NEWS U.S. petroleum firms hit hard by Washington's unilateral sanctions

Patrick Crow
Energy Policies Editor

New U.S. federal restrictions on doing business with Myanmar have moved the debate about U.S. unilateral economic sanctions back into the Washington spotlight.

As with many other U.S. unilateral sanctions targeting other nations for a variety of reasons, the fallout from these latest strictures hits U.S. oil and gas companies especially hard.

The Treasury Department is preparing an executive order for President Bill Clinton to sign that will ban new U.S. investments in Myanmar, formerly known as Burma (OGJ, Apr. 28, 1997, p. 37).

The U.S. also has unilateral sanctions in effect against Iran and participates in multilateral sanctions against Libya and Iraq.

The National Association of Manufacturers recently issued a report that found the U.S. enacted 61 laws and executive actions authorizing unilateral economic sanctions for foreign policy purposes against 35 countries during 1993-96.

NAM said the sanctioned countries represent 2.3 billion potential consumers of U.S. goods and services (42% of the world's population) and $790 billion worth of export markets (19% of the world's total).

U.S. firms are concerned about possible sanctions against countries such as Indonesia, Nigeria, Pakistan, and Turkey.

Even U.S. states are getting involved: Five have passed their own sanctions to penalize multinational companies doing business in Myanmar.

More than 500 U.S. corporations have formed the National Foreign Trade Council to lobby against sanctions against nations that are not hostile toward the U.S.

Meanwhile, the President's Export Council and the State Department both have created panels to examine the growing pattern of U.S. unilateral economic sanctions.

NAM survey

Jerry Jasinowski, NAM president, complained, "Our economic sanctions are a massive patchwork of good intentions with bad results.

"Unilateral sanctions are little more than postage stamps we use to send messages to other countries at the cost of thousands of American jobs. Yet it is difficult to argue that any of the 61 measures authorized over the past 4 years have changed the behavior of the 35 targeted governments."

The association's report on sanctions said, "A new wrinkle in 1996, apart from the dramatic increase from previous years, was the use of secondary boycott measures, which extended the reach of U.S. law to overseas companies doing business in the targeted country, angering allies and provoking threats of retaliation.

"This growing resort to unilateral sanctions departs from a period in the late 1980s of relative restraint, due in part to the lessons learned during the abortive gas pipeline sanctions against the Soviet Union in 1982 and the grain embargo of 1980."

NAM's list of sanctioned countries includes Canada, Italy, and Mexico, all of which were targeted under the Helms-Burton Act, which sought to stem international investment in Cuba.

NAM said, "Admittedly, trade with these countries has by no means been embargoed. In addition, many of the sanctions measures involve directions to vote against loans from the international financial institutions, the outcome of which the U.S. does not necessarily control."

The association recommended that before imposing blanket sanctions, the U.S. should pursue a continuum of measures, starting with multilateral approaches and including diplomatic, political, and military isolation, in order to more effectively target a country's unique vulnerabilities.

If sanctions are imposed, NAM said they should satisfy specific criteria relating to effectiveness, product availability from foreign suppliers, and enforceability: "Provisions also should be made for such measures to lapse absent reauthorization by Congress or be waived if the President determines that it is in the national interest."

Furthermore, NAM said the U.S. government should produce an annual report on all unilateral sanctions, analyzing both the effect on the target government and on U.S. companies.

Specific actions

NAM said the most frequently cited objective of sanctions was the promotion of human rights and democratization.

In the 4-year period, the U.S. adopted 22 of these measures targeting 13 countries: Angola, Bosnia-Herzegovina, Burundi, China, Croatia, Cuba, Gambia, Guatemala, Haiti, Myanmar, Nicaragua, Nigeria, and the rump Yugoslavia.

Next were anti-terrorism objectives. Fourteen laws or executive actions targeted eight countries: Cuba, Iran, Iraq, Libya, Nicaragua, North Korea, Sudan, and Syria.

Nine measures were adopted to prevent nuclear proliferation, targeting China, Cuba, Iran, North Korea, and Pakistan. Eight were adopted to promote political stability in Afghanistan, Angola, Bosnia-Herzegovina, Rwanda, the independent states of the former Soviet Union, rump Yugoslavia, and Zaire.

Eight anti-narcotics measures were adopted, targeting Afghanistan, Colombia, Cuba, Haiti, Myanmar, and Nigeria. Six sanctions were adopted to promote worker rights or the prevention of prison labor in China, Maldives, Mauritania, Pakistan, Qatar, Saudi Arabia, and the U.A.E.

And the U.S. State Department has established a new definition of national security that would encompass environmental protection. Three measures were adopted targeting Brazil, China, and Taiwan.

Myanmar sanctions

In a law last year, Congress gave Clinton authority to ban new private U.S. investments in the event of the Myanmar government's "large scale repression or violence" against its political opposition.

Secretary of State Madeleine Albright said the administration exercised that option because Myanmar's military rulers, in power since 1988, continue to repress political dissidents.

She said the U.S. action "will deal a further blow to investor confidence in Burma. It will send a message to the military that it will not attract the investment it clearly craves unless it begins a genuine dialogue with its own people."

The European Union's Council of Ministers also suspended EU tariff preferences for Myanmar in March because of the government's failure to make progress toward advancing democracy and human rights.

Sen. Mitch McConnell (R-Ky.), chairman of a foreign relations subcommittee, said the administration's action did not go far enough because it only applies to future investments, and he will push a bill to make the sanctions retroactive, thus forcing all U.S. investors from Myanmar.

Critics of the Myanmar government charge that U.S. firms' participation in building a natural gas pipeline from Yadana field in the Gulf of Martaban via onshore Myanmar to Thailand constitute a de facto endorsement of the military rulers, whom they say have committed human rights abuses to protect the pipeline corridor and suppress insurgents.

Unocal Corp. has been the target of legal action stemming from the controversy. Last year, a self-proclaimed exile government, the National Coalition Government of the Union of Burma, and the Federation of Trade Unions sued the firm, seeking to force it to leave Myanmar.

Last month, Los Angeles federal Judge Richard Paez declined to excuse Unocal and France's Total from the lawsuit, saying they can be held liable for abuses allegedly committed by Myanmar's government.

Unocal plans an appeal of that ruling, which would have major implications for other U.S. oil and gas companies operating abroad.

And some Unocal shareholders will introduce a resolution at the firm's annual meeting June 2 calling for an investigation of charges that Myanmar's state-owned energy company, also a partner in the Yadana pipeline project, is laundering drug money.

Companies react

The administration's action against Myanmar will have a major effect on oil firms engaged in production and pipeline projects (OGJ, Feb. 13, 1995, p. 28).

U.S. firms have invested about $240 million in the nation, mostly in the oil and gas sectors.

Unocal, the biggest foreign investor in Myanmar, deplored the administration's order but pledged to comply with it.

The company said the directive against new investments will not affect its involvement in the $1 billion Yadana pipeline project to move gas to Thailand but would block its possible development of two blocks in the area.

Texaco Inc. and ARCO said they would comply but would not speculate on how it would affect their operations until the executive order is published.

Texaco is operator and 42.9% owner of the offshore Yetagun gas field and ARCO is exploring two blocks.

Unocal said, "Historically, unilateral sanctions have proven to be ineffective. During our 30-year history in Asia, we've seen that responsible foreign investment is the most effective way to promote long-term economic and social development in countries throughout the region. We are concerned the administration's action may impede, rather than advance, these developments in Myanmar."

At a recent Petroleum Finance Corp. forum in Washington, D.C., Unocal Pres. John Imle complained, "U.S. policy seems to be made more in Congress than at the State Department."

John Cheatham, president of ARCO International Oil & Gas Co., told the same group, "With international growth, ARCO is learning to manage a new set of risks associated with governments and business environments very different from the U.S. What's more, we must come to grips with an added layer of uncertainty created by U.S. government policies toward countries where we invest.

"Managing the complex risks associated with overseas host governments and the added dimension of risk created by U.S. foreign policy is the most difficult part of international growth."

State Department reacts

William Ramsay, deputy assistant Secretary of State for energy, sanctions, and commodities, responded to industry's complaints at that meeting.

He said the Clinton administration recognizes that the continued growth of the economy depends on increased access to foreign markets, but at the same time it wants to protect international human rights.

He said the public and stockholders are increasingly vocal about whether U.S. companies operating abroad are contributing to, or detracting from, protection of human rights, the environment, and a host of other non-business considerations.

He said sanctions can be effective, demonstrate U.S. leadership, show U.S. disapproval of certain actions, are perceived as a "low-cost" option, and "they certainly meet the need to do something visible."

But Ramsay admitted sanctions are not low-cost and can lead to lost exports, bad business relations, and eventual exclusion of U.S. firms from markets.

"The challenge for sanctions policy makers is to get the balance right between our leadership responsibilities to project U.S. values and the need to protect our national security through U.S. competitiveness, export markets, and U.S. jobs."

He said sanctions ideally should be multilateral, effective, and realistic, but the pressure to take some action often results in unilateral measures. "Our most contentious sanctions regimes have grown out of frustration that if the U.S. doesn't do something, no one will."

He said, "For the moment, sanctions have gotten everyone's attention. Since we still have every intention of remaining a world leader-and that means influencing the behavior of other states-we might as well seize the opportunity to make our sanctions procedures and policies as cost-effective as possible."

Ramsay conceded the U.S. could have imposed any of its current sanctions programs at less cost and with greater effectiveness.

Iranian sanctions

Many think that the U.S. economic actions against Iran are a good example of misapplied sanctions.

In a recent article in Foreign Affairs magazine, two former national security advisors, Zbigniew Brzezinski and Brent Scowcroft, argued the Clinton administration's unilateral sanctions against Iran have been ineffectual "and the attempt to coerce others into following America's lead has been a mistake."

They recommended the U.S. establish commercial dealings with Iran on a case-by-case basis and work with its allies to develop a strategy to modify Iranian actions.

European nations have maintained "a critical dialogue" and commercial relations with Iran for several years. Their relations with Iran were jeopardized last month when a Berlin court determined Iranian authorities were behind the assassinations of four Kurdish opposition leaders at a Berlin restaurant.

In 1995, the U.S. forced Conoco Inc. to quit an Iranian deal to develop Sirri A and E fields in the Persian Gulf off Iran. Later, Clinton issued an executive order banning U.S. firms from engaging in any business transaction with Iran.

Last year, the U.S. enacted a law imposing sanctions against non-U.S. companies that invest in certain future Iranian and Libyan petroleum projects (OGJ, Aug. 12, 1996, p. 36). It requires that the U.S. retaliate against foreign firms that invest more than $40 million/year on oil and gas projects in either country.

The President could deny U.S. loan assistance to sanction parties, embargo their exports to the U.S., and block export licenses for them.

The U.S. so far has been unable to persuade Turkey to cancel a $23 billion deal to buy Iranian gas through an export pipeline and is unlikely to take action against that ally.

Limited impact

John Lichtblau, chairman of the Petroleum Industry Research Foundation Inc., New York, noted that Iran is the world's fourth largest producer at 3.65 million b/d and the second largest exporter (after Saudi Arabia) at 2.6 million b/d.

"Iran has operated its oil industry without foreign participation since the revolution of 1979, and its current export level is at least being maintained."

Lichtblau said the only areas where Iran is seeking foreign participation are offshore. It has increased its Persian Gulf production from 200,000 b/d to 550,000 b/d in the last 2 years, and another increase is expected again this year.

Onshore fields, which account for 85% of Iran's output, always have been operated and developed by National Iranian Oil Co. without foreign participation.

"Thus, most Iranian oil production will not be affected by the U.S. sanctions, because Iran is not seeking foreign participation in its onshore area."

Lichtblau said Iran wants to boost its offshore production to 1 million b/d by 2000, and substantial foreign investments will be required to hit that goal.

"It is quite likely that U.S. sanctions policy will slow these investments. A number of major international companies with substantial U.S. business interests are reluctantly abiding by the U.S. sanctions policy."

Bridge urged

A recent conference on U.S.-Iranian relations, organized by Rutgers University's Middle Eastern Studies Department and the Middle East Institute, was generally critical of the sanctions.

Hooshang Amirahmadi of Rutgers said, "The mutual interests of the U.S. and Iran far outweigh their differences. The Persian Gulf and Caspian Sea regions contain two thirds of the world's oil and gas reserves, and because Iran is the only country that connects these two regions, it has every motivation to foster stability in its own neighborhood."

He said there is an increasing movement within Iran that favors better relations with the U.S., if the latter nation would replace its policy of containment with one of constructive engagement.

He added, "The upcoming presidential elections in May present an opportunity for a new beginning in Iran."

Amirahmadi said an American-Iranian Council is being formed to facilitate relations between the two nations.

However, Roscoe Suddarth, president of the Middle East Institute, said "There is nothing in the leadership of either country to improve relations. Things will get worse before they get better."

Anthony Cordesman, of the Center for Strategic & International Studies, urged a moderate approach by the U.S. He said, "Iran is a hostile regime but not necessarily a serious enemy."

But John Deutsch, the State Department's director of northern Persian Gulf Affairs, said Iran is seeking to expand its influence by exporting terror around the world: "Its own human rights record is one of the worst in the world. We are seeking to change Iranian behavior through economic and political pressure."

Oil perspective

Bijan Mossavar-Rahmani, chairman of Mondoil Corp., noted, "Iran sits atop some of the world's largest tapped and untapped reservoirs of oil and of natural gas.

"This country's (gas) reserves are the second largest in the world after Russia's. And it is a stone's throw from other countries that together possess more than half of the world's oil reserves and an irreplaceable portion of its daily production. It also sits astride the Persian Gulf...through which about one half of the world's traded oil moves.

"It is naive, even by Washington standards, to believe that Iran will not again be a key player in the global oil market, sometime after the turn of the century, regaining its previous production levels and thus its significance in a world where consumption levels continue to climb.

"And it is wishful thinking, even by Tehran's standards, to believe that Iran's oil potential can be fully developed in a reasonable time frame without American technology, capital, and management know-how."

Mossavar-Rahmani said Iran needs to offer oil companies highly competitive terms for production-sharing contracts that would counterbalance their political and technical risks.

He said, "Despite its long history of oil operations, Iran is virgin territory, in oil terms, at least by the standards of 1997. With proper application of technology, capital, and management, production can be increased 50% in less than 5 years and doubled in less than 10. But that potential cannot be achieved without the U.S. oil companies, the engine of the international oil and gas industry."

Other nations

The United Nations has imposed international trade sanctions on Iraq, but that nation is compiling a list of domestic exploration and development projects in preparation for the event that they are removed (OGJ, Apr. 14, 1997, p. 19).

Neither Congress nor the administration has imposed sanctions on Sudan, but the U.S. is seeking U.N. sanctions and is discouraging U.S. firms from investing in the nation (OGJ, Apr. 7, 1997, p. 31).

Sudan is one of seven nations the U.S. has accused of sponsoring terrorism.

Through an executive order, the administration has imposed commercial sanctions on five of the seven nations (Cuba, Libya, Iran, Iraq, and North Korea) but not on Syria and Sudan. It explains that Congress has not specifically imposed restrictions on those two.

A bill is pending in the House of Representatives to block U.S. firms' financial transactions with both Sudan and Syria.

Mobil Corp. recently said it was concerned about the possibility of economic sanctions against Nigeria, which has been accused of human rights abuses.

And a number of human rights and conservative groups say they will fight to deny China's "most-favored-nation" trade status when it comes up for review in Congress this June.

There also are proposals for sanctions against Indonesia pending in Congress.

Industry action urged

Tracy O'Rourke, CEO and Chairman of Varian Associates Inc., a high-tech manufacturing firm based in Palo Alto, Calif., recently said, "Cutting off American trade and investment in a so-called rogue state is a sure-fire way to diminish American influence there.

"If we are serious about competing in the global marketplace, we need to be seen as a reliable trading partner. Unilateral trade sanctions give American businesses the stigma of being unreliable, thereby costing U.S. companies business and jobs."

Dick Cheney, former Defense Department Secretary and now Halliburton Co. chairman, president, and CEO, recently predicted Congress will continue to impose more sanctions on oil producing countries until the industry takes a "proactive approach" to battle the trend.

A former congressman himself, he said legislators see trade sanctions as an easy way to make a policy statement and satisfy their domestic constituencies.

"When prices are low, lawmakers feel free to use oil as a sanctions weapon."

Cheney said industry should educate lawmakers about how sanctions can hurt the long-term competitiveness of U.S., which can be replaced easily by foreign competitors.

He said oil and gas companies must explore where the reserves are, and that means doing business in countries that may have policies that the U.S. does not like.

"The long-term horizon of the industry is at odds with the short term nature of politics. The U.S. government needs to extend its horizon and avoid quick, light-switch diplomacy," Cheney said.