U.S. Export Controls Pose Risks for Offshore Energy Companies’ Return in Iran

Mainbrace | June 2016 (No. 3)

Matthew J. Thomas

In March, Blank Rome co-hosted a breakfast seminar in Dubai with Fichte & Co Legal Consultancy to discuss with local shipping and energy professionals the real risks and opportunities presented by the rollback of international sanctions on Iran. We were awed by the warm reception we received, the huge turnout (well over 250 clients and friends), and by the insightful questions and contributions of those who joined us.

Listening to the questions and comments from our attendees, it was clear that not only U.S. trade sanctions, but also U.S. export control regulations, pose serious obstacles for international companies considering opportunities in Iran’s offshore sector. As a result, even non-U.S. companies are finding that they must adopt careful compliance measures to avoid breaching U.S. export control rules as Iran’s offshore sector rebuilds.

Sanctions-Related Obstacles Remain for Offshore Operators

The sanctions-related obstacles to doing business in Iran remain formidable. While January’s Joint Comprehensive Plan of Action (“JCPOA”) between Iran and the EU3+3 countries rolled back most of the secondary sanctions against Iran (i.e., those measures aimed at deterring non-U.S. companies from dealing with Iran’s energy, defense, shipping, and financial services sectors), the primary U.S. sanctions on Iran remain intact. Under the Treasury Department’s Iranian Transactions and Sanctions Regulations, nearly all U.S. dealings (direct or indirect) involving Iran remain barred, including any financial trans- actions by U.S. banks and financial services companies. The breadth of these prohibitions, and U.S. authorities’ apparent willingness to mete out billion-dollar penalties for international banks that circumvent them, have left much of the global banking industry deeply reluctant to re-engage in Iran trade. Despite recent reassurances in European capitals by Secretary of State John Kerry regarding “permissible” trade with Iran, many international banks are judging the costs, risks, and burdens of compliance to be too high. (See “The Morning Risk Report: Europe’s Banks Tune Out U.S. on Iran,” http://blogs.wsj.com/  riskandcompliance/2016/05/16/the-morning-risk-report-europes-banks-tune-out-u-s-on-iran/.)

Accordingly, much of the unease in the maritime and energy sectors relates to the clearance through U.S. banks of funds linked to Iran trade (or even currency exchanges related to such transactions). Operators and banks understandably are concerned about the clearing of dollar payments with even indirect connections to Iran, such as long-term charter hire, insurance, bunkers, crew costs, ship repair, inspection, and other expenses for vessels or other units that may serve Iran from time to time. With the exception of a recent Treasury Department license for P&I cover, U.S. authorities have been reluctant to commit to any significant compliance line-drawing for vessel operators and bankers seeking to clarify their responsibilities in this area, leaving industry participants to gauge their own risks.

Export Control Compliance for Offshore Operators

Beyond these sanctions obstacles, however, oil and gas companies are also looking at the hazards of U.S. export control regulations, which are broader and more extra- territorial than those of our trading partners. U.S. export control regulations restrict not only the export, but also the overseas “re-export” and transfer of a broad range of goods and technologies that originate in the United States, include U.S. con- tent, or are otherwise subject to U.S. control. Also, the United States regulates the disclosure of controlled technology to foreign parties, even if done within the United States.

U.S. export control policy and enforcement is spread across a number of different federal agencies. Regarding non-military goods and technologies, the key authorities are in Export Administration Regulations (“EAR”), 15 CFR § 730 – 774, which are administered by the Department of Commerce Bureau of Industry and Security (“BIS”). These controls apply to a very broad range of goods, software, and technologies that can be used for either commercial or defense purposes, referred to as “dual-use” items.

U.S. export controls do not just apply to items that are made in or shipped from the United States; some non-U.S. items are subject to S. export controls, too. An item is subject to the EAR if it:

  • was produced in, or originates in, the United States;
  • is a foreign-made product that contains more than a de minimus percentage of U.S.-controlled content— generally 25 percent for most destinations, but 10 per-  cent for Iran and certain other designated countries; or
  • is a foreign-made product based on U.S.-origin technology (or produced by a plant that is the direct product of certain U.S. technology), if it would be subject to national security controls if it was a U.S.-origin item, and the U.S.-origin technology or software was so restricted when it was exported from the United States.

These broad restrictions have a significant impact on offshore energy services providers. The EAR restricts numerous technologies used in the offshore sector, such as vessels, marine engines, ROVs, many sorts of acoustic systems, optical sensors, underwater cameras, laser/MIG/ E-Beam welding equipment, pressure sensors, navigation equipment and software, gyros, accelerometers, underwater syntactic foam, and various specialized types of tanks, fittings, valves, and pipes, and many other items. Related software can also be restricted, as well as technology to produce such items.

As a result, some problems that operators may encounter include:

  • Vessels and offshore units cannot be used in Iran if they contain more than 10 percent S. content. A U.S.-made marine diesel engine can in some cases be costly enough to trigger this restriction.
  • Operators cannot export or re-export controlled equip- ment, ROVs, tools, and other technologies into Iran’s waters to work on projects there if they are S.-origin, or include more than the minimum threshold of U.S.- origin parts.
  • Operators cannot source spares and repair parts from the United States, or send equipment to the United States for service, if it is for use on a project in Iran.

In light of these rules, any exports, re-exports, or transfers of offshore items that might fall within the U.S. export restrictions should be carefully reviewed to deter- mine whether they give rise to compliance risks. Parties also need to continue to follow developments in U.S. sanctions and export policy, as there can be no guarantees that U.S. trade policy towards Iran will remain static as we move through a contentious election cycle and select a new president and Congress in the months ahead.