Iranian oil exports under the Joint Plan of Action: A report card

Sam RatnerSam Ratner evaluates Iranian oil export data from the first six-month period of the Joint Plan of Action. Export levels themselves aren't a concern, he argues, but the numbers reveal the seeds of future political obstacles for proponents of diplomacy, both within the U.S. and internationally.

By Sam Ratner 

Over the course of the Joint Plan of Action (JPA), a triple standard has emerged for evaluating Iranian oil exports. At the most basic level is the question of whether the parties to the interim agreement have complied with its terms regarding Iran’s oil exports—has the P5+1 kept to its pledge to suspend downward pressure on Iranian crude oil sales? The second, more controversial question is whether the Obama administration kept its promise that Iranian oil exports would not climb above one million barrels per day over the course of the JPA. Finally, many critics of the JPA argue that it has undermined the sanctions regime against Iran and eroded the West’s economic leverage in nuclear negotiations. Given Iran’s economic reliance on oil exports, that claim can be evaluated in the context of export data. Now that the JPA has ended its initial term and oil export data from the bulk of that term is available for review, we can offer grades on the JPA’s success on each of these three levels.

  • Compliance with the terms of the JPA: A

Despite many claims to the contrary, Iran has basically no obligations regarding oil exports under the Joint Plan of Action. The clause of the JPA that deals with oil sales falls under the section listing “voluntary measures” taken by the P5+1 as their part of the agreement. Specifically, the P5+1 pledges to “pause efforts to further reduce Iran’s crude oil sales, enabling Iran’s current customers to purchase their current average amounts of crude oil.” A State Department spokeswoman later clarified that, from the Obama administration’s perspective, the “current average amount” of oil is “looked at over a six-month period.” The P5+1 (mainly the U.S.) has lived up to its word, refraining from demands that Iran’s current oil customers (China, India, Japan, South Korea, Turkey, and Taiwan) further cut imports of Iranian crude.

  • Obama administration keeping its “around a million barrels per day” promise: C-

In a January background briefing on the implementation of the JPA, a senior Obama administration official promised that, under the JPA, Iran’s oil customers “cannot increase their amount of oil that they’re importing [from Iran]” and that the agreement “will hold Iran’s oil exports at around a million barrels per day.” Since then, numerous reporters have conflated this promise with the text of the JPA itself, claiming that the agreement sets a hard cap of one million barrels per day (bpd) on Iranian oil exports. This promise, and the misconception that grew from it, has become politically problematic as many have used the one million bpd cut-off as a metric to measure the overall effectiveness of the JPA. Each month since January has seen reports of total Iranian petroleum exports over—often well over—one million bpd. Indeed, from February to June, best estimates based on numbers reported by importing countries place Iran’s petroleum exports at just over 1,310,000 bpd. That against a “current average amount” (defined by a State Department spokeswoman as oil sales “looked at over a six-month period,” and represented here as the average publicly available imports of Iranian oil for the six months preceding implementation of the JPA—July through December 2013) of just over 1,050,000 bpd going into the JPA period.

  Total Iranian petroleum exports under the JPA

This discrepancy sparked a monthly war of words in which critics of the administration charged that promises were not being kept. The administration argued that monthly export numbers were unimportant and that the only number that mattered was the average export level over the full six months of the deal.

Unfortunately, the way the U.S. government measures oil exports makes it difficult to evaluate the administration’s success in keeping its one million bpd promise. When March export numbers suggested that total Iranian petroleum exports were unlikely to average below one million bpd over six months, the administration clarified their promise by pointing out that the U.S. is only interested in limiting crude oil exports, rather than total petroleum experts. As State Department spokeswoman Jen Psaki explained, that distinction makes widely-reported petroleum export data largely irrelevant to evaluating the one million bpd claim:

Export figures often mix condensates and crude oil, which often creates inconsistencies in the way numbers are reported. And what matters as it relates to the implementation of the JPOA… is the crude oil numbers.”

Condensates, “light petroleum that appears in oil [or natural gas] reservoirs as gas, but condenses into a liquid when it leaves the well,”  often enter the crude oil stream, which is why countries tend not to differentiate between condensates and crude oil when reporting import levels. The JPA, however, refers specifically to crude oil, and the U.S. government differentiates condensates and other petroleum products from crude oil for sanctions purposes.

This distinction makes measuring monthly crude oil sales using monthly data a thorny problem because almost all importing countries, as Psaki noted, combine their crude and condensate imports into one number. Therefore, we cannot say for sure whether Iran has exceeded the administration’s promised crude oil export cap.

Others have made educated guesses, however. The International Energy Agency, an independent group that analyzes energy markets for Western governments, estimates that Iran averaged about 1.1 million bpd of crude oil from February to June, which is in the range of the administration’s “around a million barrels per day.” The Iranian government, for its part, reports that it exported about 195,000 bpd of condensates in the eight months before the nuclear deal was signed; 504,000 bpd from December 2013 to March 2014; and 522,425 bpd from April to June. If that is the case, then Iran’s average crude exports for the first five months of the JPA were substantially lower, at 796,213 bpd, and the crude oil export graph would look like this:

 Total exports minus reported condensates

This graph, however, is unlikely to reflect the reality, as it puts Iran’s six-month crude export average leading up to the JPA’s implementation—the number that constitutes the “current average amount”—substantially lower than any outside estimates of Iranian crude sales during that period.

State Department spokeswoman Jen Psaki
June 16, 2014 - State Department spokeswoman Jen Psaki conducting a daily briefing in Washington, DC. In April, Psaki clarified the distinction the U.S. government makes between crude oil and condensates. (PAUL J. RICHARDS/AFP/Getty Images)

Despite the lack of clear data, the Obama administration’s promise receives a low grade because it constitutes a communications and political failure. Engaging with reports of total petroleum exports for three months before pointing out the key flaw in the data invited unnecessary criticism. Clarity from the administration at the outset would have mitigated, although not prevented, the outcry.

Ultimately, the administration should have thought twice before making and standing by this promise. Given the inherent variation in oil export estimates—the IEA, for instance, routinely revises their initial Iranian export estimates, sometimes by 200,000 bpd or more—and the initial miscommunication over what constitutes crude oil, being tied to a certain barrel per day average was always going to generate more controversy than assurance. Whether or not actual export levels remained around one million bpd, the monthly battle gave credence to the narrative put forward by Iranian moderates and American conservatives that the sanctions regime against Iran was “crumbling” under the JPA.

  • Health of the sanctions regime after 6 months of the JPA: A-

Thankfully, no such crumbling has taken place. Opponents of the administration, however, argue that oil sales under the JPA constitute what United Against Nuclear Iran CEO Mark Wallace called an “economic windfall” for the Islamic Republic. This windfall, Wallace and others contend, has put Iran on the path to economic recovery and left the regime under “far less pressure… to actually make material concessions on its nuclear program.” Very little evidence for either of these assertions exists.

Though the JPA temporarily halts pressure on Iranian oil sales, it does not remove banking sanctions. All payment for oil Iran exports should be directed to semi-frozen accounts that are difficult to access. As a result, it is unlikely that Iran has been able to actually use any of the revenue it is bringing in through oil sales. Indeed, banking sanctions are still so restrictive that Iran has even had trouble accessing the $4.2 billion of its past oil revenues that were unfrozen as part of the initial JPA. Iran has also complained that international banks are refusing to process transactions explicitly allowed under the JPA due to concerns over U.S. sanctions enforcement.

Country-by-country imports

For the most part, Iran’s clients have kept their oil purchases near or below their pre-JPA levels. Taiwan has never been a major buyer, importing Iranian oil only intermittently and averaging just 15,000 bpd in 2013. Though Turkey has stopped reporting its oil imports by country of origin, experts agree that Turkey imports about 105,000 bpd on a consistent basis. You can see the self-reported total petroleum (crude and condensate) imports under the JPA by the other, larger importers in the following graphs:

South Korean imports under the JPA

South Korea’s imports spiked in February as Korean refineries prepared for a maintenance shutdown in March. Since then, the Korean import average over the course of the JPA has fallen basically in line with South Korea’s previous purchase levels.

Japanese imports under the JPA

Japan also began the JPA with a small spike in imports from Iran, although nothing wildly out of the ordinary for a winter month. Imports since then have fallen, leaving Japan below its import level of the July-December 2013.

Indian imports under the JPA

Indian exports remain somewhat above levels from the latter half of 2013, but that is largely due to a pre-planned increase in Indian purchases during the first quarter of 2014. In March, I wrote a post in which I pointed out that India was well below the level of imports from Iran that it had promised to American diplomats for the year from April 2013-March 2014. I predicted that India would increase its imports from Iran through March to maximize the amount of oil could bring into the country without badly surpassing its earlier promise to the U.S. As you can see below, that is almost exactly what happened.

Indian imports 12 month rolling average

India pledged to import 220,000 bpd from Iran from April 2013 to March 2014. With their increases in the first quarter of 2014, India brought its actual import average for that time period to 220,130 bpd. That is a good indication of India’s good faith in its commitment to control oil imports from Iran, as is the fact that India has reduced its imports significantly since March. Indeed, each of the five countries covered so far has operated under the JPA as though they would be seeking new oil import waivers from the U.S. once the deal expired.

Chinese imports under the JPA

There is, of course, a major outlier. China, the largest importer of Iranian oil, has significantly increased its petroleum imports from the Islamic Republic over the course of the JPA. China’s average monthly imports of petroleum products from Iran increased by roughly 205,000 bpd during the JPA compared to the six months prior to the JPA.  It is clear that at least some of the increase is in condensate—in June, a Chinese state-run oil trading company concluded an agreement to lift 67,000 bpd of condensate from Iran for the next year, extending a previously existing arrangement. Yet these condensate purchases cannot account for the full 205,000 bpd difference between China’s petroleum imports before and after the implementation of the JPA—there has been an increase in crude oil trade between China and Iran.

China reported that it cut back to 531,000 bpd of Iranian petroleum in June, and held basically level at 559,000 bpd in July, suggesting that it plans to maintain roughly 550,000 bpd as a new import baseline. This new baseline hardly affects the Iranian economy, but it could pose a diplomatic problem for the U.S. in the future. China has always resisted cutting its imports of Iranian oil and has escaped U.S. sanctions by maintaining basically level import rates since 2012. China’s unwillingness to continue that policy under the JPA can be seen as a hedge against the failure of nuclear talks. If the talks succeed, oil sanctions will be lifted and it won’t matter that China increased its imports. If nuclear talks fail and the international community perceives the failure as the fault of the U.S., China’s refusal to maintain a steady level of imports will make it difficult to reconstitute strict import limits among the other major importers. India will resist being constrained in importing cheap oil if it perceives China as being able to do so with a free hand. To avoid future damage to the sanctions architecture, the U.S. must resist giving the impression that there is a double standard for China when it comes to importing Iranian oil.

The increase in Chinese imports of Iranian oil is the most worrying aspect of Iran’s oil sales under the JPA, but it is hardly an incentive for Iran to run down the clock on negotiations in hopes that the sanctions regime will fall apart. Iran has shown no signals that it perceives the sanctions regime as weak. If the Iranian regime believed that sanctions were falling apart, they would surely not have negotiated an extension of the JPA that demands further concessions from them in exchange for a longer period of sanctions relief.

After six months under an interim nuclear deal, the sanctions regime remains strong and negotiations toward a final deal remain in progress. There are challenges for the P5+1 to face moving forward, but on balance the JPA has succeeded in preserving the leverage that sanctions provide while creating the political space for serious negotiations.

Sam Ratner is the project coordinator for Iran Matters. He tweets at @samratner. Many thanks to Gary Samore, Henry Lee, Samuel Cutler, and Timothy Sandole for their comments on this piece.