free trade, unilateral and economic trade sanctions



May 9, 2001

Eric Thomas
Emily Kelley

Written Testimony of Archie W. Dunham

Chairman, President and Chief Executive Officer, Conoco Inc.

Mr. Chairman and distinguished Members of the Subcommittee, thank you for your invitation to me to provide testimony on behalf of Conoco, Inc., concerning an important piece of legislation that affects a region of vital interest to the United States.

I am grateful that you have given me the opportunity to address this Subcommittee on the issue of the Iran-Libya Sanctions (ILSA) Extension Act, and that the Members are devoting such appropriate consideration to the contents and the consequences of this proposed legislation. Both this Congress and the new Administration have undertaken their responsibilities at a time of intensifying threats and appalling violence in the Middle East. These circumstances add urgency to the imperative of shaping a framework for U.S. policy in this region that protects and defends America’s national interests and those of our allies.

Speaking on behalf of Conoco and its employees and shareholders, I want to emphasize the deep and abiding concerns that we in the business community share with you in determining that policy and advancing U.S. interests. We are, of course, private organizations with commercial objectives. But first and foremost we are patriots, and we profoundly believe that the American spirit of free enterprise has an integral contribution to make towards promoting peace and prosperity around the world.

Not only do we uphold common values, but we also endorse common interests, particularly in the critical area of the Middle East. The United States has vital national interests in this part of the world: to promote peace among all the people of the Middle East; to assure the stability and security of the Persian Gulf; and to protect and expand the world’s energy supplies. America’s private sector shares these priorities, because we recognize that the advancement of U.S. geostrategic objectives around the world will generate the most advantageous environment for U.S. companies. Nowhere is this more true than in the Middle East, where efforts to resolve historic tensions can only enhance the climate for American capital and technology. Here our vital national interests and our commercial interests go hand in hand.

My remarks will primarily address the subject at hand, the proposal to extend ILSA. However, I want to highlight from the outset our profound concerns about the broader problem of unilateral American sanctions on trade and investment with these two countries. Through Executive Orders issued by President Clinton with respect to Iran, and by President Reagan with respect to Libya, U.S. companies are barred from any meaningful involvement in the economies of either Iran or Libya, while our foreign friends and competitors have become increasingly active there, as I will describe below. This unilateral embargo is both inequitable to our own citizens and ineffective in its impact on the target countries. In the deliberations over this specific piece of legislation, this context is critical. Our decision on the future of ILSA can and should signify a renewed American readiness to work with our allies, to engage with our adversaries, and to address the dilemmas that Iran and Libya pose for U.S. national security.  

Conoco and The Power of Economic Diplomacy

American economic strength is a central factor in advancing our nation’s foreign policy. Commercial interactions among peoples help develop closer political and strategic ties, and they are even more powerful in cases where governments have long been estranged. In Russia and across the former Soviet Union, American businesses have strengthened fragile new democracies by transforming the controlled economy of the past into a free market of the future. As one of the first and one of the largest foreign investors in Russia’s oil industry, Conoco has played a valuable role in that transition. In Vietnam, U.S. companies helped pave the way for political normalization and the process of post-war reconciliation, and here again, Conoco is the largest foreign firm in the energy business. Commercial cooperation has been an essential instrument in America’s foreign policy arsenal throughout our history, and in today’s increasingly interdependent world, trade serves as a powerful force for inducing domestic liberalization and international moderation.

Six years ago, some envisioned such a future for the Islamic Republic of Iran. Conoco spent months negotiating a $600 million contract to participate in the development of the Sirri offshore oil and gas fields. We understood the sensitivity of the rift between Iran and the U.S., and so we were careful to keep the State Department informed every step of the way. Tehran’s decision to award Conoco this contract – Iran’s first exploration and production deal with a foreign company since the revolution – was specifically intended to signal the government’s willingness to chart a new course in its relationship with the U.S. Here in Washington, however, the decision produced the opposite effect, a campaign for the economic isolation of Iran. As a result, a series of Executive Orders and Congressional actions, including ILSA, severely restricted economic ties between our countries, and we were required to walk away from the Sirri contract.

Regrettably, U.S. policy has also required Conoco to sacrifice substantial business in Libya as well as in Iran. With our two U.S. partner firms in the Oasis Group, Marathon and Amerada-Hess, Conoco operated successfully in Libya from the 1950’s until 1986, when an Executive Order issued by President Reagan barred any further activity in that country. At that time, the Libyan National Oil Company assumed control of our operations and, of course, their revenues, although the Libyan government continues to honor our claim to the properties. The embargo developed into a multilateral effort in the aftermath of the 1988 Pan Am 103 tragedy, and the cooperation of the world community with United Nations sanctions helped secure Col. Qadhafi’s acquiescence to a judicial resolution. Since the suspension of the UN embargo, however, virtually all our international competitors resumed business with Libya, while American companies alone remain sidelined by unilateral U.S. sanctions. Even more incongruously, our foreign competitors are eyeing the properties owned jointly by Conoco in the Oasis Group, and our continued absence makes those attractive potential offerings for the Libyan government.

At its inception, the Iran-Libya Sanctions Act appeared to provide a key element of the intensified U.S. embargo – a means for persuading Iran and Libya’s alternative trade partners to participate in a multilateral effort via the threat of secondary sanctions. Unfortunately, ILSA in practice has proved not to be the linchpin of a successful strategy of economic pressure, but the fatal flaw in an ineffective framework, one that has had a highly adverse impact on both American national interests and commercial interests. ILSA has failed in each of its primary objectives, and this failure has come at the expense of American businesses, American workers, American farmers, and American consumers. Even more dangerously, ILSA has proven to be a paper tiger in combating the serious challenges, such as terrorism and proliferation of weapons of mass destruction, that US interests face today in the Middle East and around the world.

And so while we in the business community wholeheartedly support American policy, from our position on the front lines of the global marketplace, we must voice our serious differences with the choice of ILSA, and unilateral economic sanctions in general, as a tool to advance that policy. Fortunately, the choice is not in fact between ILSA and nothing. Rather, we have at our disposal an array of policy options, many of which can be far more effective in contending with the menace of terrorism and weapons proliferation. For these reasons, we strongly oppose any extension to ILSA. In the place of this hollow threat, the Congress should adopt smarter sanctions that target the perpetrators of violence rather than the people of those countries, who we are encouraging to embrace more democratic processes. Smarter sanctions would provide much greater influence over the foreign policy calculations of Tehran and Tripoli, and coupled with other measures that directly address the roots of proliferation and political violence, would send a much clearer message to these governments of American determination and resolve. The U.S. has serious national interests at stake, which can be better protected and advanced through engagement and deterrence than through attempted isolation.

Let me address the specific ways in which ILSA has fallen short of the objectives set out by its drafters and, in practice, has been counterproductive. Deactivated by its own provisions and unenforceable prescriptions, ILSA represents the worst of all possible policies – an embargo that has backfired to punish not its target, but its sponsor. The legislation sets out to punish and prevent any threat from Iran or Libya, but its primary impact has been to place all American interests at a severe disadvantage in an increasingly competitive and globally integrated political economy.  

ILSA Has Failed to Deter Investment in Iran and Libya

First and foremost, ILSA has failed in its most basic premise; it simply has not halted foreign investment in the energy sectors of Iran or Libya, nor reduced that investment in any material way. The Sirri contract in Iran, relinquished by Conoco in 1995 in compliance with U.S. policy, is an emblematic case in point. In the aftermath of our withdrawal from this project, the French company Total quickly stepped into our place. Total was undeterred by the limited likelihood that Washington would risk a major trans-Atlantic trade war over this project; in fact, the company was encouraged by the French government, which along with many of our friends and allies, took great exception to this perceived attempt by Washington to mandate a lockstep approach toward Iran. Total’s risk proved wise when in 1998 President Clinton issued a waiver, citing national security considerations, that freed Total of any fear of secondary sanctions against its much more substantial investment in the South Pars development project.

This waiver effectively opened the floodgates for investment in Iran, and since the passage of ILSA, foreign companies have committed $18 billion of investments in Iran’s petroleum industry and have signed $13 billion in contracts. In not one of these cases has the US Government chosen to implement the penalties mandated by ILSA. If it was intended to shut off the lifeline of foreign exchange for these regimes, ILSA has been a very leaky faucet.

Much of this investment has flowed from our friends and allies. The Europeans – including our closest NATO partners – and now even the Japanese have decisively broken ranks with Washington on this approach, and their massive investments in Iran have repeatedly resulted in exemptions or inaction by the U.S. Government rather than the implementation of the ILSA-mandated penalties. They increasingly disregard the threat of these punitive measures, because it is clear that our government will dismiss them.

As a result, Total, the company that assumed the 1995 deal meant for Conoco, has been joined in Iran’s congested energy sector by the Italians, the Dutch, the Norwegians, the Austrians and the Canadians, and it is only a matter of time before the British are awarded, and accept, a major new contract. And it is not only our friends and allies who are investing here; our strategic competitors in Russia and China, as well as emerging regional powerhouses such as Malaysia, Indonesia, and South Korea, have taken full advantage of the opportunities presented by ILSA and America’s self-imposed absence to move into dominant positions in Iran.

Not only are they investing in development of Iran’s oil and gas resources, the Europeans, the Japanese and a host of other countries have also become heavily involved in other aspects of Iran’s energy sector – extending trade insurance, expanding the petrochemical industry, and building power plants. Meanwhile, despite the expectation that ILSA would deny Iran opportunities to participate in the establishment and expansion of regional energy infrastructure, deals with Turkey, India, and several Persian Gulf states for natural gas exports remain in various stages of negotiation.

Libya has attracted a similar level of investor interest, although the effective deterrent of multilateral United Nations sanctions – principally the travel ban – deferred Tripoli’s opening until only two years ago. But a host of firms, representing a veritable atlas of the international oil industry including the UK, the Netherlands, France, Italy, Germany, Spain, Sweden, Canada and South Korea, remain active there. And the suspension of UN sanctions in 1999 has produced a frenzy of international activity, with at least fifty companies at the table and more than 130 blocks potentially on offer.

The magnitude of actual investment and potential interest in Iran and Libya since the enactment of ILSA and the accompanying U.S. embargo vividly illustrates the inefficacy of unilateral American sanctions. U.S. sanctions on their own have had no demonstrable effect on the income available to these governments, and the effort implicit in ILSA to extend the U.S. boycott to our allies as well as to our adversaries has collapsed under the weight of our own waivers. The global nature of the oil industry means unilateral sanctions have relatively little impact on government coffers in Iran and Libya – in fact, far less than the impact of a rise or fall in the price per barrel by single dollar, or even one penny. Since we have not convinced or compelled the other major industrial countries of the world to join us – and there is no way to do so – American sanctions only constrain our own competitiveness. They should be discarded without any further cost to American citizens.

Its proponents argue that while it has not curtailed all investment, ILSA has had some modest impact in dissuading foreign companies from Iranian and Libyan petroleum projects, citing as evidence the potential for both countries to attract and absorb even greater amounts of capital. While it is true that neither country lived up to its investment potential over the past five years, it is misleading to attribute this shortfall to the threat of secondary sanctions. The main deterrent to investment has not been ILSA, but the near-term internal difficulties of both governments to absorb the interest of major international energy companies.  Today, many of these hurdles have been removed, and through improved contract terms and important legal and regulatory enhancements to the overall climate for foreign investment, Iran and Libya are poised to move much more quickly and dramatically in securing international financing for energy projects. In addition, the past five years have provided a generous head-start for their potential trade partners in Europe, Asia and Russia to build the relationships, acquire the data, and develop the intense familiarity that is essential to the massive investments involved with the energy sector. These factors, along with the currently high price of oil, mean that the next five years will witness an intense amount of economic activity in both countries, with projects worth tens of billions of dollars on the offing. This will transform ILSA’s steady leakage into a flood of new economic ties between Iran, Libya and our allies and competitors.

Our friends recognize the power of economic links to transform security relationships, and they understand that oil is fundamentally a strategic commodity. As a result, senior government officials – indeed, heads of state, foreign ministers, trade and commercial ministers from our closest NATO allies – have provided energetic support to their business communities in securing long-term contracts in Iran and Libya, especially in the energy sector.  

ILSA Has Failed to Promote A Multilateral Approach to Iran and Libya

In addition to its failure to stem the flow of foreign capital into the Iranian and Libyan energy sectors, ILSA has missed its mark in a second key respect: it has not produced greater cooperation with our allies in confronting the challenges posed by these two governments. The legislation specifically calls for efforts to ensure multilateral support for its provisions, but this has not occurred. In fact, rather than assembling a united front, ILSA’s original enactment seriously antagonized our friends and allies, who consider its secondary sanctions to violate international law and the agreements to which we are party as members of the World Trade Organization. Renewal would cause further friction with the very governments whose cooperation is essential, both for stemming the flow of proscribed technologies and combating terrorism and for pressuring Iran and Libya to take responsibility and compensate for their violent pasts.

Moreover, ineffective sanctions such as ILSA erode America’s influence and perceptions of our integrity around the world. When sanctions don't work, it looks as though America has failed. And when America fails, it loses its ability to influence, let alone lead. We risk isolating ourselves rather than our targets, and not simply on the question of engagement with Libya or Iran, but on the wider array of issues that require coordination with our allies. As we mobilize a more cohesive coalition against the enduring threat of Saddam Hussein’s Iraq, we can ill afford greater tension with our allies, and we must not squander our influence on economic threats against our friends that will never work.

And that is of course the crux of the ILSA dilemma: this law has not been effective because its penalties have never been applied, but these penalties cannot be enforced because they would trigger a serious trade war with our most important allies. We have a lot at stake with our European partners, and such a dispute would be devastating, especially coming at a time of economic uncertainties and changing strategic priorities. A trade war would ripple throughout the U.S. economy, hurting businesses, farmers, workers and consumers in every Congressional district, and it would immensely complicate efforts to build greater European support for critical cooperative security arrangements, such as missile defense. ILSA renewal would jeopardize these fundamental American interests.  

ILSA Has Failed to Modify Iranian and Libyan Foreign Policy

Finally, perhaps the most tragic element of ILSA experience has been the failure of this legislation to produce any appreciable impact on the behavior that it is intended to halt. The increasing reintegration of both Iran and Libya into the world community and their massive resource wealth provide access to the sufficient benefits, irrespective of American restrictions. There is absolutely no evidence that the sanctions regime, or ILSA specifically, has brought about the slightest modifications in the conduct that is considered inimical to American interests abroad. We must identify and implement more effective measures for combating offensive policies, rather than relying on rhetorical threats or disengaging from the consensus of the world community.

Sanctions have also failed to contribute in any positive fashion to the uncertain political transformation that has taken place in both Iran and Libya in recent years. In fact, American efforts to apply economic pressure have worked to the advantage of those who hate the U.S. The ILSA threat of secondary sanctions plays into the hard-liners’ obsessive fears of international conspiracies against their government and arouses nationalist passions and anti-American mistrust. This serves the purposes of the small minority of Iran’s population who remain hostile to progress, and enables them to retain their dominant positions and enhance their considerable economic interests. But more than two-thirds of the Iranian population are under the age of 25, with little or no memories of the revolution itself. These young Iranians, along with so many of those from all generations whom I’ve met on my trips there, are eager to embark on a new phase of relations between our countries. Our sanctions disregard their aspirations for a government more responsive to its citizens and more responsible in the region, and enable those aspirations to be deferred for another day.

The Iran-Libya Sanctions Act and our other unilateral sanctions have failed to achieve any of their stated objectives. However, a full accounting of this legislation must not only consider its negligible part in advancing U.S. interests, but its high collateral costs to those interests.  

ILSA Has Reduced U.S. Energy Security

First, ILSA has diminished American energy security at time of soaring demands and shrinking supplies. Constraints on US investments in new production have substantially reduced  America’s diversity of  energy supplies – while constraining no one else’s, making consumers  in the United States more dependent on fewer sources. Growing demand in the U.S. and in developing economies has been met by an all too inflexible supply of oil, resulting in shortages and skyrocketing prices. Today, prices have doubled from their mid-1990s’ level that facilitated the rapid economic growth of that period. Any disruption to the worldwide supply of oil in this period of limited spare capacity and regional tensions would have an immediate and severe impact on American prosperity.

The rolling blackouts that have darkened homes and offices in our nation’s most populous state in recent months call needed attention to this neglected priority. The government Task Force under the able leadership of Vice President Cheney, as well as several independent studies released in recent weeks, are calling for a more comprehensive U.S. effort to ensure our nation’s energy security. These studies have highlighted the need to tap into new sources of energy supply, both at home and abroad.

This simply cannot be accomplished if we cordon off major producing states. Iran and Libya possess petroleum resources of a magnitude that makes them impossible to eliminate from the global energy market. Iran alone has proven oil reserves that are more than twice the size of those in this country, and on par with the entire Central and South American continent. As OPEC’s second largest producer, Iran boasts nine percent of the world’s oil reserves and 15 percent of its gas resources – percentages that could soon double with new discoveries that Iran is making – on its own. Libya’s high-quality reserves and low-cost transportation routes to Europe mean that Tripoli too is a key producer. Both countries will expand their production capabilities substantially over the next decade, and US participation in identifying and developing these resources today will guarantee an adequate, diverse supply of energy for future generations.

Other than to allow Iraq to produce flat-out, there is simply no single act that will do more in the short term to increase energy supplies and lower energy prices for Americans than to lift these sanctions, as soon as possible. The energy business has an inherently long lead-time on project developments, and investments in new production from either Libya or Iran will not yield production on the market for at least three years. The expanding American and world economies cannot afford any further delay in new energy developments imposed by legislative fiat.

In addition, investment in Iran and Libya can generate a more cooperative approach on the part of OPEC. Iran, for example, now possesses little to no spare capacity, and because it cannot benefit from the short-term expansion of supply, the government tends to adopt hawkish positions within OPEC on price and production policies. Development of new fields and redevelopment of mature reservoirs will mitigate this pressure, and make it easier for the oil producers to agree on increases in daily output, which in turn will ease price pressure on consumers.

In addition to impairing our interest in expanding and diversifying the global supply of energy, ILSA sanctions have also come at the cost of significant commercial opportunities for U.S. companies. This cost is spiraling upward even more quickly today, and any extension of ILSA would mean billions of dollars lost to American workers and industries.

A previous section of this testimony enumerated some of the investment that has already taken place despite the intended impediments of ILSA. But it is even more important to consider the future scope and scale of potential investment in Iran and Libya. In a survey of 85 multinational oil companies conducted just a few months ago, these two countries were ranked as the most attractive opportunities for new investment (Citation: Survey by Robertson Research, UK, published 3/27/01). The Iranians estimate that at least $60 billion is needed over the next decade to maintain their current petroleum production and to ensure even modest expansions in their output. In Libya, more than 70 percent of the known oil reserves have yet to be exploited. The ILSA waivers to date have granted our foreign competitors a tremendous advantage in terms of positioning, relationships, and accessibility in securing this new business.

In Libya, the restrictions on American return – while the suspension of multilateral sanctions invites the rest of the world back in – may well lead to the appropriation of U.S. assets in favor of European competitors. Iran offers different, but equally urgent, opportunities. In Iran, recent discoveries are of strategic and historic magnitude – the Azadegan field alone contains somewhere in the order of 26 billion barrels of recoverable oil, meaning that production from this single field alone could provide three to four hundred thousand (300-400,000) additional barrels of oil per day. Billions of dollars will be spent on its development, now under the leadership of a consortium of Japanese companies.

Other reserves in Libya and particularly in Iran tend to be found in mature fields that have already experienced a long and productive history. This does not suggest that further investments are unnecessary or uneconomical; rather, it is quite the opposite. Older fields in both countries urgently need rehabilitation and secondary development to maximize their current output and future potential. This is an area where American expertise and technology offers a particular advantage. However, here, as in the case of the historic Azadegan field, ILSA extension would paradoxically provide an upper hand to non-American companies.

ILSA entails significant costs to our economic competitiveness, energy security and alliance relationships, and yet it is has proven wholly ineffective in deterring investment or modifying unacceptable behavior. Still it remains on the books, and even with such a dismal record, some support its extension.  

Iran, Libya and US Security: Isolation vs. Engagement

I understand the reason for this support, even if I do not agree with it. Politicians and policymakers here in Washington are justifiably frustrated by the rising tensions and enduring violence in this region. We must be concerned about the degeneration of the Middle East peace process, which has cost hundreds of lives on both sides of the conflict between Israelis and Palestinians, as well as the decades of hope that had been invested in pursuit of an enduring settlement. This violence has generated an equally dangerous derivative trend, the partial rehabilitation of Iraqi dictator Saddam Hussein on the streets and, even more ominously, within some governments of the Arab world. Confronting these two challenges rightly rank at the top of American priorities for the Middle East.

These circumstances rightly dismay and outrage many here in Washington, and I share that frustration. But such urgent and intractable dilemmas demand real solutions, not rhetoric on sanctions such as ILSA that can never be properly implemented. Real solutions would entail more judicious use of economic pressure, as well as more generous investments in the programs that have been successful in combating the challenges that these governments pose through better training, intelligence gathering and analysis, and technical capabilities. The United States has a remarkable set of military assets designed specifically to deal with terrorists, and investing in those capabilities will do far more to combat violence than any sanction can accomplish. We did not allow the rash of airline hijackings in the 1980s to shut down international air traffic. We should not allow a very small group of individuals involved in supporting terrorist activities to keep us from developing better relations with Iran, which will enhance our security in the region, advance our commercial interests, and over time will do the most to encourage positive changes in Iran’s government and political climate.

This is a period of subtle but significant changes in both Iran and Libya, as their young populations come of age and their developing economies come on line. Isolation is not the answer to the security dilemmas we face. Rather, we should pursue engagement with Iran and Libya and expand their dialogue with the world community through commerce, culture, and diplomacy. Building linkages with these governments will require flexibility and perseverance, but just as in Vietnam, Russia, and China, these linkages will provide a foundation for peace and prosperity. Economic incentives have a major contribution to make in creating common interests. The broader reintegration of these two countries into the world economy will invite moderation and balanced responsibility. Whether it is membership in the World Trade Organization, acceptance of international finance, or participation in the multinational oil business, today’s global market imposes stringent restrictions and eschews provocative actions. Any gains from this reintegration for the governments in question will only give them more to lose if they endeavor to upset the system.

Representatives of Conoco have spoken frequently on the issue of unilateral trade sanctions. Our position reflects our proud corporate history of blazing new trails, a history that began in the American frontier states and today extends our activities throughout the global market for energy. This history has provided us with a unique vantage point on the challenges for the U.S. government in difficult parts of the world, such as Iran and Libya. We look forward to the day when we can once again serve as proud corporate diplomats, and help begin the long, slow process of rapprochement between unnecessary adversaries. Allowing ILSA to expire on schedule is the first step.




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