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Why higher Iran oil exports are not roiling nuclear deal

By Arshad Mohammed and Timothy Gardner

WASHINGTON (Reuters) - At first glance, Iran appears to have exported more oil than allowed under a nuclear agreement with major powers, but rather than complaining, U.S. officials argue Tehran is skating just inside the deal's ambiguous limits.

Iran's higher exports reflect its exploitation of a loophole in U.S. law that allows its customers to buy condensates, a very light oil, without fear of U.S. sanctions. Rising gifts of crude oil to Syria are not covered by the deal.

The major powers and Iran resume talks in Vienna on Monday aimed at reaching a comprehensive deal by July 20 for Iran to curtail its nuclear program in exchange for the easing of economic sanctions that have crippled its economy.

With officials on all sides saying it will be hard to strike a final deal in the next five weeks, critics argue that whether Iran and its customers are respecting the terms of the current, interim deal is vital to deciding whether to extend the talks and whether a wider deal will ever stick.

Estimates from the Paris-based International Energy Agency (IEA) show that from the start of the interim agreement on Jan. 20 through though April 30, Iran shipped an average of about 1.33 million barrels per day of oil.

The White House in November said the deal capped Iran's crude oil sales at an average of "approximately' one million barrels a day of crude over the six months of the deal, which expires July 20 but can be extended for up to six months.

LETTER OF THE LAW

The U.S. case that Iran is respecting the agreement rests on three factors: the intricate language of the deal and of U.S. law; what counts as "sales"; and what counts as crude oil.

    The crux of the U.S. argument is that condensates, a premium-price form of very light oil found at natural gas fields and mostly used to make plastics, do not count as crude oil; that Iranian gifts of oil to Syria are not "sales" and so also do not count; and that Iran is allowed to sell between 1 million and 1.1 million bpd under the deal, a range slightly above the White House's public estimate.

A Reuters review of the Nov. 24 nuclear agreement known as the Joint Plan of Action (JPOA), related documents and U.S. law supports the officials' position. It also found the drafters of the underlying law did not intend to exclude condensates.

Some critics concede the administration's point on the letter of the law.

Mark Dubowitz, executive director of the Foundation for Defense of Democracies, acknowledges the administration's reading of the rules allows Iran to give crude to Syria without affecting the sales total.

But the interpretation is "the triumph of bureaucratic legalese over strategic common sense," he said.

"This undermines their credibility with Congress and doesn't bode well for the strict enforcement of the terms of any final nuclear agreement," said Dubowitz, an advocate for tough sanctions on Iran, who believes Washington underestimated the amount of sanctions relief that Tehran obtained under the interim deal.

Robert Einhorn, a former State Department non proliferation official who has been a member of U.S. delegations to talks with Iran, responded that gifts of oil to Syria were not covered by the deal and did not help Iran's economy. Such transfers began before the nuclear agreement, in any case.

"The purpose of the crude oil sanctions was to reduce Iran’s oil revenues and if Syria is not paying for its acquisitions of Iranian crude, then obviously Iran is not increasing its oil revenues through these transfers," said Einhorn, now at the Brookings Institution think tank in Washington.

    "APPROXIMATELY 1 MILLION BPD"

    How much crude oil Iran is allowed to sell in some ways is in the eye of the beholder.

    The agreement, worked out between Iran, Britain, China, France, Germany, Russia and the United States, was designed to give Iran and the other states time to try to negotiate a comprehensive deal.

    The interim agreement lays out steps each side will take over the six months to July 20 but does not impose a specific, numerical oil sales quota on Iran.

Rather, it says the West would: "pause efforts to further reduce Iran's crude oil sales, enabling Iran's current customers to purchase their current average amounts of crude oil."

    In a fact sheet issued the same day, the White House said "Iran will be held to approximately 1 million bpd in sales."

    The U.S. officials said they settled on a 1 million to 1.1 million bpd range as the limit because Iranian exports rose slightly between Nov. 24, when the JPOA was agreed, and Jan. 20, when the deal went into effect.

They also said oil sales are intrinsically variable, with events like the Chinese New Year causing swings from one month to the next.

    "That’s why we used current level" in the JPOA, said one U.S. official. "It was supposed to give us some flexibility." Iran's sales could drop toward the end of the six-month period, lowering the average, officials noted.

    PLAYING HIDE THE COOKIE?

    Critics say the State Department should be more forthcoming about how much petroleum Iran is selling in order to measure how the sanctions are hitting the Islamic Republic’s economy.

    "We can't even be transparent about the elementary numbers of the most important sanction of the most important foreign policy crisis in the world today," said Bob McNally, a White House adviser on energy to former President George W. Bush.

    "The State Department is playing a game of hide the cookie here," he added.

    The IEA data show that from Jan. 20 through though April 30, Iran exported an average of about 1.19 million bpd, and an additional 137,200 bpd of condensates.

    Syria's share of this amounted to about 120,000 barrels per day, according to a "guesstimate" provided by U.S. officials, who said that Syria did not pay for this oil.

That estimate, and whether Syria had paid for the crude oil, could not be independently verified.

Stripping out the Syrian imports from the 1.19 million bpd IEA total, the U.S. officials said, means that Iran's actual, paid-for exports amount to roughly 1.075 million bpd, under the ceiling they believe is permitted under the deal.

Iran has never publicly accepted any limitations on its oil exports. On the contrary, it has consistently called all restrictions on its trade illegal and unjustified.

   

    UNINTENTIONAL LOOPHOLE

    Allowing condensate sales to be counted independently from crude is an unintended loophole, U.S. officials conceded.

The U.S. law underlying the Nov. 24 agreement, Section 1245 of the fiscal 2012 National Defense Authorization Act, threatens foreign banks with being cut off from the U.S. financial system if they buy or sell Iranian "petroleum or petroleum products."

    However, the law provides an exception to countries that have "significantly reduced" imports of Iranian crude oil. Once granted an exception, they may buy those reduced amounts of Iranian crude and, in a quirk of the law, can buy as much other kinds of petroleum, including condensates, as they wish.

People familiar with the law's drafting said they assumed it would treat condensates as oil. Then the U.S. Treasury Department issued an interpretation of the law which made clear condensates were not covered, surprising congressional aides.

There have since been efforts to close what appears to have been an inadvertent loophole, though no law has yet done so.

While administration officials and congressional aides said they were not happy that Iran has been able to increase its sales of condensates, they said it was not of a magnitude to provide Iran significant benefit.

"Am I concerned about the growth in condensates? Yes. But, at the end of the day, the growth that we are seeing in the condensates, which is a valuable product, is not significant enough to make an economic difference," said a U.S. official.

(Additional reporting by Louis Charbonneau, editing by Peter Henderson)

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