Iran’s Booming Oil Industry Adds Urgency To Nuclear Negotiations

• Iran’s oil exports hit a five-year high in May as the country becomes increasingly effective at overcoming U.S. sanctions.
• Recent reports that the U.S. and Iran have been holding closed-door negotiations about a renewed nuclear deal may be driven in part by these developments. 
• While a return to a full nuclear deal looks increasingly unlikely, new geopolitical realities may mean that a different short-term deal could be an attractive alternative.

Over the last few years, Iran has increasingly ignored sanctions imposed on its oil and gas industry by the U.S. by choosing to develop new energy partnerships and increase its oil exports. The U.S. has largely overlooked these actions in the hope that Iran will eventually sign a new nuclear deal, a hope that is yet to come to fruition. And now Iran’s oil exports are reaching new highs. So, will the U.S. start imposing stronger sanctions on Iranian oil and gas if no progress is seen in nuclear talks or will it continue to look the other way?

In May, Iran’s oil exports hit a five-year high, reaching over 1.5 million bpd. This is the highest level seen since 2018 before the U.S. had imposed sanctions on Iranian oil. Iran announced in May that it has increased its oil output to over 3 million bpd, around 3% of the global supply, also the highest since 2018. Prior to the sanctions, Iran’s oil exports stood at around 2.5 million bpd.

Iran has been gradually fostering relationships with countries that may be interested in buying its oil. The purchase of Iranian crude is not without risk, as it continues to be heavily sanctioned, and the U.S. could choose to enforce those sanctions more strictly if Iran does not agree on a nuclear deal. But Iran has been developing partnerships with countries willing to take the risk, as well as with states that would likely import the crude should the sanctions be dropped. Iran has been selling oil at a discount for those open to buying it, including China. Its low-price oil has helped Chinese refiners overcome low profit margins.

Although tanker tracking shows that China has been Iran’s biggest oil importer, official data suggests there were no imports from Tehran in the last year. Sara Vakhshouri from SVB International, a consultant, stated: “Sanctions are in place but perhaps they are not fully implemented or monitored.” She explained, “Also all of these supply volumes are in the dark market, where there is no transparency and so they are not reflected in formal global supply and export data.”

Iran has also exported oil to Venezuela, which has U.S. sanctions on its energy products. The two countries have been working hand-in-hand over the last couple of years to circumvent sanctions and support economic growth. China has aided this trade by purchasing oil products from both Iran and Venezuela via alternative routes and ghost ships. In 2022, Venezuela agreed to trade its heavy oil for Iranian condensate, which was in short supply and is vital for the dilution of its crude. In 2022, Iran increased oil shipments to Venezuela following an agreement to renovate Venezuela’s El Palito refinery.

Earlier this year, the U.S. imposed sanctions on firms it said had transported or sold Iranian petroleum or petrochemical products in violation of existing sanctions, including two firms in China. This decision came after discussions on a new nuclear deal stalled once again, largely due to the strained relationship between Iran and the U.S. The U.S. Secretary of State Antony Blinken said, “These designations underscore our continued efforts to enforce our sanctions against Iran.” Yet experts question whether President Biden is serious about these sanctions considering Iran’s rising crude export levels.

In recent months, officials from Iran and the U.S. have been holding closed-door negotiations, including indirect talks in Oman, to reduce tensions in the region, curb Tehran’s nuclear program and release American prisoners, according to officials. After years of disagreement over a new nuclear deal, experts are suggesting that the two powers may be looking for a short-term agreement including key objectives, rather than holding out for a comprehensive nuclear deal. Former U.S. President Trump backed out of the previous nuclear deal, the Joint Comprehensive Plan of Action (JCPOA), in 2018, and imposed sanctions on Iranian oil and gas. Efforts by President Biden to revive the agreement have so far been unsuccessful.

But there is little clarity on the aim of the closed-door talks, with Iranian foreign ministry spokesperson Nasser Kanani telling media sources that there is no intention to negotiate an agreement separate from the JCPOA. Several geopolitical issues come into play when talking about a potential short-term deal, which could be why any discussions are being kept private. Under a comprehensive agreement, Iran wants to maintain its nuclear program, which it insists is in place for peaceful purposes, and that its ballistic missiles program should not be included in a new deal. Meanwhile, the U.S., as well as imposing nuclear program restrictions, would likely want Iran to release American prisoners, reduce its alleged role in the Russia-Ukraine conflict, and support the stabilization of oil prices. Any deal that seeks less than this could be viewed as giving Iran concessions. However, it could be much easier to achieve as it would not require the approval of the U.S. Congress.

With Iran’s rising crude exports and closed-door discussions between the White House and Tehran, uncertainty remains over Iran’s oil industry, U.S. sanctions, and a potential nuclear deal. President Biden appears willing to continue to overlook Iran’s oil exports, despite appearing to be no closer to a nuclear agreement with the Islamic State – at least publicly. However, an interim agreement could help both sides achieve some of the key objectives of a full nuclear deal but would undoubtedly upset several key groups.

By Felicity Bradstock for Oilprice.com

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