Insult to Injury: Sinopec’s Iranian Deal Constitutes Apparent I.L.S.A. Violation

(Washington, D.C.): Last week, Sinopec the Chinese state-owned energy company whose listing on the New York Stock Exchange last October has been reeling, perhaps in part, from blow-back over its involvement with terrorism-, genocide- and slavery-sponsoring Sudan — has just hit another tripwire: As noted in the attached Dow Jones Newswire story, it inked a contract with the National Iranian Oil Company (NIOC) to explore oil in Zavareh, Kashan, an area some 200 kilometers south of Tehran. The contract, reportedly worth over $13 million, covers a total area of 4670 square kilometers.

In addition, Sinopec and NIOC signed a second contract for upgrading the Tehran and Tabriz refineries and the Neka project to build an oil terminal port in the Caspian Sea, according to Tehran’s official news agency. The latter agreement is said to be valued at $150 million.

An ILSA Violation?

These transactions together seem to constitute a violation of U.S. law — the Iran-Libya Sanctions Act which imposes select sanctions on foreign companies that invest more than $20 million in Iran’s energy sector. Although President Clinton saw fit not to apply these sanctions in connection with earlier investments by France’s Total and Russia’s Gazprom, this deal raises a number of questions for the new Bush Administration: Will it maintain its predecessor’s opposition to an Iran-based Caspian export route? Will it continue to turn a blind-eye, as the Clinton team did, to the Chinese practice of trading arms — including components for weapons of mass destruction — for energy-related concessions and contracts? Would doing so signal an indifference to the Iranian government’s ongoing repression of “moderate” elements and its testing of long-range ballistic missiles?

The Sudan Gambit

Even before the potential violation of ILSA arose, Sinopec had already attracted controversy. Thanks to a well-researched and timely article published by Peter Wonacott in another Dow Jones publication, the Wall Street Journal on 11 October 2000 — just days before Sinopec’s IPO was launched in New York — the Chinese concern had maintained a $30 million investment in Sudan’s oil sector. In a transparent effort to clean up its prospectus so that Sinopec could avoid the tragic fate of PetroChina’s IPO last April, the company supposedly transferred its Sudan-related assets (on undisclosed terms) to China National Petroleum Company, the parent company of PetroChina.

The Wonacott article cast considerable doubt on the authenticity of this asset transfer and prompted the bipartisan U.S. Commission on International Religious Freedom (USCIRF) to demand an investigation of the matter in a letter to SEC Chairman Arthur Levitt on 20 October. No public statement has ever been provided by the SEC, and, likewise, there was no response to the USCIRF letter of inquiry. Stockholder concerns about these revelations may nonetheless have contributed to fall of some 30% in Sinopec’s share value since its IPO price last October.

Investor Ponderables

The Dow Jones Newswire article by Campion Walsh puts the choices ahead for the Bush Administration and holders of Sinopec stock into sharp relief: Should the Administration decide to enforce sanctions against Sinopec — or even delay a decision on the matter — U.S. investors may be spooked by this latest Sinopec controversy (coming on top of negative press regarding the company’s suspiciously divested stake in Sudan’s oil sector). Such a scenario raises a number of disclosure-related questions:

• What did Sinopec’s lead investment bank know — and when did they know it? Given the complexity of a multi-million dollar joint venture agreement with Iran, such negotiations may have been underway at the time of Sinopec’s IPO. If Sinopec’s investment banking team knew about this impending negotiation/deal (which seems plausible given the positive impact such a deal would have on the company’s bottom line), it would be reasonable to expect prior disclosure of the matter, given the possible triggering of US sanctions and potential downside pressure on the stock.
• If its investment bank was “out of the loop” on the deal, why did Sinopec not disclose this impending deal in its SEC filings? The SEC presumably would want companies seeking to list on the NYSE to disclose developments that could pose a risk to the company’s stock value. If the SEC were to determine that a material omission occurred, it has the authority to suspend trading of the stock while an investigation ensues.
• Why does the SEC not require more stringent “political risk” disclosure? Sinopec and its investment bank may contend that the SEC does not require disclosure regarding where a company — and its subsidiaries, affiliates and/or parent — is doing business overseas, and with whom. The William J. Casey Institute has long argued that these and other questions are of material relevance to investors, particularly when a foreign entrant to our markets has or soon will have operations in terrorist-sponsoring states and other State Department-designated “countries of concern.”

Bottom Line

This latest “case study” demonstrates the need for expanded political risk assessments by Wall Street players and prospective purchasers of emerging market equity and debt offerings. As the Casey Institute’s Capital Markets Transparency Initiative has consistently asserted, the SEC is shirking its responsibility to protect this nation’s shareholders by not insisting on greater disclosure and transparency on the part of these types of foreign entities.

It can only be hoped that the incoming Bush Administration will conclude that — in addition to the obvious national security concerns involved in Sinopec’s Iran/Sudan deals — stock and bond values can be significantly, and adversely, affected by these new non-traditional, non-financial risk factors.