Iran is finding a way around Western sanctions to export increasing amounts of an ultralight oil to China and other Asian markets, expanding the value of its trade by potentially billions of dollars a year.
The exports come during a slight thaw in Iran’s relations with the West as negotiations over its nuclear program continue, and energy experts say it is counting on the United States and Europe to tolerate an increasing export stream.
According to Iranian customs data, the country in recent months has exported 525,000 barrels a day of the ultralight oil, known as condensates, over two times more than it did a year ago. In the past three months, the sales have generated as much as $1.5 billion in extra trade — a rate of about $6 billion a year — based on Iranian trade figures and market prices, analysts said.
The result has been an overall increase in petroleum shipments to China and other Asian markets without violating the letter of the sanctions. U.S. officials have aimed to keep Iranian oil exports at around 1 million barrels a day, but when combined with condensates sales, they averaged 1.4 million barrels a day between January and May, according to the Energy Department.
Administration officials said they were aware of the increased sales and had periodically discussed them with Iran’s trading partners, suggesting that such purchases were not in the spirit of sanctions agreements. But the sanctions, they said, remained effective, with oil exports still down substantially from two years ago.
“The implementation caused a dramatic and drastic reduction in Iranian oil exports,” Amos Hochstein, the State Department’s acting special envoy and coordinator for international energy affairs, said in an interview.
The condensates can be a byproduct of natural gas or oil production. But under the sanctions, they are fully covered only when they come out of an oil field and not when produced from a natural gas field, even though they are routinely mixed with heavier grades of oil later for making fuels.
Administration officials said that the countries that had waivers to continue importing some Iranian oil — China, India, South Korea, Turkey, Taiwan and Japan — were not technically prohibited from buying the gas condensates and were not breaking the letter of the agreements with Washington.
The increase in condensate exports compensates for a small part of Iran’s lost oil revenues. According to OPEC estimates, the value of Iranian oil exports in 2013 had plunged to $62 billion, down from $102 billion in 2012 and $115 billion in 2011.
Still, there has been some slippage. The Energy Department reported that from January to May, Iranian oil and condensates exports were 300,000 barrels a day higher than the 2013 average, with China and India accounting for most of the increase. Other slippage comes from sales to Syria, a close ally of Iran.
“They found a loophole that buyers can use,” said Greg Priddy, director of global energy at the Eurasia Group, a consultant firm. But he added that despite the new condensates sales, “sanctions are not melting away.”
The Chinese Embassy and Iranian Interests Section in Washington did not respond to email requests for comment on the increased sales.
Under the sanctions, crude oil exports to most nations are banned. As for natural gas, Iran was banned from exporting it to the European Union in late 2012, but not to Asian markets — providing an opening for the gas condensates sales.
While the added exports are giving the Iranians a taste of the economic benefits of a diplomatic rapprochement, administration officials note that the benefits of the condensates sales are still limited by the sanctions on Iran’s central bank. Under those sanctions, the money from the sales of gas, like oil, cannot be repatriated and must stay in the country that buys the Iranian product. That means the proceeds can be used to buy products in China or India but not to support Iran’s nuclear program.
Iran is already owed billions of dollars in oil payments because the value of the goods it wishes to buy does not always equal the value of the oil it sells.
“What is actually in peril are the assets of the Central Bank of Iran wherever they come from,” said Richard Nephew, the State Department’s deputy coordinator for sanctions policy.
Nevertheless, experts say the increased exports are likely to spur added tensions between the Obama administration and congressional critics who say it is not pressuring Iran enough to force the country to retreat from developing the ability to build atomic weapons.
“If this gets up to the billions of dollars, then it could lead to retaliatory measures,” said Denise Natali, a Middle East expert at the National Defense University in Washington. “This could reinforce suspicions about Iran, that it cannot be trusted.”
An energy powerhouse, Iran has the second-largest reserves of natural gas in the world after Russia, and it ranks among the world’s top five gas producers, according to the Energy Department. It ranks fourth in proven crude oil reserves.
Iran appears to be looking to increase condensates exports even further with the development of its enormous South Pars gas field. The National Iranian Oil Refining and Distribution Co. recently announced plans to build a condensates processing plant with the capacity to produce 60,000 barrels a day.
Condensates represent a gray area in the oil and gas world, and even OPEC is challenged about how to define the product. Under OPEC rules, condensates are not included in oil export quotas allotted to its members even though they are commonly included in statistics for oil production and reserves.
U.S. regulatory agencies consider them a form of crude oil and severely limit the ability of producers to export the product.
“For U.S. regulations, we can’t export condensates because it’s a crude oil, but in sanctions for Iran they can export condensates because it’s not a crude oil,” noted Larry Goldstein, a director of the Energy Policy Research Foundation, an organization partly financed by the oil industry. “From a policy perspective, there is an inherent contradiction.”
But that may be changing. In June, the Commerce Department granted the first export licenses to two U.S. companies to export slightly processed condensates, ruling they were no longer crude oil but a refined product. Refined petroleum products, like gasoline and diesel, are legal to export despite the ban on most foreign sales of crude oil since the 1970s.
A tanker full of 400,000 barrels of condensates left Galveston, Texas, in July for South Korea, and another tanker is expected to leave port with processed condensates this month.
In the end, energy experts say, the extra supply of Iranian condensates on the world market can have some benefits, at least for a short while, given the potential for big disruptions in global oil supplies from mounting crises in Libya, Iraq and Ukraine.
“A little seepage in the market right now,” said Frank Verrastro, an energy and geopolitical strategist at the Center for Strategic and International Studies, “is a good thing.”
First Published August 11, 2014 8:00 PM