Iranian Oil Exports and Sanctions: A Case for more transparency from the Obama Administration

1. Iranian Oil Exports and Sanctions: A Case for more transparency from the Obama Administration Nathaniel Kern Foreign Reports Inc. May 1, 2014

2. Notes on data • Data in this report is current as of May 1, 2014. Individual countries importing Iranian oil report their data between 15 and 45 days after the month in question has ended. • Sources: General Administration of Customs (China); KNOC (South Korea); METI (Japan); Reuters’ tanker discharge data (India); EPDK (Turkey); Bureau of Energy, Ministry of Economic Affairs (Taiwan). Taiwan and Turkey won’t publish data until mid-May. Our assumption is that Taiwan imported no oil from Iran in March and that Turkey’s imports were the same as the average during the past six months. Data does not include unreported imports by Syria or the UAE or product imports by China. • Unless otherwise noted, all data is in ‘000 of b/d. Chinese and Indian data is converted from tonnes to barrels at 7.2 barrels per tonne. • Copies of this presentation are available at ForeignReports.com (c) Foreign Reports Inc.

3. Officially Reported Imports of Iranian Oil Nov. 2011 to date (c) Foreign Reports Inc.

4. The Post-November Perspective (c) Foreign Reports Inc.

5. The Post-November Issues White House Fact sheet insisted that during the JPOA period, the six authorized import jurisdictions would be held to their average levels of around 1 million b/d of “oil” purchases prior to November 2013. In Q1, imports by these countries’ imports were 1/3 higher than average levels prior to the agreement. • If a “good” nuclear agreement is reached, it won’t matter if Iran was allowed to export more. • If a “gray” agreement is reached, Administration will have a more difficult time convincing Congress that it isn’t hiding something. • If no agreement is reached, it will be harder for Administration to come down “like a ton of bricks” on Iran’s oil salesif core architecture of oil sanctions has already been eroded. • Will Iran’s Supreme Leader conclude that Iran’s sitting at the negotiating table is and will continue to be the best way to erode sanctions? Dilatory tactics have been a staple of Iranian nuclear diplomacy for 11 years. (c) Foreign Reports Inc.

6. Denials and Excuses As the import data began to show that Iran’s sales were going up sharply, the Obama Administration: • Denied that the import data was accurate; • Insisted that normal seasonal fluctuations were to blame; and finally-- • Claimed that “technically” condensate, a type of crude oil, doesn’t count as crude oil. • The net result: The U.S. has okayed a significant increase in Iranian oil sales while insisting it hasn’t done so. (c) Foreign Reports Inc.

7. Actual Total Volumes Officially Reported (c) Foreign Reports Inc.

8. What About Other Reports on Import Volumes? • IEA “early estimates” need to be takenonly as estimates. Many are later corrected. Recently, the IEA has also been obfuscating. • Ship-tracking estimates have proven to be unreliable. • Wire-service summaries before official reports are published are unreliable • Undersecretary Sherman has testified that State waits for official reports. • For the past few months, Platts Oil Gram Newsand others have been reporting substantially the same volumes as Foreign Reports, but Platts uses a slightly different conversion factors for tonnes into barrels (India and China). (c) Foreign Reports Inc.

9. The Hazards, or Utility, of Early Estimates (c) Foreign Reports Inc.

10. Condensates Don’t Count? • State said on April 11 that condensates don’t count. • State counted condensates before—otherwise average imports prior to November would be lower than 1 million b/d. • Only Japan’s METI reports crude imports by grade—and includes S Pars C as crude. • UAE doesn’t report on condensate imports of about 100-120,000 b/d. (c) Foreign Reports Inc.

11. Condensates and LPG matter(Total $ value in H2 (Iranian year) was the approximate equivalent of 470,000 b/d of crude oil) (c) Foreign Reports Inc.

12. Is Condensate Crude Oil? • The U.S. statute which imposed the core oil sanctions—the National Defense Authorization Act (2012)—requires thatcountries which import petroleum or petroleum products from Iran be sanctioned. NDAA 2012, Section 1245 (c) • But it provides for the granting of 180-day exceptions for countries which significantly reduce their purchases of Iranian crude oil. NDAA 2012, Section 1245 (d) • What, in practice, does this anomaly in the legislative language mean? (c) Foreign Reports Inc.

13. UAE Example • The UAE imports no crude oil from Iran, but it has long imported about 120,000 b/d of South Pars condensate for ENOC’s condensate splitter. • Did this mean that the UAE was never eligible for an NDAA exception because it could not reduce its crude oil purchases below zero? • UAE was never granted an exception. • In practice, State never wanted to address this issue. But Treasury Undersecretary David Cohen did. UAE agreed to some reduction after Cohen visit. (c) Foreign Reports Inc.

14. Reducing crude, increasing condensate? • Did Congress mean that Country X could make significant reductions in its purchases of crude oil while simultaneously increasing its purchases of condensate and thus qualify for an exception? • Condensate is often blended into a crude oil stream to fetch a higher price, but it can just as well be sold separately. • Iran has said that it has increased its sales of condensate (as a separate product) by 300,000 b/d since November. (c) Foreign Reports Inc.

15. Waivers and Exceptions • Exceptions to the NDAA were first granted to EU countries and Japan in March 2012. • Others were granted exceptions in June 2012, and every 180 days thereafter. • Final exceptions were granted to China, India, South Korea, Taiwan and Turkey in late November 2013. • National Security waivers were granted to Japan, China, India, South Korea, Taiwan and Turkey onJanuary 20, 2014for a period of 120 days. • The waivers obviated the need for more exceptions. • The current waivers expire on May 20. (c) Foreign Reports Inc.

16. Value of additional sanctions relief The total estimated value of the relief is between $6 and $7 billion during JPOA period (per White House Jan. 16 Summary.) : • $4.2 billion by unfreezing assets in installments. • Balance is estimate of auto parts, petrochemical, etc. relief But 300,000 b/d of additional exports x 180 days x $100 = $5.4 billion (c) Foreign Reports Inc.

17. What’s $5.4 billion to Iran? • The Rouhani government aims to save $5.5 billion per year by cutting cash subsidies to better-off Iranians and increasing prices of subsidized goods. • $5.4 billion is value of 300,000 b/d additional oil sales over six month period. (c) Foreign Reports Inc.

18. What’s in it for Iran if it sells more oil, but the money is still frozen in foreign banks? Not 100% sure all additional revenues will be frozen*, but if so: • The oil is still monetized—better frozen assets than no assets, and probably better than oil left in the ground. • Frozen funds can be freely used to buy products from oil-importing countries. • Increased volumes give Iran a jump-start now on securing more market share. • Iran also gets a jump-start in raising production. *If condensate doesn’t count as crude, are revenues from its sale frozen? How about revenues from export of pistachios? (c) Foreign Reports Inc.

19. Possible motivation for permitting higher oil sales? • Create goodwill with Rouhani government/nuclear negotiating team. • Iran in turn may give a little more than promised on the nuclear side. • Nuclear Agreement with Iran would be Obama Administration’s most important foreign policy triumph. (c) Foreign Reports Inc.

20. Will Administration Need Congressional approval for nuclear deal? CHAIRMAN MENENDEZ: “Does the Administration intend to come back to the Congress, if you have a final deal, for ultimately lifting some of the elements that would be needed to be lifted under law?” SECRETARY KERRY: “Well, of course. We would be obligated to under the law, Mr. Chairman. We would absolutely have to. And so clearly, what we do will have to pass muster with Congress. We well understand that.” {April 8 testimony before Senate Foreign Relations Committee} Possible Ways to Bypass Congress • Pure Executive Agreement with Iran would have to conform with Case Act plus rely on existing 120-day national security waivers. • Short 120-day waivers would impose substantial burdens on Iran and never be permanent. • Youngstown Sheet & Tube Co. v. Sawyer (1952) effectively limits president’s executive authority if it clearly contravenes Congressional intent (c) Foreign Reports Inc.

21. Final Agreement—neither black nor white? More transparency will be needed now. • If there are gray areas in any final agreement, the Administration will need credibility on key nuclear issues in order “to pass muster with Congress.” • A track record of obfuscating material facts about the extent of sanctions relief could undermine Administration’s credibility when it might need it most. • Administration must renew waivers by May 20. Will it inform Congress about import levels in Q1—the last data it will have available at that time? Or will it keep trying to explain away the numbers? Will it undermine Congressional confidence that it isn’t also trying to sweep material facts about the nuclear program under the rug just so it can claim a signature foreign policy victory? (c) Foreign Reports Inc.