Sinopec-Iran Deal Facing Increased Scrutiny: Capital Markets Dimension Could Spell Trouble For Wall Street

(Washington, D.C.): Over the past several days, mounting anger is being expressed in the United States — notably by the Chairman of the Senate Foreign Relations Committee, Sen. Jesse Helms — regarding contracts estimated to be worth some $160 million recently signed by China’s second largest state-owned petroleum company, China Petroleum and Chemical Company (a.k.a. Sinopec), and the National Iranian Oil Company (NIOC). It is now widely assumed that these two contracts meet the threshold to trigger the Iran-Libya Sanctions Act (ILSA) and now await a presidential determination concerning whether to impose sanctions on the Chinese company, Sinopec.

This breaking issue has the potential to be one of the first to arrive on the desk of the occupant of a newly created position at the White House — the Deputy Assistant to the President for International Economics — intended to report jointly to National Security Advisor Condoleeza Rice and Economic Advisor to the President Lawrence Lindsay. The Sinopec- Iran/ILSA decision demands such attention for the following reasons: 1) The Sinopec investment appears to violate U.S. law. 2) A sizeable portion of the largest of the Sinopec contracts with NIOC ($150 million) will reportedly involve the upgrading of Iran’s oil infrastructure (i.e., two refineries, including its oil port facility at Neka on the Caspian Sea). 3) The award of these significant contracts to the Chinese begs the question of whether it was a quid pro quo for Beijing’s delivery of components for weapons of mass destruction and/or long-range ballistic missile delivery systems to Tehran. And 4) the question of whether or not this Sinopec-Iran negotiation was underway prior to Sinopec’s $3.4 billion initial public offering on the New York Stock Exchange last October. If so, it could be tantamount to a “material omission” with regard to the company’s S.E.C. filings and prospectus.

In addition, according to the Dow Jones Wire Service item circulated on Wednesday, even the outgoing Clinton State Department feels that “Sinopec’s investment may impede more than one…policy initiative. In addition to a potential ILSA violation, the investment would expand an export route for Caspian oil that competes with the U.S.-backed plan to carry the oil by pipeline to the Mediterranean [the so-called Ceyhan route’ through Turkey].” Dow Jones quotes an unnamed “official” at State as saying that, “In light of our policies, we have long been concerned about the Neka project. We have expressed those concerns to the government of China, to Sinopec and to other companies which have been reported to have been interested in the project….”

Two noteworthy articles addressing aspects of this developing controversy appeared in the Far East Economic Review dated 25 January and in the Dow Jones Wire Service.

Chinese oil giant Sinopec, which was listed on the New York Stock Exchange in October, could face sanctions in the United States for signing a deal with the National Iranian Oil Co. The Chinese company agreed earlier this month to work on a $150 million-plus project to upgrade two Iranian oil refineries and a Caspian Sea oil and port, press reports say.

But analysts say the deal violates the United States’ Iran-Libya Sanctions Act, which restricts investments in the sectors of Iran and Libya. The U.S. has authority to impose sanctions on foreign firms that invest more than $20 million. Observers wonder if Sinopec will be punished for not disclosing its plans in Iran when it filed its disclosure and registration papers with the Securities Exchange Commission.

Due to the American sanctions, TotalFina of France was forced in 1997 to unload all of its U.S. assets before it could announce plans to participate in an oil and gas project in Iran. American human-rights activists have sharply criticized Sinopec for its investments in the Sudan, where the government is repressing the Christian minority in the part of the country. Sinopec’s shares have plunged to less than $15 from more than $21 in October, despite the high price of oil on the international market.

WASHINGTON -(Dow Jones)- China Petroleum & Chemical Corp.’s (SNP), or Sinopec’s, plan to expand Iranian trade in Caspian oil may trigger U.S. trade sanctions that have yet to be enforced since their enactment more than four years ago.

Touching several raw nerves in U.S. foreign policy, Sinopec’s $150-million-plus investment in Iranian oil infrastructure may reinvigorate unilateral sanctions that U.S. allies have deemed at best symbolic and at worst extra-territoriality.

Since 1996, the U.S. has threatened unilateral sanctions against non-U.S. companies investing more than $20 million in Iran’s petroleum sector. The sanctions, under the Iran-Libya Sanctions Act, or ILSA, were meant to address concerns Tehran was supporting terrorism, obstructing Arab-Israeli peace and developing weapons of mass destruction.

ILSA immediately drew cries of extra-territoriality from U.S. allies in Europe. But the criticisms were muted by the fact the sanctions were never enforced, with waivers to European and Asian companies such as TotalFinaElf SAW (TOT), OAO Gazprom (R.GAZ) and Petronas. While U.S. companies are strictly barred from investing in Iran, the sanctions on non-U.S. companies have appeared mainly symbolic. The ILSA sanctions require renewal in August, and some industry observers have hoped President-elect George W. Bush would let them expire quietly.

But Sinopec’s investment is throwing the president-elect a foreign policy curve ball even before he takes office this weekend, and observers say many assumptions about ILSA sanctions could go out the window.

Sen. Helms Wants ILSA Enforcement, Renewal

Officials at the State Department, which enforces ILSA, couldn’t be reached for comment. The decision whether to enforce sanctions on Sinopec will likely fall to the Bush administration.

Bush officials have declined comment on foreign policy during the transition. But Secretary of State-designate Colin Powell testifies tomorrow before the Senate Foreign Relations Committee, where Iranian sanctions policy may be discussed.

The committee’s chairman, Jesse Helms, R-NC, says ILSA sanctions should be enforced against Sinopec and the law should be renewed this August. “The Chinese communist government is aiding and abetting an Iranian terrorist state; that’s not something for which sanctions should be waived,” said Helms spokesman Marc Thiessen.

The Clinton administration’s failure to enforce ILSA penalties on numerous non-U.S. investors in Iranian oil and gas has eroded the potency of the law, Thiessen said. “If you have a sanctions on the books that you never impose, no one takes you seriously,” he said. If President Bill Clinton had concerns about possible extra-territorial aspects of the law, he should have never signed it, Thiessen said.

ILSA supporters say the Sinopec deal will spotlight the need for renewing the sanctions.

“This investment could conceivably complicate allowing ILSA to lapse this summer,” says Roger W. Robinson, Jr., a National Security Council official under President Ronald Reagan.

Robinson is chairman of the William J. Casey Institute, which advocates closer scrutiny of the geopolitical and human rights records of companies that seek financing in U.S. capital markets.

Robinson says Sinopec, which was listed on the New York Stock Exchange last October, and its chief U.S. underwriter Morgan Stanley Dean Witter & Co. (MWD), should have told potential investors of any plans to invest in Iran.

The listing had already created controversy because of revelations Sinopec had invested in Sudan, where the U.S. has trade sanctions. The company disposed of its $30 million investment in Sudan ahead of the NYSE listing.

Issues Of Sinopec Investors, Caspian Policy

Formerly a wholly state-owned refining monopoly, Sinopec sold equity last year to investors including Exxon Mobil Corp. (XOM), Royal Dutch/Shell Group (RD) and BP Amoco Plc. (BPA). Policy analysts say the indirect role of these companies in the Iranian deal could complicate the issue for Bush, whose administration is widely associated with Big Oil.

Another twist in the Sinopec deal is that it would compete with the U.S.-backed plan to export Caspian crude through Azerbaijan and Georgia to Turkey’s Mediterranean port of Ceyhan. The U.S. government has been the chief supporter for the Ceyhan line and has blocked U.S. companies from taking Caspian crude into Iran.

Sinopec finished deals last week for exploration rights in Iran as well as a contract to upgrade and expand Iran’s Tehran and Tabriz refineries and its Caspian port facilities at Neka.

The infrastructure upgrades, financed by European oil trading company Vitol SA and Hong Kong’s Federal Asia, would expand Iran’s capacity to swap Caspian crude.

Under swaps, Iran can use crude from Kazakstan, Turkmenistan, Azerbaijan and Russia for its northern refineries in exchange for Iranian crude in the Persian Gulf.