Deal or no deal — what will re-imposed Iran sanctions mean for UK oil and gas firms?

Iran is OPEC’s third biggest oil producer behind Venezuela and Saudi Arabia.

Given Venezuela’s production is currently at less than half its usual level due to political and economic instability, there are substantive reasons for oil and gas businesses to see Iran as somewhere with significant demand for supply of goods and co-venturer opportunities.

However, US President Donald Trump’s announcement that the US was withdrawing from the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal or the Iran deal, has led to significant concerns across the UK oil and gas market, both within the supply chain and among certain operators.

It has already been reported that Total is revisiting its Iran investment plans; Serica is assessing its proposed acquisition of BP’s interest in the Rhum field (where the Iranian Oil Company is a co-venturer); and numerous financial institutions have already sought to block or freeze payments (both incoming and outgoing) with any link to the country.

US sanctions – worldwide impact

The US implemented a wind-down policy following the announcement of the exit from the JCPOA.

This means that all US companies engaged in the energy sector have until 4 November this year to fully wind down all operations relating to Iran.

In addition, US entities will also seek to ‘de-risk’ their wider financial and commercial operations in order to avoid being construed as breaching the imposed sanctions.

On a practical level this means that companies with a US connection (either a direct or indirect parent company or an affiliate) will be expected to avoid both dealing with Iran directly, and to risk assess all contractual and operational relationships to determine if there is a possibility of a connection.

For example, the presence of the Iranian Oil Company (IOC) in certain UKCS fields may prove problematic for co-venturers with a US-based parent or affiliate organisations, because — arguably — funds transmitted to the wider group from field production profits will have been received through dealings with the IOC.

This means these co-venturers may look to dispose of those assets, but will find a very narrow marketplace as potential buyers will need to be live to the US connection risks and restrictions.

Moreover, a significant proportion of UK banks and financial institutions have links with US parent organisations, investors or shareholders.

Accordingly, the banks will be cautious in handling transactions which have either a direct or indirect connection to Iran.

Typically, banking policy around such restrictions is drafted on a particularly wide basis to allow the bank or financial institution significant discretion in rejecting such transactions. Practically, this means that for companies trading with Iranian entities or even receiving or delivering goods shipped through Iranian territory there is a risk that payments relating to such transactions could be delayed, reversed or frozen.

One area that may prove particularly challenging is insurance. Providers backed by US institutions will be caught by the full re-imposition of sanctions and will be unable to cover liabilities relating to Iran. Due to the scale of insurance required for the oil and gas industry, and the institutions in the marketplace at the moment providing that cover, sourcing an alternative could prove particularly difficult.

Safe harbours

When the JCPOA was in place, US entities were still restricted in engagement with Iran, but could allow foreign subsidiaries to engage in Iranian transactions provided there was no direct link (either commercially or financially) to them.

The use of such ‘safe harbours’ led to many US-based corporations hiving out any Iranian operations to Australian or Far East locations.

It is likely that once the sanctions are fully back in place, there will not be such a similarly permitted position for US businesses.

But this is a concept for UK entities with no direct US parents or affiliates to use in order to maintain business relationships in both areas.

This includes —

• Ring-fencing of business and banking arrangements into two separate corporate entities, one engaging exclusively with Iranian business and the other engaging on all other matters, would allow a UK business to maintain existing business relationships while continue to explore Iranian opportunities

• Regard would have to be given to the remaining restrictions on trade with Iran which the UK imposes (certain financial restrictions, types of products and specified sanctioned individuals) but these are not insurmountable

• Similarly, specific banking arrangements with a provider that has systems in place to deal with Iranian payments would need to be established, but these could be with a completely separate bank than the one ordinarily used, which would again provide further comfort for US connections

These ring-fencing arrangements may not be practical for some co-venturers so much thought will be needed from businesses on other ways to manage or rationalise their assets.

In summary, provided the UK maintains its currently stated course and does not withdraw from the JCPOA, then UK entities are still able to operate within Iran and engage in JCPOA-compliant Iranian transactions.

Careful consideration and structuring will require to go into the management of such operations and transactions in order to also retain engagement with US-related co-venturers, customers and suppliers.

For some though, the restructuring required may be just too significant when weighted against the potential benefits of engaging in Iranian transactions.

For others, it may be a small inconvenience for entry into a significant market.