December 2011

Summary

On November 8, 2011 the International Atomic Energy Agency released a report stating Iran was engaged in the research and development of a nuclear weapons program.  This report acted as a catalyst for a new round of international economic sanctions against Iran.  In response to these new sanctions, the British Embassy in Tehran was attacked by Iranian citizens.  As a result of this act, U.K. diplomats in Iran have been ordered back to the U.K. and Iranian diplomats in the U.K. have been expelled from that country.

The increased sanctions may prompt additional responses from Iran, spurring a cycle of escalating tension between Iran and the international community.  This escalation will create increased risks for investors in companies doing business in Iran.  In addition, heightened media attention increases the likelihood legislatively mandated divestment campaigns will face additional scrutiny from the media and from activist organizations seeking to ensure the agencies responsible for the campaigns are following the requirements set forth in the legislation.

Background

State divestment legislation related to Iran can be traced back to the mid-nineties when the most prominent of many sanctions was placed on companies doing business with Iran. Originally known as the Iran and Libya Sanctions Act of 1996 (ILSA) it was later renamed the Iran Sanctions Act (ISA) and extended until December 2011. This act of Congress supported previous executive orders issued by President Bill Clinton banning United States investment in Iran’s energy sector and trade with or investment in the country.  The bans were the United States’ response to Iran’s nuclear program and its support for terrorist organizations including Hezbollah, Hamas and the Palestine Islamic Jihad.

The act, which was aimed at U.S. and non-U.S. companies, mandates the President to sanction those who make an investment of more than $20 million dollars annually to Iran’s energy sector or engages in sales to Iran of weapons of mass destruction technology and/or advanced conventional weapons.  Seven possible sanctions for the violating company were detailed in the ISA including: denial of Export-Import Bank of the United States assistance, denial of export licenses, prohibition on loans or credits from U.S. financial institutions, prohibition on serving as an agent of the U.S. or as a repository for U.S. government funds, denial of U.S. government procurement opportunities, and a ban on all or some of the company’s imports. 

The ISA ceases to apply to Iran only when it is removed from the U.S. list of state sponsors of terrorism, has ceased its efforts to acquire weapons of mass destruction and no longer poses a significant threat to U.S. national security and U.S. allies. President Barack Obama renewed executive order 12959, the U.S. trade and investment ban on Iran, in March 2009.

Current Developments

While Iran has steadfastly denied the development of a nuclear program, a Nov. 8 report by the International Atomic Energy Agency stated the country was engaged in the research and development of a nuclear weapons program.   Following the release of the report President Obama expanded the U.S.  sanctions on Iran by targeting the supply of goods, services, technology and support to Iran for the development of its petroleum resources and maintenance or expansion of its energy and petrochemical sectors. The U.S. was joined by the U.K., who said it would ban its financial institutions from doing business with Iran, and Canada who has agreed to place a ban on the exports of goods used in the petrochemical industry. The European Union has applied its own sanctions to nearly 200 individuals or companies. Those sanctions include the freezing of assets and a ban on entering the EU.

A day after President Obama signed the executive order the British embassy in Tehran was invaded. A strong supporter of the U.S. sanctions against Iran, U.K. diplomats believe the embassy attack was a retaliatory move for that support. U.K. diplomats in Iran have been ordered back to the U.K. and Iran diplomats in the U.K. have been expelled from that country. Ambassadors from other European countries have followed suit, leaving Iran.

Implications for Companies, Investors, and Iran Divestment Campaigns

The current developments related to Iran present the possibility of an acceleration of legislatively mandated divestment campaigns.  Currently 23 states have either divestment legislation or a divestment policy regarding Iran.  There are even more states with resolutions encouraging public funds to divest from companies doing business in Iran.  Furthermore, an increasing number of individual investors are becoming aware of the developments in Iran as well as how their own individual and retirement investments can be used as a tool to dissuade companies from doing business in Iran.

The escalation of tension with Iran may increase the likelihood that additional sanctions and/or divestment mandates could emerge in the U.S. or Europe.   The potential for additional sanctions and perhaps even military action against Iran elevates the risk profile for companies doing business in Iran, particularly those involved directly or indirectly with Iran’s energy sector.

These reasons make it more important than ever for investors and fund managers to ensure the timeliness and accuracy of information they rely on to make decisions regarding the divestment of companies with ties to Iran.

Examples of Companies with Involvement in Iran’s Energy Sector

Indian Oil Corporation Ltd.

According to a company press release, Indian Oil Company purchases 1.5 million tons of oil from Iran annually.  (Company press release, 08/2011)

Indian Oil Corp. Ltd. holds 51.88 percent of Chennai Petroleum Corp. Ltd., a joint venture with National Iranian Oil Co. (NIOC). Chennai Petroleum Corp. Ltd., formerly known as Madras Refineries Ltd., owns and operates oil refineries in Manali, India. Naftiran Intertrade, an affiliate of National Iranian Oil Co. (NIOC), owns 15.40 percent of Chennai Petroleum Corp. Ltd.  (Chennai company website, 08/2011)

In January 2011 Indian Oil Corp (40 percent interest) and its partners, Oil India and ONGC Videsh Ltd, are in the final stages of negotiations with Iran for the development of the Farzad B gas field. The estimated total investment for the project will be over US $5 billion.  The Farzad B gas field has an estimated 12.8 trillion cubic feet of recoverable natural gas reserves.  (Business Standard website, 01/2011)

Indian Oil Corp. owns 12.5 percent of Petronet LNG Ltd., a publicly-traded entity which has ownership equity in the Iran LNG Co., a South Pars gas project that consists of an LNG plant, including LNG storage and loading facilities.  (Petronet website, 08/2011; Iran LNG website, 06/2010)

Gail (India) Ltd.

According to the company's website, Gail (India) Ltd. has active agreements with national entities in Iran. Gail has a Memorandum of Cooperation (MoC) in place with the National Iranian Oil Co. (NOIC) and the National Iranian Gas Export Co. (NIGEC) which apply to liquified natural gas (LNG) and compressed natural gas (CNG) projects and trading agreements between the two countries. Gail also has a Memorandum of Understanding (MoU) and Project Development Agreement (PDA) in place with Iran's National Petrochemical Co. (NPC) which applies to joint gas cracker, methanol, and GTL projects in Iran and India. (Company website, 09/2011; Company Press Release, 02/16/2005)

In addition, the company owns 12.5 percent of Petronet LNG Ltd., which has ownership equity in the Iran LNG Co., a South Pars gas project that consists of an LNG plant, including LNG storage and loading facilities. (Petronet website, 09/2011; Petronet Annual Report, 2010-2011) In December 2009, Petronet LNG Ltd., along with ONGC Vidhesh Ltd. and privately-held Hinduja Group, was granted 20 percent ownership of Iran LNG Co. by the National Iranian Oil Co. (NIOC). (GAO Report, "Firms Reported to Have Commercial Activity in the Iranian Energy Sector and U.S. Government Contracts", 05/12/2010; The Financial Express, 12/01/2009; Rigzone, 12/01/2009; Economic Times, 12/02/2009) Iran LNG is building a gas conversion facility on the southern coast of Iran valued at some US $4.32 billion. The Iranian LNG project is expected to convert gas from the South Pars Phase 12 gas field into some 3 billion cubic feet of LNG per day for export purposes. (Iran LNG website, 09/2011)

Mitsui & Co. Ltd

Mitsui & Co. Ltd. has an Iranian subsidiary, Mitsui & Co. Iran Ltd., located in Tehran. (Company website, 10/2011)

The company describes its current operations in Iran as: "Our Iran-related operations consist both of business activities where we act as principle and those where we act as agent. As principle, we have purchased crude oil, oil products and petrochemical products... We have also acted as an agent for Japanese companies, and assist them with various aspects of entering into and completing industrial projects in Iran. Mitsui only has one asset located in Iran: a subsidiary which renders services to support Mitsui's implementation of the above-mentioned activities." (Annual Securities Report, 03/31/2011)

Technip

The company currently is providing Engineering Services for an Ethylene Cracking Unit. This plant is located on Kharg Island and is estimated to take a total of 53,000 man hours. In addition, the company lists Norgan, based in Iran, as an international client. (Company website, 02/2011)

Technip has hydrogen plant contracts with National Iranian Oil Engineering and Construction Co. (NIOEC) and JGC in Iran in the cities of Tehran, Tabriz, and Arak. It also has a polyethylene plant in Bandar Imam in Iran. (Company website, 02/2011)

Technip is one of several contractors involved in the construction of an $800 million, 500,000-t/y ethylene plant, a major petrochemical project at Assalouyeh, for Iran's Morvarid Petrochemical Co. The other contractors working on the project are Rah Sahel Co., Darya Sahel Co., and Nargan Consulting Engineers, all Iranian companies. The project was expected to be completed in the first quarter of 2009. (Middle East Economic Digest, 12/11/2008)

Conclusion 

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