Making Iran Sanctions Hit Harder This Time
(Bloomberg Opinion) -- While the Trump administration’s reimposition of U.S. sanctions on Iran earlier this month grabbed the headlines, a more significant date is Nov. 4, when the truly crippling penalties — including those on Iranian oil — are slated to return.
If the sanctions are to have the desired effect on Iran’s economy and behavior, Washington has just weeks to lay the groundwork by issuing clarifications, plugging loopholes, and more actively helping U.S. partners find alternatives to Iranian oil.
One of the primary challenges involves Iran’s high-volume sale of a type of ultralight oil known as condensates, which are byproducts of oil and natural-gas production. There are two types: Lease condensates are derived from the production of crude oil during the fracking process, while plant condensates come from natural gas processing plants and crude oil refineries. Both types are termed “petroleum products” by the U.S. for the purposes of Iran sanctions, but are not considered crude oil.
Iran produces and exports a large amount of plant condensates that it often classifies as crude oil. Yet when the Barack Obama administration cranked up oil sanctions, a loophole allowed nations to buy Iranian condensates without violating them, which provided the regime with additional cash even as its crude-oil export revenues declined. As reported in the New York Times, this scheme yielded Tehran an estimated $1.5 billion in a three-month period of 2014 alone.
The problem stemmed from the way the Obama administration granted sanctions exemptions for countries that “significantly reduced” their crude oil purchases from Iran — it did not take imports of condensates into consideration. Purchasers of Iranian oil were legally and politically able to increase their imports of what the U.S. government termed a petroleum product, including select types of Iranian condensates, yet still receive exemptions from sanctions because, according to the terminology employed in U.S. law, they decreased their imports of Iranian crude oil. This needlessly narrow criterion remained in place even though it was exposed in reporting in 2014, the year the interim nuclear deal was in effect.
Should the U.S. not vigorously enforce oil sanctions this time around, the export data on condensates show that that Iran will be able to exploit this loophole again. In May, it reported exports of 300,000 barrels a day of natural gas or plant condensates. And with Tehran and its customers preparing for harsher U.S. punishments, the June numbers showed a decrease in crude exports but an uptick in condensate exports.
With harsh sanctions going back into effect, the Trump administration must tighten the conditions under which exemptions — if any — are given to prohibit the sale of all types of Iranian condensates in addition to those of crude oil. Similarly, the Treasury Department should make explicit in its website’s FAQs and guidance documents that it will not differentiate between condensate and crude oil imports. This message must be reinforced during the so-called roadshows that State and Treasury Department officials undertake to inform foreign nations on how sanctions will be applied.
South Korea and Japan plan to ask the U.S. for waivers to continue importing Iranian oil after the sanctions deadline. South Korea, in particular, relies on Iranian condensates for its petrochemical manufacturing. Iranian condensates may be particularly inexpensive at a time when oil prices are on the rise, but the truth is that there is plenty of condensate available in today’s oil market. Closing this loophole in the sanctions regime should not cause any significant dislocation in the oil market.
South Korea, Japan and another of Iran’s big customers, the United Arab Emirates — which despite its large petroleum reserves imports light oil for domestic use — could easily replace Iranian condensate by importing more superlight crude oil from Kuwait and other producers.
Down the road, the U.S. itself could become a global supplier. The fracking revolution has produced a glut of condensates that domestic refineries have not been able to process. However, with the decades-long ban on crude oil exports having been lifted in 2015, U.S. ports are being reconfigured and America could emerge as an alternative source of inexpensive condensates for Asian buyers, allowing them to shift away from Iranian supplies.
When Trump announced in May that he was pulling the U.S. out of the Iran nuclear deal, he said Tehran was in for “bigger problems than it has ever had before.” To make good on this threat, he needs to learn from the mistakes of the previous sanctions regime and crack down on Tehran’s sale of all petroleum products, starting with condensates.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ellen R. Wald is a nonresident senior fellow at the Atlantic Council's Global Energy Center and president of Transversal Consulting.
Behnam Ben Taleblu is a research fellow at the Foundation for Defense of Democracies.
©2018 Bloomberg L.P.