Iranian Oil Exports and Sanctions A Case for

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

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 Foreign. Reports. com (c) Foreign Reports Inc. 2

Officially Reported Imports of Iranian Oil Nov. 2011 to date The Long Perspective: Imports averaged 1. 074 million b/d from July 2012 through October 2013 2500 2000 Other S. Africa 1500 '000 b/d IEA Eur. Turkey S. Korea 1000 Japan India 500 China 0 nov dec jan feb mar apr mayjune july aug sept oct nov dec jan feb mar apr may jun jul aug sept oct nov dec jan feb mar 2011 2012 2013 (c) Foreign Reports Inc. 2014 3

The Post-November Perspective "Big Six" Q 1 2014 imports average 1. 356 million b/d, or 1/3 higher than six-month period before JPOA signing (1. 018 million b/d) 1600 1400 1200 '000 b/d 1000 Taiwan Turkey 800 South Korea 600 Japan India 400 China 200 0 jan feb mar apr may jun jul aug sept oct 2013 nov dec jan feb mar 2014 Foreign Reports (c) Foreign Reports Inc. 4

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 Q 1, imports by these countries 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 sales if 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. 5

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; sharp fluctuations are normal, but follow no seasonal pattern; and finally: • Claimed that “technically” condensate, a type of crude oil, doesn’t count as crude oil. This claim may have been based on memo from State’s Legal Adviser. • The net result: The U. S. has okayed a significant increase in Iranian oil sales while insisting it hasn’t done so. End-May reports on April imports could show some downward fluctuations in import levels, but it’s best to wait for the final tallies. Early reports have proven to be misleading. Ditto for end-June reports. (c) Foreign Reports Inc. 6

Actual Total Volumes Officially Reported (including condensates) "Big Six" Q 1 2014 imports average 1. 356 million b/d. May-October 2013 average was 1. 018 million b/d. 1 471 1700 1 246 1 142 1 118 1 007 894 jun jul 762 810 900 898 1100 1 361 1 269 1 283 1 281 1 089 '000 b/d 1300 1 238 1500 700 500 jan feb mar apr may aug sept 2013 (c) Foreign Reports Inc. oct nov dec jan feb mar 2014 7

Condensates Don’t Count? • State first said publicly on April 11 that condensates don’t count. Did the Legal Adviser make this determination? When and why? Was “L” being sensitive to policy objectives? • State counted condensates before—otherwise average imports prior to November would be closer to 800, 000 b/d than 1 million b/d. • Only Japan’s METI reports crude imports by grade— and includes S Pars C as crude. (For a number of reasons, UAE condensate imports of about 100 -120, 000 b/d have never been counted. ) (c) Foreign Reports Inc. 8

What are condensates? Condensates are byproducts of crude oil production (lease condensates) and of natural gas processing (plant condensates). They are gaseous at elevated temperatures, liquids at normal temperatures. U. S. producers can’t export them because they are considered a kind of crude oil. They can be used to supplement a crude oil stream, or sold as separate products. They are mostly pentanes and heavier hydrocarbons. They sell at rough parity to crude oil and are processed at splitters, refineries and in petrochemical plants. (c) Foreign Reports Inc. 9

Condensates and LPG matter Increase in condensate exports even sharper in Nov. -March period Iran's "Non-Oil" Exports H 1 and H 2 of Iranian year ending on 3 -20 -2014 9 8 7 Value in $ billions 6 5 LPG 4 Condensate 3 2 1 0 Mar-Sep Iran Customs Administration April 2014 Report (c) Foreign Reports Inc. Sep-Mar 10

Is Condensate Crude Oil under the NDAA? • The U. S. statute which imposed the core oil sanctions —the National Defense Authorization Act (2012)— requires that countries 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? Could this anomaly be the legal basis for saying that condensates don’t count? (c) Foreign Reports Inc. 11

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. 12

Waivers and Exceptions • Exceptions to the NDAA were first granted to EU countries and Japan in March 2012. • State Department granted exceptions to China, India, South Korea, Taiwan and Turkey in June 2012, and every 180 days thereafter. • State exercised discretion allowed by NDAA in granting these exceptions. State decided what constituted “significant reduction” and gave effective latitude to a number of jurisdictions. • National Security waivers were granted to Japan, China, India, South Korea, Taiwan and Turkey on January 20, 2014 for a period of 120 days. • The waivers “obviated” the need for more exceptions. • The current waivers expire on May 20. (c) Foreign Reports Inc. 13

Value of additional sanctions relief The total estimated value of the relief is between $6 and $7 billion during JPOA period according to 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. Did a memo from the Legal Adviser give an extra $5. 4 billion during the JPOA period? (c) Foreign Reports Inc. 14

What’s $5. 4 billion mean for Iran and for Ali Khamenei? • 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. • Might this encourage Supreme Leader to believe that sitting at the negotiating table is and will be the best way to erode sanctions? (c) Foreign Reports Inc. 15

What’s in it for Iran if it sells more oil and/or condensate, but the money is still frozen in foreign banks? No one can say for sure that all additional revenues will be frozen*, but if so: 1. The oil is still monetized—better frozen assets than no assets, and probably better than oil left in the ground. 2. Frozen funds can be freely used to buy products from oil-importing countries. 3. Increased volumes give Iran a jump-start now on securing more market share. 4. 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. 16

Possible motivation for permitting higher oil sales? • Create goodwill with Rouhani government and 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—if it is a sound one, without secret concessions to Iran. (c) Foreign Reports Inc. 17

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. 18

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. It would be a good time to be more transparent about sanctions relief to date. If not, it could undermine Congressional confidence that it won’t also try to sweep material facts about the nuclear program under the rug. (c) Foreign Reports Inc. 19