European governments and oil companies are drawing up a range of strategies to deal with US sanctions aimed at stopping new investments in the Iranian and Libyan oil industries. They hope a tough stance will force the US into a compromise arrangement, but may well face a legal confrontation and a trade war.

The legislation. passed by the US Congress on 23 July and expected to be signed into law by President Clinton within days. penalises non-US companies investing more than $40 million a year in the oil industries of Iran or Libya (see box, and MEED 2:8:96). In 1995, US companies were barred from any transactions with Iran as part of unilateral sanctions deemed ineffective because of the willingness of non-US companies to deal with Tehran.

Iran and Libya have themselves not said much. Libya has been silent while Iran has dismissed the sanctions as illegal and ineffective. The effects on their oil industries would not be felt for some years; nor is there much they can do beyond rooting from the sidelines as Europe tackles the US.

The EU has taken a very strong stance against the US legislation. This is not only because it does not think such sanctions are the right way of dealing with Iran and Libya, but because it views the US effort to force its laws on other countries as unacceptable.

The Europeans have threatened to take the US before the World Trade Organisation (WTO) for allegedly violating free trade rules.

Particularly vehement have been France and Italy, two of the countries most directly affected by US action. Italian Foreign Affairs Minister Augusto Fantozzi said on 26 July that Italy could take extra retaliatory action independent of the EU, and would consider blacklisting US companies if its firms were penalised.

The strong language only partly reflects European anger. In early August, Europeans were still hopeful that their forcefulness would induce President Clinton to exercise the discretion afforded him in the legislation.

Any European optimism may be premature, particularly in the run-up to the November presidential election in the US when Clinton is likely to come under rising pressure from his Republican opponents to apply the law. The legislation has so far been forced on a reluctant White House by a Republican-dominated Congress. The bill’s passage through Congress in 1996 has in turn been speeded up by a spate of terrorist attacks against Israeli and US targets, the latest on 17 July, when a suspected bomb destroyed a TWA Boeing 747 off the coast of New York, killing all 230 people on board.

At the practical level, the EU and European and Canadian companies are considering various options to nullify the US legislation.

The European Commission (EC) says it can extend legislation drafted to counter the earlier Helms-Burton Act against Cuba to cover Iran and Libya. The blocking statute, sched0uled to be considered by the EC in early August, would shield European companies by forcing them to ignore the US laws. The companies would be able to act in European courts.

Another approach by the EU is to bring together the companies concerned, ‘particularly those in Libya, and to draw up a plan of action,’ a EU official says. EU and company lawyers are scrutinising the US legislation in preparation for any case brought before the WTO.

Yet another approach, says the official, will be to ‘encourage the (US) president to use waivers’ in the sanctions act.

Working group

The European companies most involved, and estimated to number about 20, have set up a working group to co-ordinate their moves and to talk with the EC. The first meeting of the working group with the EC was scheduled for early August ‘to see if visible action can be taken,’ the official says.

European and Canadian companies involved with Iran and Libya are separately exploring ways of circumventing the US legislation. Among the options considered by some companies are: redefining contracts to exclude ‘investment’, working through affiliates, and breaking up projects into units of less than $40 million.

The companies are, however, unlikely to move until the November election in the knowledge that such arrangements would work only if the US chose to look the other way. Until then, the White House may come under such congressional pressure that even contracts technically permissible under the US legislation would come under scrutiny.

Publicly, the companies affected are saying little. Italy’s Agip, which has a high profile in Libya, says through its parent company ENI that it is waiting to see how it will be affected by the legislation (see Libya).

In the case of Iran, France’s Total says its $600 million contract to develop two offshore oil fields near Sin island, in the Gulf, is unaffected. However, it could face problems looking for a partner to share the cost of the scheme, and may even provoke a US reaction by awarding an expected $300 million construction subcontract.

Royal Dutch/Shell, which has been negotiating over the second phase of the offshore South Pars gas field development project, says talks continue unaffected. A Shell official says it is ‘too early to talk about the effects’ of the bill on the scheme adding that the company was opposed to unilateral sanctions and believed in free trade.

Most companies dealing with Iran and Libya are keeping a low profile, waiting for the governments concerned to agree a compromise. Until the US presidential election in November, things can only get worse.