IRAN SANCTIONS ACT (ISA, FORMERLY ILSA): APPARENT

C O N F I D E N T I A L SECTION 01 OF 02 STATE 142040 SIPDIS SIPDIS E.O. 12958: DECL: 10/09/2017 TAGS: ETTC PREL ENRG EPET IR CH SUBJECT: IRAN SANCTIONS ACT (ISA, FORMERLY ILSA): APPARENT PROGRESS BY SINOPEC ON YADAVARAN PROJECT REF: A) STATE 126111 AND PREVIOUS (B) BEIJING 6114 (C) BEIJING 6170 (D)BEIJING 6402 Classified By: EAP Acting DAS John Norris; Reason 1.4 (b and d). ¶1. (U) This is an action message; please see paragraphs 2 through 4 below. ¶2. (C) Department appreciates Embassy,s continuing close attention to this matter. Ref. C conveys disturbing news of apparent progress toward a firm agreement on Yadavaran. The seriousness of this issue calls for further approaches, which Embassy is asked to make at the most senior appropriate levels of the government and company. We believe this would be an appropriate follow-on to the Ambassador,s broader discussion of cooperation reported Ref. D. ¶3. (C) Except for the important point about the recently-enunciated French position on business with Iran (below),our arguments are not new. But it is important to restate them for the record, since a final agreement on Yadavaran would be an extremely negative development, as the first major new deal for actually developing an Iranian oil or gas field in recent years. At a time when Iran continues to defy UNSC resolutions about its nuclear activities, such an agreement would encourage Iranian obduracy, damage the P-5 1 (particularly in light of a new development: the recent decision by the French government to actively discourage French firms from finalizing oil and gas deals or bidding on new projects in Iran),and undermine our increasingly important efforts to persuade other countries to go beyond UNSC requirements in further constraining commercial engagement with Iran. It would also raise concerns under ISA (the Iran Sanctions Act) and spark a strong reaction in Congress, where new Iran sanctions legislation is under active consideration. ¶4. (SBU) In its discussions, Embassy may draw as appropriate on previous messages as well as on the following points: -- Since our recent discussions we have received further indications that there has been important progress by Sinopec toward reaching a firm agreement with Iran on developing the Yadavaran oil field --The pace of investment in developing Iranian oil and gas fields has slowed markedly in recent years. Such an agreement by Sinopec would be would be the first major new agreement of this kind for some years, and would thus have an enormous negative impact. --It would severely impair our common effort to bring Iran into compliance with UNSC resolutions regarding its nuclear program )sabotaging the concept reflected in the P-5 1 proposal of offering enhanced economic engagement as an inducement for Iranian compliance. --At a sensitive moment when we are considering elements for a third sanctions resolution, signing an agreement to develop Yadavaran would reward Iran for defying the Council and harden Iranian resistance. --Regarding potential deals of this kind, restraint by firms from all countries is critical. France has called on its own companies not to move toward finalizing oil and gas deals, a key one of which has been under negotiation longer than Yadavaran. STATE 00142040 002 OF 002 --In light of the French position, an agreement by a Chinese firm to go forward on the Yadavaran project would severely damage P-5 1 unity --in addition to the encouragement it would give to Iranian defiance. --Congress is intensely interested in the issue of investment in Iran, and preliminary agreements earlier this year concerning major LNG deals with Iran, including one by CNOOC, drew strong negative attention. --In addition to its other negative effects, entering into such an agreement would provide fuel to critics of the U.S -China relationship. --Agreements involving investment in Iran,s oil and gas sector also raise concerns under US law )the Iran Sanctions Act (ISA),which provides for sanctions against companies making certain investments in Iran,s oil and gas sector. --You have told us numerous times that your investment in Iran,s oil and gas sector is an engineering service contract. We assume you are doing so to establish your position that you believe your investment does not violate ISA. Referring to your activity as engineering work does not establish whether the activity in question constitutes investment within the meaning of the ISA statute. The final decision in this regard rests entirely with the Secretary of State. --Hope you will clearly understand the importance of this matter, and take appropriate steps with respect to any potential new actions by Sinopec. ¶5. (U) Please include the four letters ILSA in subject line of reply. RICE