IRAN UNDER SANCTIONS Iran’S Economy Has Been Under Sanctions in One Form Or Another Since the 1979 Revolution

IRAN UNDER IRANSANCTIONS UNDER SANCTIONS

U.S. SanctionsU.S. Sanctions and Iran’s Energy Strategy and Iran’s EnergySARA VAKHSHOURI Strategy

SARA VAKHSHOURI ABOUT IRAN UNDER SANCTIONS Iran’s economy has been under sanctions in one form or another since the 1979 revolution. Yet little systematic knowledge exists on the short- and medium-term impacts of sanctions on the growth patterns of the Iranian economy, the general welfare of its people in the cities and rural areas, societal dynamics, civic space, and the country’s environment. The focus has often been on a few metrics that flare up with tightening of sanctions: currency depreciation, inflation, and recession, which are then followed by increases in unemployment and poverty. But the more comprehensive picture is lost in political cacophony around the policy’s merits. This is the gap that SAIS is filling with its Iran Under Sanctions project, which is a 360-degree in-depth view on the implications of sanctions on Iran. This first-of-its-kind research provides for an instructive case study on the use of sanctions as a tool of statecraft. For any questions or feedback on the project, please reach out to Ali Vaez at [email protected].

ABOUT THE AUTHOR Sara Vakhshouri is the founder and president of SVB Energy International, a strategic energy consulting firm with offices in Washington, DC, and Dubai. She has more than two decades of experience working in the energy industry and has extensive experience in global energy market studies, energy strategy, energy security, and geopolitical risk. She has consulted with numerous public and private entities, as well as policy leaders and international organizations, including the International Monetary Fund, the World Bank, the International Energy Agency (IEA), and the US Energy Information Administration (EIA).

Vakhshouri has been based in Washington, DC, since 2009 and has advised US, European, Indian, Japanese and GCC governments, investment banks, financial institutions, law firms, and international corporations. She is currently a member of the Energy Task Force of the Cyprus Climate Initiative, which was launched and initiated by the president of the Republic of Cyprus.

She has worked with multiple think tanks and educational organizations such as the Oxford Ener- gy Institute; Harvard University’s Kennedy School; the Energy, Economics, and Security Program at the Center for a New American Security (CNAS); and the Atlantic Council’s Global Energy Cen- ter. She is a professor of energy security at the Institute of World Politics and also a member of the Middle East Petroleum Club.

ACKNOWLEDGMENT I would like to express my deepest gratitude to those who helped with the completion of this report and particularly to the SAIS Initiative for Research on Contemporary Iran for giving me the opportunity to collaborate with its Iran Under Sanctions project.

I also would like to extend my appreciation to H.E. Dr. Luay Al-Khatteeb, Iraq’s former Electricity Minister and member of the Federal Energy Council in the Government of Adil Abdul-Mahdi, for sharing his generous time and valuable insights on Iran-Iraq energy relations. - Sara Vakhshouri

The SAIS Initiative for Research on Contemporary Iran Johns Hopkins University Washington, DC Copyright 2020 All rights reserved p. 2 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? TABLE OF CONTENTS

04 EXECUTIVE SUMMARY

05 I. ENERGY SANCTIONS IN THE HISTORICAL CONTEXT

07 II. OIL PRODUCTION AND EXPORT UNDER TRUMP SANCTIONS

11 III. CONDENSATE PRODUCTION UNDER THE SANCTIONS

13 IV. SANCTIONS’ IMPLICATIONS FOR IRANIAN NATURAL GAS

15 V. STRATEGIES TO WEATHER THE NEW SANCTIONS

20 VI. LONG-TERM STRATEGIES

26 VII. RETURN TO THE OVERSUPPLIED OIL MARKET

29 VIII. CONCLUSIONSION

p. 3 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? EXECUTIVE SUMMARY

After years of weathering nuclear-relat- increases its domestic condensate refinery ed sanctions and limitations on its oil ex- capacity. ports, Iran reached an agreement in 2015 with the five permanent members of the This report examines the impact of the UN Security Council plus Germany over its new U.S. sanctions on Iran’s oil and con- nuclear program, the Joint Comprehensive densate production and exports and their Plan of Action (JCPOA). In May 2018, Pres- potential impact on natural gas produc- ident Donald Trump announced U.S. with- tion and export capacity. It then analyzes drawal from the agreement and – despite Iran’s strategies to weather these sanc- Iran’s compliance with the JCPOA – imple- tions and its long-term oil and gas strate- mented a “Maximum Pressure” tight sanc- gy. It finds that if sanctions are lifted, Iran tions policy aiming, inter alia, at “zero oil will face few technical obstacles to return- export”. Exports of oil and condensate -- a ing oil production to pre-sanctions levels. byproduct of natural gas mostly produced However, it will be difficult to recover lost from Iran’s South Pars field – have fallen market share, because the global oil mar- to under 1 million barrels per day (mb/d), ket is glutted due to U.S. shale growth and down from 2.5 mb/d in the pre-sanctions lower demand growth due to COVID-19. era. Iran has been forced to reduce crude Iran would thus do better to use its oil oil production, but natural gas production domestically, while exporting other ener- remains rather unchanged, propped up gy products, thus maximizing its broader by huge domestic demand and exports to economic benefits and energy strategy. neighbors. If the sanctions continue, they can potentially impact that natural gas production, however, unless Iran either secures customers for its condensate or

p. 4 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? I. ENERGY SANCTIONS IN THE HISTORICAL CONTEXT

Iran’s energy sector was the target of mul- A second shock to Iran’s oil industry oc- tilateral and unilateral sanctions long be- curred in the immediate aftermath of the fore the Trump administration launched its 1979 Islamic Revolution, when the U.S. “maximum pressure” strategy. In 1951, the stopped importing Iranian oil, and Tehran British government imposed an oil embar- halted exporting crude oil and products go, after Iran attempted to nationalize the to Israel, a once close friend and custom- Anglo Iranian Oil Company (AIOC, future er.2 Revolutionary chaos saw oil produc- British Petroleum). The embargo starkly tion drop from 6 mb/d in 1974 to 1.3 mb/d revealed to Iranians a major vulnerability: in 1981. This was also when a shift began they were unable to transport their own oil in the oil trade’s flow from Western mar- to global markets. Today Iran has one of kets toward Asian. In 1996, Washington’s the largest oil transport companies in the Iran-Libya Sanctions Act (ISA) limited in- world, with at least 42 Very Large Crude vestment and technology transfer to Iran’s Carriers (VLCCs). The National Iranian energy industry.3 While it did not com- Tanker Company (NITC ) had a vital role pletely prevent non-U.S. firms from in- in transporting Iranian oil to international vesting in the energy industry, due to the markets during the Iraq-Iran War (1980- EU’s resistance to the extraterritoriality of 1988) and in circumventing the European the sanctions and Washington’s reluctance Union (EU) and U.S. export sanctions be- to enforce measures that could alienate tween 2006 and 2016.1 European allies, it limited Iran’s ability to attract much needed foreign technology

p. 5 IRAN UNDER SANCTIONS I. Energy Sanctions in the Historical Context and capital.4 As a result, the National Ira- remaining oil customers wean themselves nian Oil Company (NIOC) maintained oil off Iranian crude, the sanctions targeting production capacity in the 4 mb/d range the energy sector came back into force. in the early 2000s (with average export volume of 2.5 mb/d), but never recovered its pre-revolutionary capacity. Iran’s energy sector

Another shock came in 2012, as U.S. and was the target of EU sanctions aimed at curbing Iran’s nu- multilateral and clear program slashed oil production to below 2.7-3 mb/d and exports to around unilateral sanctions 1-1.5 mb/d.5 This caused a severe reces- long before the sion in Iran, where oil revenue was responsible for some 80 per cent of total Trump administration export earnings and about 60 per cent of launched its “maximum government revenue.6 By end 2015, average production of crude oil was about 2.9 pressure” strategy. mb/d, and production of condensate and natural gas liquids (NGLs) was 692,000 to 710,000 b/d.7

On 14 July 2015, Iran, the U.S., Russia, Chi- na, Britain, France and Germany (the P5 + 1) signed the Joint Comprehensive Plan of Action (JCPOA). Upon its implementation in January 2016 and removal of oil export sanctions, NIOC was able to reboot oil production remarkably close to pre-2012 levels. Within months, Iran regained most of its lost market share, as exports returned to pre-nuclear sanction levels. Neverthe- less, despite Iran’s compliance, President Trump on 8 May 2018 announced U.S. withdrawal from the JCPOA, re-imposed the nuclear sanctions and imposed new sanctions targeting the economy and energy sector. On 4 November 2018, after a six-month grace period aimed at helping

p. 6 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? II. OIL PRODUCTION AND EXPORT UNDER TRUMP SANCTIONS

In November 2018, concerned about a that the U.S. would not issue any new waiv- sharp rise in oil prices, the Trump adminis- ers for Iranian oil. Japan, South Korea and tration granted 180-day waivers to import India halted and China significantly re- Iranian oil at reduced volume to India, duced purchases. Iran’s formal and direct China, Japan, South Korea, Greece, Italy, oil exports dropped from 2.5-2.7 mb/d in Turkey and Taiwan. Despite Iran’s JCPOA early 2018 to 380,000 b/d in June 2019, compliance, all EU countries (including and production was reduced from near- Greece and Italy) halted their imports of ly 4 mb/d prior to re-imposition of sanc- Iranian oil due to concerns from refiners tions to 2.3 mb/d.9 Oil exports fluctuated, and financial institutions about incurring in some months as low as 200,000 b/d, in U.S. sanctions. Taiwan also imported no others as high as 500,000 b/d until Janu- Iranian oil during the waiver period. Japan ary 2020.10 From January 2020 to October and South Korea stopped imports in Sep- 2020, Iran’s average oil export was about tember 2018, even before the sanctions’ 478,000 b/d and its average oil produc- implementation, though Japan resumed tion was about 2 mb/d.11 imports from January to April 2019, and South Korea imported reduced volumes Brian Hook, then the U.S. State Depart- (mostly condensate) from December 2018 ment’s Special Representative for Iran, to April 2019.8 noted in an August 2019 interview that: “US sanctions caused Iranian crude exports In April 2019, upon expiration of the 180- to fall to 300,000 b/d in June and about day waiver, President Trump announced 100,000 b/d in July, down from roughly

p. 7 IRAN UNDER SANCTIONS II. Oil Production and Export under Trump Sanctions

2.5 million b/d a year earlier”.12 In January prices; 2) consumers’ lower demand and 2020, Commander Rahim Safavi (ex-chief storage capacity; and 3) increased trans- commander of the Islamic Revolution- portation costs as tanker rates temporarily ary Guard Corps (IRGC) and currently an rose. All these reduced the appetite and adviser to Iran’s Supreme Leader) said, demand for Iran’s discounted oil. During “Iran’s oil export has fallen under 700,000 this time, most of Iran’s oil sales were di- b/d”.13 In October 2020, Iran’s Parliament rectly between the government and China, Research Center announced that oil sales while the private sector had little luck. Due in the first six months of the Persian Year to lack of storage capacity, China start- (21 March 2020 to 21 September) were less ed to hold its purchases in floating and than $ 2.5 billion.14 onshore storage in Malaysia and Singa- pore. This resulted in a drop in direct im- The oil demand shock caused by COVID-19 ports of Iranian oil that had cleared Chi- inflicted additional downward pressure on na’s customs and were reported by its port Iran’s oil exports due to three main factors: authorities. 1) oversupply in the market and drop in oil

IRAN OIL PRODUCTION (MILLION B/D) JANUARY 2018- OCTOBER 2020

3.5

2.5

1.5

0.5

JUL-19

JUL-18

JUL-20

JAN-19

JAN-18

SEP-19

SEP-18

JAN-20

SEP-20

NOV-19

NOV-18

MAY-19

MAY-18

MAR-19

MAR-18

MAY-20 MAR-20

Source: SVB Energy International 15

p. 8 IRAN UNDER SANCTIONS II. Oil Production and Export under Trump Sanctions

Oversupply in the oil market helped soft- en the blow from the Trump administration’s aggressive sanctions policy against Iran’s oil exports on the broader market That U.S. sanctions and prices. By May 2019, after the expi- under the Trump ration of the waivers, the market already expected additional global supplies (par- administration have ticularly from the U.S.). Russia and OPEC been particularly members such as Saudi Arabia, the Unit- ed Arab Emirates and Iraq filled the gap successful in curtailing left behind by Iran’s reduced exports. Also, Iran’s oil exports. U.S. production from the Eagle Ford field replaced Iran’s condensate market share in South Korea.16

IRAN OIL EXPORT (MILLION B/D) JANUARY 2018 - OCTOBER 2020

2.5

1.5

0.5

JUL-19

JUL-18

JUL-20

JAN-19

JAN-18

SEP-19

SEP-18

JAN-20

SEP-20

NOV-19

NOV-18

MAY-19

MAY-18

MAR-19

MAR-18

MAY-20 MAR-20

Source: SVB Energy International17

p. 9 IRAN UNDER SANCTIONS II. Oil Production and Export under Trump Sanctions

That U.S. sanctions under the Trump administration have been particularly successful in curtailing Iran’s oil exports is due to several factors:

1. Washington was willing to enforce its 3. Major oil producers, such as Saudi Ara- sanctions much more aggressively, so bia, the UAE and other OPEC members had much higher expectations for cuts (alongside Russia), increased their sup- from importers of Iranian oil. During plies and moved quickly to sign con- the nuclear sanctions under the Obama tracts with importers to substitute Iran’s administration, the U.S. expected a oil. The market was much better-sup- “significant reduction” in oil imports plied, and prices were lower since the from Iran by customers every 180 days. late-2014 crash, unlike the 2012-2015 While the reduction was never clearly Obama-era sanctions, which coincided articulated, it averaged close to 20 per with oil market disruptions such as the cent in each cycle. The Trump adminis- Libyan revolution and civil war and the tration’s expectation, however, was that ISIS insurgency in Iraq. importing nations, with rare exceptions, would have to reduce imports to zero. 4. The complementary sanctions re-imposed in August 2018, which limit and 2. The U.S. developed more accurate restrict any financial transactions with means for tracking Iranian exports and Iran or insurance of Iranian oil, have enhanced its surveillance capabilities. contributed to a more effective imple- Using this information, the administra- mentation of oil sanctions. tion even sanctioned a specific Chinese shipping line (COSCO) for violating its sanctions.18 Targeting shipping companies was effective in disrupting Iranian efforts to store and transfer oil to different destinations.

p. 10 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? III. CONDENSATE PRODUCTION UNDER THE SANCTIONS

Iran’s condensate and gas liquid out- duction. Reducing gas production could put has increased over the past decade. have severe implications, as domestic de- The former is a byproduct of natural gas, mand for natural gas is high, and natural about 90 per cent from the giant South gas has a considerable, if not strategic, Pars field. Despite U.S. sanctions, this nat- share in power generation and feedstock ural gas and condensate production and to petrochemical factories, as well as res- refinery capacity has increased over the idential and industrial use. past few years. From March 2017 to March 2018, Iran produced around 259 million As a result of limitations on condensate barrels of condensate (about 709,580 b/d) export, Iran lost almost all its condensate and exported about 430,000 b/d.19 By end market share, sold mostly to South Korea 2019, condensate production is estimat- and some to Japan. Tehran, however, had ed to have increased by 9 million barrels made expansion of condensate process- a year (about 25,000 b/d) and reached ing capacity a priority even before the 734,246 b/d.20 re-imposition of sanctions. This meant that Iran started to expand its condensate Unlike the 2012-2015 nuclear sanctions, refinery capacity and was able to mit- current sanctions include condensate ex- igate the risk of sanctions by consuming port alongside crude oil exports. Not be- more condensate domestically. This not ing able to export its condensate excess only made it self-sufficient in production capacity means that Iran had to adjust of gasoline and other light distillates, but and cut back its overall natural gas pro- also created a new gasoline export ca-

p. 11 IRAN UNDER SANCTIONS III. Condensate Production under the Sanctions pacity. This helped Iran to maintain its lored-made cocktail to be used as a feed- natural gas production under the shadow stock for its oil refinery and petrochemical of U.S. sanctions. factories. This “synthetic oil” could potentially be used as a feedstock for Iran’s Completion of the Persian Gulf Star Refinery power plants, freeing up some natural gas helped by adding 360,000 b/d of domes- share in its power generation. Iran has also tic condensate processing capacity. Each changed the allocation of some of its oil processing unit has a capacity of 120,000 storage tanks to handle condensate and b/d, and the refinery’s total capacity is es- unsold gasoline, especially during the first timated to be 360,000 b/d. To cope with few months of the COVID outbreak, when the new U.S. sanctions on its condensate domestic gasoline consumption plummet- export, Iran was able to process beyond ed due to lockdowns. It also used some of its the nominal capacity of this refinery up to tanker fleet as floating storage for unsold about 400,000-420,000 b/d.21 Besides the condensate. Persian Gulf Star Refinery, oil refineries such as Lavan, Bandar Abbas and Shiraz have been processing condensate as their As a result of feedstock. However, this domestic refining limitations on capacity is insufficient to process all the condensate, so Iran has been struggling condensate export, to maintain its domestic natural gas production. Yet, despite the limited conden- Iran lost almost all its sate export capacity, Iran resisted reduc- condensate market ing condensate production, as that would have required cutting gas output. Instead, share. Tehran, however, it stored unsold condensate in domestic had made expansion tanks and bonded storages in China and also expanded domestic condensate re- of condensate fining capacity. By November 2019, con- processing capacity densate stocks had reached 98.9 million barrels.22 a priority even before

Iran has also come up with new strategies the re-imposition of to maintain its condensate production by sanctions. increasing domestic use. It has experi- mented in new ways to blend condensate with heavy crude oil (“synthetic oil”), a tai-

p. 12 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? IV. SANCTIONS’ IMPLICATIONS FOR IRANIAN NATURAL GAS

At 17 per cent, Iran has one of the largest B, Aghar, Kish, Golshan, Pazan, Charak, proven natural gas reserves in the world, Khartang and Kangan are other major estimated at 33,899 billion cubic meters non-associated fields, holding, together (bcm), more than one third of OPEC’s re- with South Pars, a significant amount of serves and the second largest after Rus- condensate.27 sia.23 Iran is also the world’s third–largest dry natural gas producer, after the U.S. With the 2015 JCPOA, Iran introduced a and Russia.24 Historically, the success rate new type of upstream contract in the hope of natural gas exploration is very high in of creating incentives for international oil Iran, usually above 60 per cent compared companies to invest in its upstream oil to a global average of 30-35 per cent.25 In and gas industry. In both exploration and the past 20 years, most exploration in Iran development, NIOC’s highest priority was resulted in discovery of gas reservoirs. to focus on oil and gas fields shared with About 40 per cent of these are in onshore neighboring countries. But the type of up- regions; the remaining 60 per cent are stream contracts Iran offered were not offshore. South Pars, an offshore gas field originally profitable compared to risks in- in the Persian Gulf shared with Qatar’s ternational companies would have to un- North Dome field, is estimated to have dertake, and negotiating periods were too about 40 per cent of Iran’s proven natural long. gas reserves. About 80 per cent of Iran’s gas reserves are from non-associated gas South Pars, the giant gas field shared with fields.26 North Pars, Sardar Jangal, Forouz Qatar, received particular attention and

p. 13 IRAN UNDER SANCTIONS IV. Sanctions’ Implications for Iranian Natural Gas priority for diverting capital and invest- contract with the French company Total ment. Natural gas production increased and China’s CNPC. Total left immediately even during the Obama era nuclear sanc- after announcement of new U.S. sanctions tions. Almost all the production rise was in 2018; CNPC withdrew in October 2019. from South Pars. Domestic contractors, with the help of Chinese and Russia firms, Iran’s sixth Five Year Economic Plan antic- furthered the development process of dif- ipated that gas production would reach ferent phases of South Pars, along with 1,300 mcm/d by March 2021, almost dou- the construction of gas refineries to pro- ble the 2016 level.29 Because of sanctions, cess the produced gas and condensate. however, Tehran was not able to achieve Nevertheless, the attempt to attract West- its goals, though it was successful in in- ern energy companies’ capital and tech- creasing natural gas production, most- nology was dashed by U.S. sanctions after ly from South Pars. Gas production from 2018.28 Before then, Iran signed a single gas caps and associated gas, on the other hand, remained largely unchanged.

If U.S. sanctions If U.S. sanctions continue long term, and Iran cannot access international capi- continue long term, tal and technology, it will not be able to increase natural gas production signifi- and Iran cannot access cantly. Production levels may even start international capital to decline. South Pars, responsible for 80 per cent of Iran’s natural gas output, has and technology, it will already peaked. According to Pars Oil and not be able to increase Gas Company, South Pars gas production will face a natural decline from 2023, es- natural gas production timated to be equal to the annual output significantly. South of a producing phase, about 28 bcm a year.30 If Iran is forced to reduce its con- Pars, responsible for densate production, this could potentially have a significant impact on natural gas 80 per cent of Iran’s production. Tehran could avert this if it natural gas output, has either finds customers for its unsold condensate or gradually increases domestic already peaked. condensate refinery capacity.

p. 14 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? V. STRATEGIES TO WEATHER THE NEW SANCTIONS

The Islamic Republic has a long history other side. This is likely taking place al- of dealing with unilateral and multilater- ready in the Caspian Sea. al sanctions. The main current challenge is that the U.S. has identified most previous solutions for circumventing oil export Discounts sanctions. Additionally, international tanker trackers have already started following To keep customers interested and increase Iranian oil tankers with very high accuracy incentives, Iran reduced export prices and using satellites. But it is important to stress gave further discounts per barrel on deliv- that Iran may find new ways to continue ery. Intermediaries who sell and purchase “unofficial” oil sales. Many smaller trad- Iranian oil, condensate and petroleum ers lack direct or indirect trade/business products have also received a percentage relations with the U.S. and would prof- of sales as commission. Selling oil in the im- it from purchasing Iranian discounted oil porting country’s local currency or selling and “re-selling” it internationally. There in return for goods or services are among are also countries that reject the legitima- other strategies in Iran’s toolkit. NIOC tra- cy of the unilateral sanctions and are will- ditionally has not offered significant crude ing to confront the U.S. A good example oil price discounts but rather discounts on was Iran’s gasoline exports to Venezuela delivery, as well as longer payment terms. in summer 2020. Also, Iran could raise in- Iran agreed with India on a “free deliv- come from fields shared with neighbors ery” of oil upon implementation of sanc- by granting extraction permissions to the tions. Nevertheless, oil price discounts and

p. 15 IRAN UNDER SANCTIONS V. Strategies to Weather the New Sanctions even steeper condensate discounts did not to Venezuela, it did not turn off AIS, in or- add much to its oil exports. Almost all its der to signal that it was not intimidated by oil and condensate customers -- India, the U.S. Japan and South Korea – officially halted oil purchases due to the Trump “maximum pressure” policy. China’s official formal Pre-selling Oil import was only what Iran owed as part of the “debt repayment” agreements for Chi- In July 2019, Vice President Eshagh Jahan- nese investment and services in its energy giri said that “any powerful country that is industry. Still, China imported additional willing to work with Iran can pre-purchase Iranian oil and condensate through ship- Iranian oil”.31 He alluded to a potential to-ship transfers in international waters or market for countries pre-purchasing its via Malaysia and Singapore. Importantly, oil for future deliveries in return for a line low oil prices, due to oversupply of both of credit, investment, goods or services. oil and condensate, have helped the U.S. “Pre-selling oil for future deliveries” was to reduce Iran’s exports significantly. The designed to protect customers from vio- COVID-19 induced global demand shock lating U.S. sanctions. It would allow Iran to and crash of oil prices were additional circumvent sanctions on oil exports, while factors in reducing the appetite for Iranian helping it either to raise money or receive oil. All this limited the effect of “discounts”. oil-backed lines of credit. As mentioned, by July 2019 oil exports had dropped below 300,000 b/d. Iran hoped that pre-selling Turning off the Tankers’ Geolocators would help it to raise not only the required revenue for its fiscal budget, but also cash Another NITC tactic is to turn off its ships’ for importing goods for which it needed Automatic Identification System (AIS) so to export 500,000 b/d. The budget for the as to deliver cargoes “off the grid”. This is Persian year March 2019 – March 2020 done mostly to conceal cargoes and des- was set on an expected export of 1.5 mb/d tinations. Iran has used its tanker fleet to of oil at $55 per barrel. The share of oil carry oil and condensate directly to final export in the budget of the current Persian destinations, or to international waters year assumes lower oil export, down to 1 where it transferred cargo to other tank- mb/d at a barrel price of $50.32 ers by a ship-to-ship (STS) method. Nev- ertheless, most Iranian tankers were de- Nevertheless, oil exports in 2019-2020 so tected and identified by satellites. Turning far have been much lower than the fiscal off AIS systems did not help conceal them budget requires. Iran hopes that China, Ja- from U.S. surveillance. On other occasions, pan, India and the EU will allocate funding for example when Iran exported gasoline and credits directly or in escrow accounts,

p. 16 IRAN UNDER SANCTIONS V. Strategies to Weather the New Sanctions allowing the government to purchase its Changing the Allocation of needs from them. Conceivably this could Storage Tanks help Iran adjust actual oil exports with its need to export to sustain the economy. Domestic gasoline consumption dropped The particular advantage is that it would significantly between April and May due help Iran sustain future market share by to COVID-19 and national lockdowns. Gas- receiving oil-backed loans with the pros- oline consumption in May was about 55 pect of future delivery. This could also be million liters/day compared to 75 million a potential solution for Iran and EU coun- liters/day in November 2019.34 By end May, tries negotiating over the JCPOA, helping in order to create storage capacity for its Iran’s economy to function in the face of unused gasoline, Iran had transferred U.S. sanctions. Aside from the direct ban 770,000 barrels of crude oil from its stor- on oil and energy export, restrictions on age tanks in the northern oil terminal Neka financial transactions have also been a to the Tehran Oil Refinery. As officials were major obstacle for the energy industry. hoping for gasoline demand to pick up Pre-selling oil would thus not necessarily again in the summer, domestic consump- bring in requisite cash, but instead extend tion of gasoline started to grow.35 Lower a line of credit for Iran to purchase goods domestic consumption due to COVID-19, and services. But crucially, with markets higher gasoline production from the Per- oversupplied, no one has thus far shown sian Gulf Star Refinery and export limita- an appetite to pre-purchase. tions due to U.S. sanctions have all swelled Iran’s gasoline inventories.

Pre-selling Oil in the Stock Market As mentioned, the capacity of the Per- sian Gulf Star Refinery has increased from Iranian officials announced that they will 360,000 b/d of condensate to 420,000 introduce contracts to presell oil for de- b/d. This refinery produces 45 million li- livery in two years.33 The goal is to assist ters/day of gasoline -- less than half of the government’s budget deficit while the Iran’s gasoline production capacity -- and economy has been hurt significantly by 17 million liters/day of gasoil. The petro- U.S. sanctions and COVID-19. It is both dif- leum ministry plans to increase gasoline ficult and politically infeasible for the Rou- production from South Pars to 54 mil- hani administration to raise its budget via lion liters/day by October 2020. Since the taxes. This preselling plan, though neither March 2020 drop in domestic gasoline finalized nor announced, has become a consumption, Iran has added 120 million political football. liters of capacity for storing gasoline produced from the Persian Gulf Star Refinery. Another 40 million liters of gasoline stor-

p. 17 IRAN UNDER SANCTIONS V. Strategies to Weather the New Sanctions age capacity was added in Tehran. These has been disconnected from U.S. and additional capacities were achieved by global trade and financial markets, changing the allocation of storage tanks it is difficult for Washington to block from crude oil to gasoline. NIOC is in the exports by threatening loss of U.S. busi- process of allocating another three crude ness. oil storage tanks, each with 120 million li- • Since March, most Iranian tankers car- ters capacity and in the Naeen crude oil rying oil to China (and all tankers head- transportation center, for storing gasoline ing to Venezuela) have flown the Ira- produced by the Persian Gulf Star Refin- nian flag and had their AIS turned on. ery. Iran has also started diluting crude oil This strongly suggests that the govern- storage tanks in Kharg port by gradually ment is no longer concerned about its adding condensate. exports being tracked. Officials stated clearly that they would respond to any Iranian Gasoline Export to Venezuela threat against their tanker movements in international waters. In May 2020, Iran exported about 1.5 million barrels (210,000 mt) of gasoline to Venezuela in five NITC tankers.36 Vene- Synthetic Oil zuela’s oil production in April was about 622,000 b/d, down from 1 mb/d in 2018 In order to increase domestic consumption and early 2019, before U.S. sanctions. Its beyond its condensate refinery capaci- gasoline production is all used domesti- ty (which is lower than Iran’s condensate cally, as refining capacity has dropped production capacity), NIOC introduced from 1.3 mb/d to 626,000 b/d. Reportedly, “synthetic oil”. This blended product is Iranian tankers were also carrying cata- a cocktail of condensate and Iran’s ul- lysts to help Venezuelan refineries pro- tra-heavy crude oil produced in the West duce higher yields of gasoline. The Vene- Karun oil fields, made to be used as a zuela trade has had a number of positive feedstock for the northern refineries.37 Iran features for Iran: is also studying the possibility of using this it as feedstock for both its petrochemi- • Due to lower domestic gasoline con- cal factories and power generation. The sumption (as a result of COVID-19), it condensate produced in South Pars is re- was able to export its excess gasoline ceived by the Bahregan operational unit, capacity instead of continuing to re- then sent to the Marun 2 operational unit duce its oil and refinery production. and from there to the refineries in Isfahan, • Finding new markets in an era of Tehran and Tabriz. The petroleum minis- sanctions is crucial. Since Venezuela try is building new pumping stations and

p. 18 IRAN UNDER SANCTIONS V. Strategies to Weather the New Sanctions other logistical infrastructure for this pro- and naphtha, the domestic and global de- cess. Overall, 40,000-45,000 b/d of syn- mand for which have been hit significantly thetic oil is to go to the three named re- by COVID-19 and lockdowns. fineries via a pipeline from the southern oil fields. Some 35,000 b/d is condensate, the rest ultra-heavy and sour crude oil. Making a New Cocktail & Capillaries Ex- The Isfahan refinery, with a 360,000 b/d port Strategy capacity, is to receive about 20,000 b/d of the synthetic oil. The rest is to be used as Another often employed tactic is to feedstock for the Tehran and Tabriz refin- change the DNA and specifications of Ira- eries.38 nian crude oil. Recalling the cliché of oil as a fungible commodity, Iran has attempt- The Lavan, Bandar Abbas and Shiraz refined to hide its origin and render its new oil eries also process a blend of crude oil and “cocktail” unidentifiable. It started to blend condensate. They consume 428,000 b/d of different crude types at terminals or blend feedstock, of which about 45,000-52,000 its crude oil with neighboring crudes (such b/d is condensate, 296,000 b/d is Kharg’s as Iraqi oil) in order to change its spec- heavy crude oil, and 75,000 b/d is heavy ification and prevent identification. This, oil from the Gachsaran/Sarvestan, Saa- along with changing certificates of origin dat Abad, Salman/Abazar and Lavan oil and swapping oil from one tanker to an- fields. The condensate feedstock for these other on the high seas, makes Iranian oil refineries is Bandar Abbas (20,000 b/d to tough to track. But the volumes of this ex- 25,000 b/d); Lavan (15,000–20,000 b/d); ported cocktail mix -- what the petroleum and Shiraz refinery (6,000-8,000 b/d).39 minister has called a “capillaries export The synthetic oil used as feedstock for strategy” -- are very low.41 these refineries would add about 77,000 b/d total condensate processing capacity to Persian Gulf Star Refinery’s 420,000 b/d The main current processing capacity. challenge for Iran The Abadan refinery is the next currently in is that the U.S. has a reconfiguration process so as to receive and process synthetic oil. It is planned to identified most receive and process 20,000-30,000 b/d previous solutions of synthetic oil.40 However processing synthetic oil has changed the quality of the fi- for circumventing oil nal products in these refineries. They now produce more light distillates like gasoline export sanctions.

p. 19 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? VI. LONG-TERM STRATEGIES

Expanding downstream capacity naphtha and gasoline. Persian Gulf Star and Siraf are two refineries that will pro- The IRGC and its subsidiary companies cess condensate. The former currently have played a crucial role in circumvent- processes 420,000 b/d into gasoline. Siraf, ing U.S. sanctions and increasing Iran’s announced in 2014, is not yet in operation. resiliency. Achievement of self-reliance in It has six units with 360,000 b/d capacity. domestic gasoline production is a testa- Its main final product is to be naphtha. Due ment to this policy. Iran today produces to export limitations, Iran has also used about 105 million liters of gasoline per day, about 130,000 b/d of condensate as feed- 40 per cent in refineries built by the IRGC’s stock in its petrochemical plants. Another Khatam-al Anbiya Construction Head- 80,000 b/d was used in its oil refineries, quarters.42 Gasoline production capacity apart from the Persian Gulf refinery. Iran surpasses domestic needs, creating the currently produces about 700,000 b/d of possibility of some export at a time when condensate from South Pars, but this can crude oil and condensate exports are un- theoretically increase to 1 mb/d. der sanctions.

Condensate to Power; Electricity Export Ending Condensate Exports by 2021 and Water Desalination

The petroleum ministry announced that In May 2020, Oil Minister Bijan Namdar it plans to expand domestic conden- Zanganeh announced that Iran is pre- sate refinery capacity and stop exporting paring to make more domestic use of gas condensate by March 2021.43 All of Iran’s condensate by stopping its direct export.44 production will then be used as refinery The hope is that this will create resistance and petrochemical feedstock to produce to sanctions and other international pres-

p. 20 IRAN UNDER SANCTIONS VI. Long-term Strategies sure on the economy, particularly its oil generating electricity for Iranian power and gas exports. It would also increase the plants from gas condensate is not much value of non-oil exports and provide value different from generating it from natural added to the chain of domestic production, gas. lower energy consumption and greater economic self-reliance. Special emphasis Officials realize that it is harder for the is to be on exporting downstream prod- U.S. to implement sanctions on electricity ucts (such as refined petroleum products) exports, which directly involve the end-us- and petrochemical products, as well as ers, than on crude oil, condensate or nat- converting part of Iran’s natural gas into ural gas. Electricity exports also help Iran electricity for export. strengthen trade ties and diplomacy with neighbors, many of whom lack adequate As mentioned, production of condensate power supply sources. Electricity exports has increased from the South Pars field are not foolproof against sanctions, how- along with gas production there. 45 The ever. According to the former Iraqi electric- U.S. sought to curtail natural gas produc- ity minister, Luay al-Khatteeb, Iraq imports tion by sanctioning condensate export, but 1,200 MW of electricity per year and up to Iran came up with creative ideas to boost about 1.2 billion cubic feet a day (bcf/d) domestic demand for its condensate. Ex- of natural gas during peak consumption. panding condensate refinery capacity 49 Overall Iraq needs more natural gas and using the product in its petrochemi- and power generation imports to fill the cal factories and to generate power are gap between supply and demand.50 Thus, strategies that could help Iran diversify though Washington has given it waivers to and expand power generation capacity. import Iranian gas and electricity, Iraq is 46 In early February, Zanganeh said that still under continuous U.S. pressure to find about 130,000 b/d of gas condensate is alternatives. The period of the waivers has used as feedstock for Iran’s petrochemical been shortening, and Baghdad may re- plants. A further 80,000 b/d goes to do- duce its imports if it finds sources that are mestic refineries, apart from the 420,000 competitive in price and volume. b/d of condensate feedstock used by Per- sian Gulf Star. 47 The energy ministry is Reportedly, Iraq has held separate talks considering using gas condensate to re- with Saudi Arabia, Jordan and Turkey place natural gas in power plants.48 The to “import electricity not only to sup- condensate-to-power project was an- ply Baghdad but also [the] northern part nounced in March 2020 as a strategic plan of Iraq as pathway to other countries”.51 to increase resiliency against U.S. oil and In August 2020, General Electric and the condensate export sanctions. Preliminary Iraqi electricity ministry signed two agree- ministry studies indicated that the cost of ments worth over $1.2 billion to expand

p. 21 IRAN UNDER SANCTIONS VI. Long-term Strategies

Iraq’s power generation capacity and en- in order for economic reform to move for- hance its electricity transmission network. ward. “This requires a stable government Capturing associated gas and using it as with full term not something that changes feedstock for power generation is a spe- every twelve months. Otherwise it will be cific part of this agreement, which aims to impossible to fix the electricity sector”, for- capture 30-40 per cent of the associated mer Iraqi electricity minister Al-Khateeb gas that is currently flaring and to gen- noted.56 Noteworthy that a stable govern- erate 3.3. GW of electricity.52 In July 2020, ment is a key requirement for Iraq to be Iraq completed its side of a 1 GW link to able to attract international investment in Kuwait, which is to enable it to tap into the its energy sector and Iraq might remain GCC grid.53 dependent on natural gas and electricity imports from Iran. However this could Al-Khatteeb, Iraq’s former minister of change in the long-term and Iran’s market electricity, believes it will take three to share in Iraq could shrink eventually. four years’ timeline for Iraq to develop its power sector and implement the economic reform and tariff reform, and also to develop its gas network and capabil- Converting condensate ities.54 Nevertheless, to reduce its energy independence to Iran and to expand its to Power, exporting domestic natural gas and electricity pro- electricity and duction, Iraq has a serious hurdle to face. According to former minister Al-Khateeb, expanding its water “achieving this goal requires an uninter- rupted and clear government program. desalination industry My statement on the three to four years are key long-term of required timeline is a conditional statement because now the government of Iraq strategies that will help is changed and we are out, so the whole Iran use its condensate plan could be interrupted and could be compromised.”55 Iraq has now an interim domestically instead government and will have an early elec- of searching for a tion in June 2021, hence not only has the whole economic reform been interrupt- market share in an ed but also the economic situation in Iraq oversupplies market. has changed and COVID-19 has changed the whole game across the globe. There- fore, many things have to be restructured

p. 22 IRAN UNDER SANCTIONS VI. Long-term Strategies

In future, Iran could also use electricity • recently by discharging cargoes in Sin- to expand its desalination industry, thus gapore, where China buys them, or in helping with the water crisis. Water desali- floating storages rented and held by nation capacity beyond domestic needs Beijing. might also “potentially” build an export capacity to supply water to its neighbors. On 8 July 2020, Vice President Eshaq Ja- hangiri announced that “any powerful country that is willing to work with Iran can Oil Exports to China pre-purchase Iranian oil”. Iran is active- ly trying to convince traditional custom- The latest figures in China’s customs data ers, particularly China and India, to buy indicate that trade has reached a new low, in advance for future deliveries in return imports from Iran dropping 61 per cent in for investment, goods or services that can the first four months of 2020 compared to help it keep market share while providing the same period in 2019. The main rea- short-term assistance to the economy and son is the substantial fall in Iran’s direct oil key industrial projects that otherwise lack exports: for example, only $115 million in funding. Most infrastructure projects, par- March, down 89 per cent year on the year. ticularly in the energy sector, are presently The data further indicate that China is idle due to lack of money and access to buying on average 70,000 barrels of Ira- crucial technologies. nian crude per day, a tenth of the volume before U.S. sanctions were re-imposed in Iran and China announced a few months 2018.57 Non-oil exports to China remained ago a 25-year strategic partnership that stable in March at $384 million, but this is Tehran hopes will reinforce a strategic and the lowest value of Iran’s declared month- political alliance as a counterweight to U.S. ly oil exports to China in 20 years.58 pressure. The deal may open the door to more Chinese investment and technology, Nevertheless, as noted, Iranian contracts but due to sanctions, Chinese companies indicate that Chinese oil purchases are, have generally not met their commitments upon closer inspection, far more tha what to existing Iranian energy projects over the has been officially declared in customs past few years. A specific cooperative el- Iran has been selling oil to China through ement is establishment of an Iran-China alternate ways: bank, with branches in both countries, to facilitate bilateral transactions. One of the • from its bonded storages inside China, more controversial components is China’s mostly in Dalian; investment in upgrading and strengthen- • increasingly in past months via Malay- ing Iran’s military systems, particularly via sia, from where it is exported as Ma- naval cooperation. Despite their supposed laysian; and “closeness”, however, China is unlikely to p. 23 IRAN UNDER SANCTIONS VI. Long-term Strategies jeopardize its economic and trade relation While Jask port does not directly impact with Iran’s rivals: the U.S., Israel, the UAE Iranian oil export volumes, its importance and Saudi Arabia. There is thus a large lies in its ability to function as an alterna- gap between the expectation and rhetor- tive export route should the Strait of Hor- ical value Iran attaches to the long-term moz be blockaded. Iran has repeatedly agreement and the value China places in “threatened” to close the strait in response it. to attacks on its oil tankers and geopolitical strife within the region. This encouraged other Persian Gulf countries dependent Bypassing the Strait of Hormoz

On 25 June 2020, Petroleum Minister Zan- ganeh announced that Iran would start While Saudi Arabia and crude oil exports from the Jask terminal by the UAE have put much end of the Persian year (20 March 2021). The Goreh-Jask Pipeline requires, he said, effort into re-directing an investment of $850 million. Reported- ly, $300 million has been invested thus far, exports to bypass the and the project is 40 percent complete.59 Strait of Hormoz, Iran

While Saudi Arabia and the UAE have put sees its dependency much effort into re-directing exports to on this chokepoint as bypass the Strait of Hormoz, Iran sees its dependency on this chokepoint as a vul- a vulnerability. While nerability. The export facility is thus a key Jask port does not strategic project for the Rouhani administration that will theoretically allow Iran directly impact Iranian to export its liquid products via the Sea of Oman. It includes a 42-inch, 1,000 km oil export volumes, its pipeline connecting the oil processing fa- importance lies in its cility in Goreh (Bushehr Province) to Fars Province, then Hormozgan and western ability to function as an Jask and on to the Makran region. The plan alternative export route is to build the largest oil export terminal after Kharg in the region, which, beside should the Strait of crude oil, would export 600,000-700,000 Hormoz be blockaded. barrels daily of processed gas condensate in the Persian Gulf Star Refinery via Jask.60

p. 24 IRAN UNDER SANCTIONS VI. Long-term Strategies on the strait for exports to find alternative worth $50 million, have never previously shipping routes. Riyadh has primarily fo- been built in Iran. The port is designed to cused on expanding its East-West crude host twenty storage tanks, each with a ca- pipeline stretching from its Gulf Coast to pacity of 500,000 barrels.61 Yanbu in the Red Sea; Abu Dhabi has invested in the Abu-Dhabi Crude Oil Pipe- line that transports crude oil from Hab- shan to Fujairah in the Gulf of Oman. Both these pipelines can circumvent Hormoz, thus providing some flexibility in the event of a blockade. Jask port, therefore, could give Iran the same flexibility and eliminate what would otherwise be a geostrategic disadvantage.

According to the petroleum ministry, Iran has constructed all the equipment for the pipeline. The largest obstacle was gain- ing access to special, very wide sheets, the pipeline’s most important component. Foreign suppliers abandoned signed contracts due to sanctions, so Iran had to use domestic producers: Mobarakeh Steel and Oxin Steel of Khuzestan. They were able to build the required sheets, a first in Iranian petroleum/energy history. Mobar- akeh made the required slabs, delivering 320,000 tons of sheet metal from 420,000 tons; Khuzestan manufactured the wide sheets, 250,000 tons of sheets out of an anticipated 385,000 tons. Domestic pipe manufacturers have produced 440 of the 1,000 km so far, of which 350 km have been transported to sites and are being welded and laid. According to official sources, 50 huge pumps, with a capacity of 2.5 MW, are required, all to be built by three local companies. These pumps, estimated to be

p. 25 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? VII. RETURN TO THE OVERSUPPLIED OIL MARKET

Whenever sanctions are lifted, Iran is like- and Russian production cuts in 2018-2019, ly to begin working on exporting oil and prices are low. condensate at a pre-sanctions level of 2.5 mb/d. It has increased production capaci- In September 2019, a drone missile attack ty in 2020 in anticipation of its return to the closed Saudi Aramco’s oil processing fa- global oil market. While it certainly has the cilities in Abiqaiq and Khurais, costing the technical ability to produce and export oil global market about 5.7 mb/d, 5 per cent at maximum capacity following removal of crude oil worldwide. However, this sig- of sanctions, exports would be limited by nificant supply interruption did not cause subdued demand. a market price shock. Global oil demand and consumption are not keeping up with The oil market glut and resulting low prices supply growth, a trend COVID-19 has ex- have created a serious challenge for Iran acerbated. to find customers simply by offering discounts. Sanctions in an oversupplied mar- Demand shock, coupled with disagree- ket are a new hurdle not faced under Pres- ments among OPEC+ members in March ident Obama’s tenure. While other major 2020, led to a significant oversupply in producers have been competing to secure the market that briefly caused negative market share, Iran’s hands have been tied. oil prices due to a lack of storage capac- The U.S. shale boom compounded the ity. OPEC+ failed to agree that month on market’s glut, rendering Iran’s, Venezuela’s deepening or even extending the produc- and Libya’s oil redundant. Despite OPEC tion cuts initially agreed in December 2016

p. 26 IRAN UNDER SANCTIONS VII. Return to the Oversupplied Oil Market between OPEC and leading non-OPEC JCPOA. It is a top priority for the new ad- countries. Upon that failure and the an- ministration’s first 90 days. This is partic- nouncement that producers would pursue ularly relevant because US withdrawal free market competition from 1 April, oil fu- from the JCPOA was accomplished exclu- tures fell by 40 per cent. On 21 April, for the sively through easily rescindable Executive first time in history, futures contract for U.S. Orders. There is a strong willingness from WTI crude for May delivery dropped be- the Biden administration to restart negoti- low $0 a barrel. The May futures contract ations and encourage Iran to fully comply for WTI (the benchmark for U.S. crude oil with the nuclear deal, which would start prices) eventually settled at -$37.63 a bar- unwinding some US sanctions including, rel.62 Ultimately OPEC+ and non-OPEC+ the ban on Iranian oil exports. The new countries such as the U.S., Canada and administration might also try to unwind Norway agreed to cut production. Never- some of Trump’s sanctions before the Ira- theless, global demand is still low due to nian presidential election in June 2021. This COVID-19 and is projected to remain that is particularly important, as it would signal way at least until mid-2021. Full recovery to Iranian voters the US willingness to work to pre-COVID levels is not likely before end with a pro-diplomacy candidate close to 2021 or early 2022, depending on vaccine the current administration, instead of a development. relatively more ‘hardline’ candidate.

Iran’s market return would present many hurdles: for Iran to regain market share; for While common the global oil market and major producers to adjust to the new supplies. OPEC+ expectations are that would need to prevent another price col- lapse. It has already cut production to his- Iran’s exports will not torical lows, and the return of Iran could increase immediately, create havoc unless that return were in- cremental. with Biden in the White House we could expect With Biden in the White House, oil market expects Iran’s exports to increase when an immediate rise of the US (likely) returns to the JCPOA in 2021. Iran’s production and While common expectations are that Iran’s exports will not increase immediately, we export from January could expect an immediate rise of Iran’s production and export from January 2021. 2021. Biden intends to return the US to the

p. 27 IRAN UNDER SANCTIONS VII. Return to the Oversupplied Oil Market

Iran, in anticipation of a ‘softer’ approach from the new US administration, will start raising its informal exports from January without fear of US response. On the other side, Iran’s oil customers (particularly Chi- na) will also anticipate less US pressure and enforcement. Under Obama’s nuclear sanctions, China was still importing on average about 500,000 b/d of oil from Iran. The trade war with the US under the Trump administration, however, forced China to increase its compliance with US sanctions.

p. 28 IRAN UNDER SANCTIONS Inflation Targeting in the Time of Sanctions and Pandemic? VIII. CONCLUSION

U.S. sanctions were intended to drop Iran’s densate domestically and converting it to oil exports to zero. Under nuclear-relat- either fuel and petrochemical products, or ed sanctions until 2015, Iran exported an using it directly to generate electricity. average of 1.5 mb/d, a 1 mb/d loss, but the Trump sanctions have cut much deep- To tackle economic hardship under sanc- er, with Iran’s oil and condensate exports tions and generate additional financial bottoming out at less than 500,000 b/d. resources for the government, the Rou- Iran has tried several ways to circumvent hani administration seeks to pre-sell oil, sanctions and increase incentives for trad- with delivery in two years, in return for ers and traditional customers, but none purchase credits. Iran still faces many have helped much. From the beginning challenges, however, both to maintain its of new sanctions in November 2018, Teh- economy and to sustain oil, gas and con- ran has cut crude oil production to adjust densate production, all of which are suf- production with export capability, and less fering from the U.S. sanctions and inad- crude oil has meant NGL production has equate investment. While sanctions have also dropped. almost completely slashed crude oil exports (those to China being the exception), However, it is a different story for con- Iran has maintained more of its market densate, a byproduct of natural gas. If it share in electricity sales to neighbors. is to meet domestic demand, Iran cannot cut its natural gas output in order to reduce condensate production. It has stored Iran would do better to condensate in domestic storages, floating use its oil domestically, storages and bonded storages (mostly in China). Condensate stocks totaled about while exporting other 98.9 million barrels by November 2019. If U.S. sanctions continue, the rise of con- energy products, thus densate production could ultimately con- maximizing broader strain natural gas production, but Iran has resisted that so far by mitigating the economic benefits and sanctions threat with short and long-term energy strategy. measures. It is focused on processing con-

p. 29 IRAN UNDER SANCTIONS VIII. Conclusion

Nevertheless, it has been unable to access a large amount of the energy revenue it has accrued through electricity exports to Iraq and Turkey.

If sanctions are eventually lifted, Iran will face very few technical obstacles to increasing oil production to earlier levels. However, it will be difficult to regain lost market share, due to the oversupplied market. In any case, Iran would do better to use its oil domestically, while exporting other energy products, thus maximizing broader economic benefits and energy strategy.

p. 30 IRAN UNDER SANCTIONS Endnotes ENDNOTES

1. Sara Vakhshouri, “Iran’s energy 9. Vakhshouri, “Iran’s strategy to 15. ‘Iran Energy Tracker”, SVB En- policy after the nuclear deal”, tackle sanctions: pre-selling oil”, ergy International, November Atlantic Council, 16 November Atlantic Council, 11 July 2019. 2020. 2015. 10. In November 2019, Heshmatol- 16. Ibid. lah Falahatpisheh, a member of 2. In 1957, the Eilat-Ashkelon Pipe- the Majlis [Parliament] Nation- 17. Ibid. line was built in Israel to trans- al Security and Foreign Policy port Iranian crude oil to Eu- 18. U.S. government officials are Committee, noted that “Iran’s rope. In 1968 the Eilat-Ashkelon looking much closer at the tank- oil exports have dropped … 20 Pipeline Company (EAPC) was er industry of late. Various ships times … after the US sanctions founded as a joint venture with have been accused of helping were implemented”. “Iran’s oil a 50-50 per cent share be- Iran evade sanctions, and offi- export had dropped 20 times”, tween Iran and Israel, in terms cials have sent strong warning Deutsche Welle (Farsi), 5 No- of operation and oil transport massages to the global shipping vember 2019, www.dw.com/fa- to Europe. Between the Arab industry. On 25 September 2019, ir/ -Washington sanctioned the CO نماینده-مجلس-ایران-فروش-نفت-کشور-به-یک-بیستم- ,oil embargo of 1973 and 1979 /a-51126350. If average ,(SCO Shipping Tanker (Dalian کاهش-یافت Iran supplied most of Israel’s oil exports were 2.5 mb/d before a subsidiary of China’s state- needs. these new sanctions, this would owned shipping group COSCO. put Iran’s oil exports at 125,000 3. The legislation was entitled the The U.S. alleged involvement in b/d. Iran and Libya Sanctions Act shipping and helping with ship- (ILSA) until 2006. 11. Iran Energy Tracker, SVB Energy to-ship transfer of Iranian crude oil. 4. Total of France was the first ma- International November 2020 jor international oil company to 19. Supreme Audit Court of Iran, 12. “Iranian oil exports fell below invest. Nevertheless, Iran could Iran’s 2017-2018 budgetary re- 100,000 b/d in July: US”, S&P attract only $15 billion of invest- port to the Majlis, February 2018. Global Platts, 20 August 2020, ment, a far cry from what was www.spglobal.com/platts/en/ 20. Vakhshouri, “Iran Natural Gas required to rehabilitate its ener- market-insights/latest-news/ Report”, Cedigaz, 20 Janu- gy production. oil/082019-iranian-oil-exports- ary 2020, www.cedigaz.org/ 5. Vakhshouri, “Post-Vienna: Pros- fell-below-100000-b-d-in-july- iran-natural-gas-report/. pects for Iran’s oil production usa. 21. Ibid. and exports”, Atlantic Council, 6 13. “Rahim Safavi, our daily oil ex- January 2017. port is below 700,000 b/d, 22. Ibid. Hamshahri Online, 14 February 23. “Iran’s Facts and Figures, world- 6. Data based on International 2020, www.hamshahrionline. wide look at reserves and pro- Monetary Fund (IMF) reporting. ir/news/484186/ - - -duction”, Oil & Gas Journal, De رحیم-صفوی روزانه زیر- %DB%B0%DB%B0- /cember 2017, www.opec.org هزار-بشکه-نفت-صادر- Iran Upstream Oil and Gas Re- ۷“ .7 . .opec_web/en/about_us/163 می-کنیم-دولت-نمی-تواند -port”, SVB Energy Internation al, June 2015. 2015 condensate 14. “Iran’s oil sales in the first half htm. production was about 480,000 of 1399”, EghtesadNews, Octo- EIA Country Report, Iran, 17 b/d. ber 2020, www.eghtesadnews. 24. January 2019, www.eia.gov/ com/ -67/368146- - .beta/international/analysis بخش-اخبار اقتصادی اعالم- رقم-صادرات-نفت-نیمه-نخست-ایران-در-ماه-میلیارد-دالر-نفت-. -Iran Energy Tracker”, SVB Ener“ .8 php?iso=IRN. .فروخت .gy International, June 2019

p. 31 IRAN UNDER SANCTIONS Endnotes

25. “Interview with the head of NI- arrives-in-fuel-starved-vene- ter Homayoun Haeri, the ener- OC’s Exploration Directorate”, zuela-three-more-tankers-en- gy ministry is studying a plan IRNA, December 2018, www. route. to modify the design of power -Iran Energy Tracker”, SVB Ener- plant turbines so that gas con“ .37 میدان-های-/irna.ir/news/83137993 -gy International, August 2020, densate can be used as a re .جدید-نفت-و-گاز-در-كشور-كشف-شد and “Limitations of transferring placement fuel for natural gas: 26. Non-associated gas is produced “… for conducting the necessary from an independent field, not synthetic oil”, Saham Energy, 12 July 2020, http://sahamenergy. research, we have introduced dissolved in crude oil in a reser- Assaluyeh power plant as the pi- محدودیت-های-/voir from which oil is extracted; ir/NewsDetail/72062 . lot to the mentioned company so that its turbines can be reviewed ارسال-نفت-سنتزی-به-پاالیشگاه-های-نفت associated gas is produced as a byproduct of crude oil. Gas caps 38. “Iran Energy Tracker”, SVB Ener- and redesigned”. Ibid. overlie an oil layer within a res- gy International, August 2020. ervoir. 49. Sara Vakhshouri’s discussion with former electricity minister, 39. Ibid. 27. Vakhshouri, “Iran Natural Gas Luay Al-Khateeb, November 3, Report”, op. cit. 40. Ibid. 2020. 28. Ibid. 41. “Iran’s oil export doubled 50. Ibid. through capillaries export meth- 51. Abbas Kadhim, “Iranian for- 29. Ibid. od”, IRNA, 27 September 2020, eign minister’s visit aggravates www.irna.ir/news/84055044/ Iraqi-Saudi rapprochement”, 30. Ibid. Each phase in the South -July 2020, www.atlantic 23 .افزایش۲--برابری-صادرات-نفت-با-راهکارهای-مویرگی-زنگنه Pars Gas field produces about council.org/blogs/menasource/ 28 million cubic meters per day 42. “40% of gasoline is pro- iranian-foreign-ministers-vis- of gas and 40,000 barrels of duced by Khatam-al Anbi- it-aggravates-iraqi-saudi-rap- condensate. Each phase pro- ya Construction Headquar- prochement/. duces about 1bcm of gas per ters”,.Mehr News Agency, June year. 2020, www.mehrnews.com/ 52. “GE signs power agreements ,”worth over $1.2 billion with Iraq درصدnews/4938833/۴%DB%B0-- Reuters, 19 August 2020. “GE .بنزین-کشور-در-پاالیشگاه-ساخت-قرارگاه-تولید-می-شود .Vakhshouri, “Iran’s strategy”, op .31 cit. 43. “Zanganeh: Condensate won’t ready for talks with Iraq to generate power from capturing flared 32. “Forecast of 1 million barrels of be exported”, 27 May 2020, Donya-e Eqtesad, https://don- gas: executive”, 23 June 2020, oil sales in 1399”, IRNA, 9 De- www.spglobal.com/platts/en/ بخش- نفت- /ya-e-eqtesad.com cember 2019, www.irna.ir/ market-insights/latest-news/ پتروشیمی-3657879/35-زنگنه-میعانات-گازی- news/83587001/. natural-gas/062220-ge-ready- .صادر-نمی-.شوند 33. “What is the reason behind Iran for-talks-with-iraq-to-gener- oil future contracts?”, Eghtesad 44. “Energy Ministry considering use ate-power-from-capturing- Online, 12 August 2020, www. of condensate as power plant flared-gas-executive. Iraq was fuel, Tehran Times, 29 June 2020. importing some 32 million cubic بخش-بانک-بیمه-/eghtesadonline.com The South Pars gas field is esti- meters of gas daily as of April .45 -459285/190علت-انتشار-اوراق-سلف-نفتی-چیست- .mated to contain about 18 billion 2020. Tehran Times, op. cit .چهار-راه-حل-تأمین-سالم-کسری-بودجه barrels of condensate. 34. “Iran Energy Tracker”, SVB Ener- 53. “Middle East Economic Survey” gy International, June 2020. 46. Previously, producing power (2020). from natural gas was a poli- 54. Sara Vakhshouri’s discussion 35. Ibid. cy adopted by Iran as part of with former electricity minister, 36. “Iranian gasoline arrives in fu- its grand resistance strategy. Luay Al-Khateeb, Novemebr 3, el-starved Venezuela, three Vakhshouri, “Iran’s energy poli- 2020. cy”, op. cit. more tankers en route”, S&P 55. Ibid Global Platts, 26 May 2020, 47. “Energy Ministry considering”, www.spglobal.com/platts/en/ Tehran Times, op. cit. 56. Ibid market-insights/latest-news/ 48. According to Deputy Minis- 57. Iran’s Real Oil Exports Might oil/052620-iranian-gasoline- Be Much Higher Than Esti-

p. 32 IRAN UNDER SANCTIONS Endnotes

mated: Tanker-Tracking Firm, Radio Farda, August 9, 2020, https://en.radiofarda.com/a/ iran-s-real-oil-exports-might- be-much-higher-than-estimated/30773893.html 58. Iran Can No Longer Rely On Trade With China, Bloomberg, 27 April, 2020, https://www. bloomberg.com/opinion/arti- cles/2020-04-27/iran-can-no- longer-rely-on-trade-with-china 59. “Zangeneh: We hope to start exporting oil from Jask terminal by the end of year”, Petro Energy Information Network (Shana), 25 June 2020, www.shana.ir/ زنگنه-امیدواریم-صادرات-نفت-از-/news/304225 پایانه-جاسک-تا-پایان-امسال-آغاز 60. Ibid and “Iran Energy Tracker”, SVB Energy International, July 2020. 61. Ibid. 62. “US Crude Oil Collapses to Neg- ative -$37 Per Barrel - Why and What Does it Mean?”, DailyFX, 20 April 2020.

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