of 1996 (ILSA)

• Allows the President to impose sanctions if a
  person has made an investment of more than 20
  million that directly and significantly
  contributes to the enhancement of Irans ability
  to develop petroleum resources of Iran.
• Controversial because it allows the President to
  impose unilateral sanctions on foreign companies
  or entities

Source Iran-Libya Sanctions Act, 50 U.S.C.
1701 note (1996)
10
ILSA Continued

• Investment" defined as the entry into a contract
  that includes responsibility for the development
  of petroleum resources in Iran or Libya
• Statute silent as to whether the construction of
  energy transit routes from Iran might be
  considered an investment
• However, Clinton Administration position was
  that, under certain conditions, the construction
  of such routes could be a sanctionable investment

Source Kenneth Katzman, The Iran-Libya
Sanctions Act (ILSA), Congressional Research
Service Report for Congress, updated Apr. 26,
2006.
11
ILSAs First Test

• The French oil company, Total
  SA, struck a 2 billion deal with Iran in
  September 1997, to develop natural gas reserves
  in Irans South Pars field
• This was the largest single foreign investment in
  Iran since the U.S. Embassy in Tehran was sacked
  in 1979
• Clinton Adm. found that deal violated ILSA, but
  ultimately decided to waive sanctions

Source Kenneth Katzman, The Iran-Libya
Sanctions Act (ILSA), Congressional Research
Service Report for Congress, updated Apr. 26,
2006.
12
The Iran-Pakistan-India Natural Gas Pipeline

• 4-7 billion project
• 2100 km in length from Iran to India
• Would supply 60 million cubic meters of gas a
  day to India and up to 30 million cubic meters a
  day to Pakistan.
• Officials of India, Pakistan Iran met in August
  2006 to discuss pricing of gas
• Tentatively scheduled to
  begin construction in 2007
  and be completed by 2010

Source George Perkovich and Revati Prasad, A
Pipeline to Peace, N.Y. Times, Apr. 18, 2005.
13
The Need for the Pipeline

• Pakistan would benefit from Iranian natural gas
  exports, and Pakistani territory would be used as
  a transit route to export natural gas to India
• Would bring in 700 million per year in
  transport fees
• Indias Energy needs will surpass
  Chinas in the next 50 years
• Cooperation between Pakistan and India
  would increase stability in South Asia

Source George Perkovich and Revati Prasad, A
Pipeline to Peace, N.Y. Times, Apr. 18, 2005.
14
Would the Pipeline be an investment under ILSA?

• The Iranian side of the project will be financed
  entirely by Iran and a group of multi-national
  investors Iran will be required to put together
• Pakistan's investment in the project will start
  only after the pipeline reaches Pakistani
  territory
• Applying a plain-meaning interpretation of ILSA,
  Pakistans and Indias involvement could be
  interpreted as one that does not directly
  contribute to the enhancement of Irans ability
  to develop petroleum resources of Iran.

15
Comparing Totals case with Pakistans

• 7-10 billion proposed project
• Natural gas transit route
• No direct development by Pakistan
• Pakistani ownership of the pipeline would begin
  at its border
• However, deal would provide incentive and funding
  for Iran to develop its gas resources

• 2 billion investment
• Direct development of oil fields within Iran

16
Recent Developments

• ILSA expired on August 5, 2006
• Iran Freedom and Support Act
• Bill passed by Congress that tightens the
  sanctions imposed on entities that invest in
  Irans energy sector
• Includes stricter provisions regarding the
  waiving of sanctions by the president

17
Congresss View

• Agreement in Congress that ILSA shouldnt be
  allowed to expire
• U.S. must continue to look at economic sanctions
  as a method for
  keeping Iran in
  check and isolating
  them

Source Hearing of the Senate Banking, Housing,
Urban Affairs Committee on June 22, 2006
18
Bush Administrations View

• The Bush Adm. sees the value of ILSA, but did not
  support significant changes to the statute
• Did not support the tightening of the ILSA
  sanctions as contained in the Iran Freedom
  Support Act
• Restrictions would weaken the Presidents
  flexibility to pursue diplomacy with Allies

• Source R. Nicholas Burns, Under Secretary of
  State for Political Affairs, Testimony Before the
  Senate Committee on Banking, Housing and Urban
  Affairs, June 22, 2006 and March 21, 2007.

19
Have Sanctions Been Effective and should they
continue to be used?

• 27 years of sanctions and isolation have not
  dissuaded Iran from pursuing its nuclear program
  or driven the cleric-led government from power.
• ? instead have convinced Iran that only nuclear
  technology can protect them from American
  hostility

• Source R. Nicholas Burns, Under Secretary of
  State for Political Affairs, Testimony Before the
  Senate Committee on Banking, Housing and Urban
  Affairs, June 22, 2006 and March 21, 2007.

20
Effects of Sanctions Continued

• Since the Total waiver, 11.5b in foreign
  investments in Irans energy sector have been
  agreed upon.
• Irans natural gas sector, non-existent prior to
  the late 1990s, is becoming an increasingly
  important factor in Irans energy future as a
  result of foreign investment.
• E.U. threatened formal counter-action over ILSA
  in the WTO, and in April 1997, the U.S. and E.U.
  formally agreed to try to avoid a trade
  confrontation.

Source Kenneth Katzman, The Iran-Libya
Sanctions Act (ILSA), Congressional Research
Service Report for Congress, updated Apr. 26,
2006.
21
Why Iranian Sanctions are Detrimental for
American Interests

• Sanctions on Iran? higher global energy prices ?
  higher U.S. energy prices
• Energy prices are set by the global market, so
  doesnt matter whether its coming from Texas or
  Tehran
• Increases in oil prices correspond closely to
  downturns in the economy. The last four
  recessions all correlated with restrictions in
  the oil supply.
• When energy prices spike, the market slows down
  when prices decrease, the market speeds up.
• Lower oil and gas prices allow us to invest in
  alternative energies and gives us time and
  breathing room to develop those technologies.

Source Mark Zupan, Dean of Graduate School of
Business Administration at the University of
Rochester, New York. Available at
http//analysisonline.org/energy/zupan.html
22
Continued...

• Numerous Western oil companies have shied from
  investing in Iran for fear of incurring Americas
  wrath
• Imposing sanctions on companies that develop
  Irans petroleum resources would isolate America
  from its European allies, as well as China and
  India
• Best way to engage Iran is to bring them into the
  global community
• Lifting economic sanctions, or at the very least
  allowing American allies to invest, should be
  seen as real priority.

23
Conclusions

• U.S. made historic offer in June 06 when Sec.
  Rice first offered to engage in direct
  discussions with Iran provided Iran completely,
  verifiably suspends its enrichment activities.
• Instead of energy independence, the goal should
  be an effort to improve relations with Irans
  regime and bring them into the global community.
• U.S. unilateral sanctions on Iran undermine this
  goal.

24
The End