On 14 July 2015, the Joint Comprehensive Plan of Action (“JCPOA”) was agreed between Iran and the US, the UK, France, China, Russia and Germany.  In basic terms the JCPOA is a quid pro quo arrangement under which Iran makes certain promises in relation to its nuclear programme and in return the UN, the US and the EU promise to remove their “nuclear-related” sanctions (including oil and gas embargoes) which are currently in place against Iran.

The JCPOA is the most significant step in decades towards more open relations with Iran and could mean a “green light” for Western business in the Iranian oil and gas industry. But the question on everyone’s lips is... when will we get the green light and what can we do then?

JCPOA Timeline – When will sanctions relief apply?

Several key deadlines in the timeline under the JCPOA have been met successfully in the last week and so progress so far looks good. These deadlines were:

  • On 15 October 2015, the International Atomic Energy Agency (“IAEA”) confirmed that Iran had completed activities set out in the “Roadmap for the clarification of past and present outstanding issues regarding Iran’s nuclear program” – an agreement between the IAEA and Iran (signed on the same day as the JCPOA) in which Iran commits to clarifying outstanding issues relating to possible military dimensions of their nuclear programme. We expect a report from the IAEA Director General assessing these issues by 15 December 2015.
  • Last Sunday, 18 October 2015, was “Adoption Day” under the JCPOA which means that the JCPOA is now in force. This does not mean that the Iranian sanctions relief now applies. Adoption Day marks the point at which all parties to the agreement will begin taking the steps required for compliance with their JCPOA obligations. In the EU and the US this means issuing administrative documents which eventually come into force, giving effect to the agreed sanctions relief. In Iran this means taking steps to reduce their nuclear capacity as set out in the JCPOA. At the time of writing, these steps appear to have been initiated on all sides.

The next key point in the JCPOA timeline is known as “Implementation Day” which is triggered by the IAEA’s verification of Iran’s compliance with the JCPOA. On this day Iranian sanctions relief will apply and for many Western businesses this is “green light” day for business with Iran.  It is likely that this will not be until June 2016 at the earliest - it will take a number of months for Iran to fully action its obligations and then a couple of months for the IAEA to independently verify that this action has been taken.

A Post-Implementation Day World: What does this mean in real terms for oil and gas business?

So, what will be permitted in relations with Iran after Implementation Day?

The good news is that in terms of EU law, notwithstanding other applicable laws, the majority of oil and gas sector activities that were previously prohibited under the EU regulations will be allowed. (For more specific details of what will be allowed see section 3.3 of JCPOA Annex II here)

The not so good news is that the US sanctions relief anticipated under the JCPOA relates only to US regulations which currently attempt to restrict “non-US persons” in their dealings with the Iranian oil and gas sector. Comprehensive US restrictions on Iran will remain in place for US persons - even in relation to foreign branches of US entities and entities owned or controlled by a US person. This concept of “control” is not black and white - even internal policy decisions being made by US persons could mean that US restrictions apply.

As such, careful consideration should be given to an organisation’s ownership, administrative and operational structures (including supply chain) prior to deciding whether US sanctions will apply or affect business with Iran.  For example, it is crucial to note that US Dollar transactions relating to the Iranian oil and gas industry may not be cleared through the US financial system as US persons will remain prohibited in areas where EU persons are not.

Fortunately the US has undertaken to issue Office of Foreign Assets Control (“OFAC”) licences to non-US entities that are owned or controlled by US persons in certain circumstances. These licences are not guaranteed and commercial deals where such licences are required should have built in contingency for delay caused by obtaining the licence and the possible refusal of the licence.

In the meantime...

As with all things political, what has been agreed may not come to pass. We will endeavour to keep you up-dated on developments as the JCPOA timeline marches on.

The anticipated sanctions relief presents great opportunities for western business in the Iranian oil and gas sector. With the end being in sight it is tempting to push the boundaries of the current restrictions in relations with the Iranian oil and gas sector. Look out for our next blog in which we address some of the potential pitfalls in preparation for business with Iran.

If you are considering post-Implementation Day business opportunities in Iran and would like to discuss taking these forward, please get in touch.