Effective U.S. Sanctions?

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Effective U.S. Sanctions?

Anwar Altaqi – Esam Aziz

We have discussed in previous issues some of Iran’s tactics to skirt U.S. sanctions, from forging documents, to smuggling, to invisible oil cargos. But are there “legal” ways to mitigate sanctions via navigating their terms and laws, and spotting loopholes within their own text? In other words, can Iran legally avoid some sanctions without being accused of breaking the sanctions’ regime?

One example of alegal loophole to bypasssanctions is that the United States did not mention Iran’s exports of condensate. Why? Because many U.S. allies need the ultralight Iranian crude for their industries, particularly petrochemicals.

Yet, the United States could have encouraged alternatives to the Iranian condensate instead of dropping it from the targeted Iranian exports. To explain this point we should say that there are two kinds of condensate: 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 United States for the purposes of Iran sanctions, but are not considered crude oil. The U.S. diplomatic campaign to tighten sanctions focused on Iran’s exports of crude.

However, Iran produces and exports a large amount of plant condensates. It often classifies its crude oil as condensate. In the last round of sanctions, President Barack Obama excluded condensate from sanctioned Iranian exports. This allowed Iran to earn $1.5 billion in a three-month period in 2014, according to the New York Times.

The deal, then, was as follows: If you buy less Iranian crude, we will avert our eyes if you buy more Iranian condensate. The terms of the sanctions’ legislation then allowed any country to be legally exempted from penalties if it reduced its purchases of Iranian crude, not condensate. By resurrecting the previous legal phrasing used in the case of Iran’s sanctions, the Trump administration is leaving one gaping loophole in the terminology of the sanctions’ law. And if this loophole is not closed, Iran will increase its exports of condensate and use the cash to ease the effects of the new sanctions. Last May, Tehran reported exports of 300,000 barrels a day of plant condensates.

Iranian condensate should be treated — in the legal terms of the sanctions law — as equal crude in the sense that buying any of the two categories should be penalized the same. The U.S. Department of Treasury webpage explaining Iran’s sanctions does not mention Iran’s condensate in any clear terms. This message must be reinforced during the diplomatic tours that State and Treasury department officials undertake to inform foreign nations on how sanctions will be applied.

South Korea 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. There are other sources of condensate that should be explored as well.

One example is just under the nose of the U.S. administration. U.S. producers of ultralightcondensate in the Eagle Ford basin have a type of naphtha that is particularly suited not only to South Korea’s petrochemical industry, but also to that of China and Japan. Those producers have the opportunity to gain a market share in a tightening Asian condensate market, which is expected to further tighten with the return of the U.S. sanctions.

Iran has stored large quantities of condensate in anticipation of exploiting the old sanctions’ loophole once more. It is now gearing towards increasing its daily production of condensate as well. U.S. producers must act quickly if they want to grab market share, because there is competition coming from projects in Australia, Malaysia, and Vietnam, all of which are geographically closer to the key Asian markets than Texas. Furthermore, these alternative sources must be pushed harder to come into production as soon as possible. This will encourage the U.S. administration to “remember” the Obama loophole and close it.

When President Trump announced in May that he was pulling the United States 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, 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.