PHOTO: Foreign Ministers mark nuclear deal between Iran and 5+1 Powers, July 14, 2015

Amid heated rhetoric in both the US and Iran about the approval of the July 14 nuclear deal, Richard Nephew — formerly with the US State Department and now at Columbia University — and I joined the Reuters Global Oil Forum last week to cut through the propaganda and assess the chances that the agreement will be implemented by the end of the year.

Christopher Johnson of Reuters hosts the discussion:

Johnson: I wonder if we could start today by talking about the domestic environments in the United States and Iran?

Nephew: Sounds good.

Johnson: Are there any developments there that could obstruct the nuclear deal between Iran and the West? What is the mood music?

The Debate in the US

Nephew: Well in the U.S. Congress, things are what i expected. There are a number of critical voices out there and many people are picking apart rather technical parts of the deal. But many more are seeing the underlying logic and are questioning what will happen without the deal.

So I think Congress is going to obviously take its full 60 days [to review the deal] and people will have to weigh strategy and politics.

I also think that the idea that Democratic Senators will stay with the President is not crazy. I hear that a number of them are considering opposing a joint resolution of disapproval, which means that we don’t even have to look at veto.

But, that’s something we won’t know until September.

Johnson: What does the balance of views look like now? Is it more favourable generally than before?

Nephew: Well, I would say that probably most of the Democratic Senators are more favorable than they were before, and they see the risk of no deal or shutting down this deal.

A lot of nuclear technical issues were solved positively in the text.

Lucas: Some analysts are citing an unprecedented lobbying effort through AIPAC and pro-Israel outlets, linked to media like Wall Street Journal (and some at Washington Post) and think tanks like the American Enterprise Institute. But you don’t think that is tipping the debate?

Nephew: I don’t. At least not yet. The problem is that they have to shoot at the deal with arguments that aren’t holding a lot of water or arguments that don’t address the underlying problem.

Take, for example, the idea that the deal will contribute to terrorism. But no one has shown how no deal makes terrorism an easier problem to solve since Iran has been supporting terrorism before and after sanctions. So the argument just doesn’t hold.

But I think that August is going to be a time to regroup for opponents. So September is going to be a busy, political, tense time.

Lucas: So if Iran shows compliance over next two months that gives no opportunity to overturn the deal?

Nephew:: Yes, if Iran cooperates then it will be much, much harder to reverse the deal. But that said, the main issue Iran will work on is the past warhead work with the IAEA [International Atomic Energy Agency], and final results on that will not be until October.

Nephew: So, ultimately people will have to vote on expectations rather than confirmed compliance.

Johnson: I have heard reports that Iran is on a very active charm campaign, to try to isolate its opponents.

Lucas: Has the “secret” protocol to resolve past work been agreed between IAEA and Iran?

Nephew: My understanding is that, yes, it has been agreed. But it is not secret per se. It is standard practice that countries have confidential conversations with the IAEA. It’s written into the IAEA statute (which by the way was agreed to by President Eisenhower, not exactly a wimp).

Lucas: Noted. Deal opponents are using that term “secret” to denigrate the deal.

And in Tehran….

Johnson: There have even been rumors of Tehran distancing itself from some allies in the Middle East, presumably to minimize opposition to the nuclear deal. Is that right?

Lucas: Iranian Foreign Minister Zarif’s tour to Kuwait-Oman-Iraq was in part to show engagement and in part to drive Iran effort for influence in region. But I don’t see distancing from Hezbollah or Iraq militias. And I think they are considering their position on Syria.

Johnson: Hamas?

Lucas: If anything, it was Hamas that distanced from Iran from 2012, in large part because of the Syria situation. Iran has been closer to Islamic Jihad in Palestine.

Nephew: I would just add that we can probably read too much into things on Iran and its allies. Iran has complicated relationships with its allies too, just like we do. Sometimes that may look like distance. Sometimes, it’s a real disagreement over the course ahead.

Lucas: Very much agreed.

About the domestic environment in Iran….

I think it is more positive re deal than in US. The Ahmadinejad camp are sniping at the agreement (which caused a black comedy moment in Parliament this week) but President-Foreign Minister-Speaker of Parliament are holding line.

And Revolutionary Guards are not showing signs of challenging — though, on an interesting side point, they are sniping at French Foreign Minister Fabius’ visit to Tehran for political and possibly economic reasons.

Nephew: Agreed. My view has been that the IRGC [Guards] are in a decent place because they benefit either way. They own enough industry to profit from deal and, without a deal, they have a political upper hand vis-a-vis Rouhani. What do you think?

Lucas: Without deal, Rouhani is dead politically. So yes on that point.

Supreme Leader has blocked their opposition to a deal so that option is not really open right now. They will be wary of any post-deal effects cutting into their economic interests, which may account for the shot at Fabius this week. But they can’t take on the deal directly or block its implementation at this point.

My sense is that many in regime are already looking to post-deal contests for power — both within the regime, and within the region v. others.

Nephew: That’s fair and makes sense.

The European Dimension and Iran’s Oil

Lucas: What is your sense of the German and French visits to Iran re oil and other sectors? Have we moved to competition between European interests for contracts already?

Nephew: I think that it is similar to post-JPOA [interim nuclear deal] visits in 2014. People are looking to see what their options are, and certainly yes trying to see what the competition will be.

But, I would be really surprised if there were any solid contracts agreed to right now. Both because it could prompt sanctions if they go too far and because the Iranians still haven’t worked out what terms they’re going to ask for.

Lucas: What timetable are you projecting for contracts? Providing deal is not undermined?

Nephew: My sense is that really long term contracts still won’t be in place until maybe mid-2016. The nuclear steps will take probably until March-April-May. And there is enough political complication with the US presidential race to give really big companies pause before jumping in.

I would think it would take sweetheart deals for them to jump in really long term contracts without pretty sterling force majeure clauses. And Iran doesn’t want that.

Lucas: So no change to forecasts for oil markets for some time?

Nephew: No, not from me…

Question from Forum: Can you discuss how the deal is being tied in with the issue of [Iran] oil exports by some domestically, and what that could mean?

Nephew: I’m still at: 300-500K [barrels per day in increased after deal starts in 2016, and much more after substantial investment.

There are people here saying that “if Iran can export oil, so should US producers”. So it would be reasonable to expect a tie in to future legislation on the Iran deal. The problem is that most of the people supporting dropping the restrictions in Congress also don’t like the Iran deal, so you don’t have a good tie-in until the votes happen in September.

But I think that we could see a cluster of bills in September associated with the deal, like on regional security assistance, oil export restrictions dropping, other things to make the pain of the deal easier for some folks
and to take advantage of the deal from others.

Johnson: That could be something of a perfect storm for oil prices. Extra volumes from two ends.

Lucas: Surely there are numerous complications from easing restrictions on US oil exports? Shock to oil market, as Christopher notes, unsettling of US Arab allies like Saudi, undermining the national security/energy security strategy….

Johnson: Sure, opening the gates into international markets….

Nephew: Well, yes and no. I mean: ultimately, US oil is getting to the market anyway, right? So it’s not like new production like from Iran. It’s just easing market distortions.

Johnson: Um, well, not exactly. It’s only getting to international markets indirectly via products or via backing out Canadian crudes.

Nephew: That’s right. Which is why I would describe it as a market distortion problem rather than some massive amount of new production. Better economists than I ought to opine, but I would argue that the price impact of eliminating the market distortion would be less than with all of the sudden 300-500K emerging from a black hole.

Johnson: You are right, but I’m think in terms of the psychology of the markets.

Nephew: Absolutely, no disagreement on that point. But, if you want my snarky view, the psychology of the market is always a bit weird

Johnson: Of course!

Nephew: I mean, people were screaming about new Iranian oil six months ago and saying prices were already changing because of it and then hyper-ventilating because the deal might fall through. But, as I look at pure, real terms, I don’t see US export restrictions changing, having a major, disproportionate or sustaining impact on prices per se. And at least not like with major new production.

Lucas: I think regional security pacts may be more significant in the politics for September. Israel has already gotten an arms sweetener, and I suspect more will follow to Israel and to “friendly” Arab States.

Johnson: To “balance” things out?

Lucas: As Richard says, to blunt opponents of the deal, more than any idea of a strategic balancing. Israel and the Arab States could already take out Iran in a direct conflict.

Nephew: Exactly right! Rather than “balancing” there is going to be “over-killing” in terms of support and assistance. This myth that Iran is somehow going to be the top dog in the Middle East is forgetting that there are fundamental realities that already exist there with regard to military spending and U.S. support.

Predicting the Outcome

Johnson: just looking at the oversight process in Washington and Tehran, what’s your take now on the odds of the deal being approved?

Lucas: It will be approved in Iran by the Supreme National Security Council by September. Supreme Leader and elite are just watching to see any sign of wobbles from Obama Administration before moving.

Nephew: In Washington, I think the safe bet is still a joint resolution of disapproval, passed on partisan lines with a few senate defections of Democrats with political problems at home; presidential veto; and no attempt to override since the political point has been made.

But, people are going to spend August with their constituents and their fundraising apparatus. So we really won’t know until early September.

Johnson: You are saying the opponents simply don’t have the numbers?

Nephew: Correct. And I think it will proceed to be implemented. Just don’t know how nasty the process will get.

Lucas: I generally agree. My question is whether the initial passage of joint resolution of disapproval is spun as Obama weakness, and it snowballs into a possible movement to override any veto. There will be at least a few weeks where anti-deal faction is seen to have the upper hand.

(But perhaps I’m suffering a “Fox Shock” after visiting the United States this month.)

Nephew: Maybe, but I don’t think so. Frankly, that fear is what may motivate enough Senate Democrats to oppose the joint resolution.

The momentum point only makes sense to me if it weren’t already assumed that a joint resolution of disapproval is coming. I think the reaction to one will be a yawn.

Politically, even though the media will go haywire, it would be different if the expectation was that Senate Democrats would stay with the President no matter what. But that’s not the expectation, which helps here on the override.

Lucas: Is there any possibility of politics for the Presidential Election 2016 altering this scenario?

Nephew: I don’t think so, mostly because so many republicans have said they oppose already and Clinton says she supports. It could be a factor if Iran cheats in the first six months of the deal. But I doubt that.

Question from Forum: So if the media is going to go haywire, are there any signs that you would look out for that the deal is under a real threat?

Nephew: I think if the IAEA reports in September that Iran is stalling on past weaponisation answers, that would be a really bad sign.
.
I doubt that this happens, but that is my biggest fear now for the deal.

Johnson: Is that likely? That Iran cheats?

Nephew: Nah, i don’t think so. They won’t have gotten any real relief yet. So it would be really cutting their nose off to spite their face…

Lucas: Well, they didn’t cheated on the interim deal for its 18 months. And indeed went well beyond its terms to try to get final agreement.

Cheating before IAEA verification (and thus sanctions relief) would be economic suicide.

I don’t see many signs of loud hostility from Arab States to the deal, in contrast to Israel response. Is that a fair assessment?

Nephew: Yes, I think so. And in keeping with standard Arab practice on this issue. They prefer to keep conversations and conflicts private. But there are positive statements about the deal. I think that at least some see it as a decent enough deal — and one that they can use to make some money while also getting increased support from the US — to deal with residual challenges.

So, really, win-win-win for them.

Lucas: My reading is that they are looking to regional effects post-deal. So priority is Syria/Yemen/Iraq rather than the deal itself.

And since Assad is in danger of falling in Syria, it’s Iran that faces the immediate difficult choice.

Nephew: I agree with that.

How the Deal Might Fail

Lucas: Am I right that we are now waiting for IAEA verification in December to sound the starting gun for sanctions relief?

Nephew: Actually, I think that we’re still looking at late Spring for relief. Iran won’t have done its part probably until then. December is when the IAEA will issue its report on “PMD” — past weapons work. That’s not linked per se to relief, which instead is linked to centrifuge dismantlement, etc.

Lucas: In terms of reducing the centrifuges to 5,000? Reducing in-country stock of uranium?

Nephew: Yep, all of that. And modifications to the [under-construction] Arak reactor and other techie steps.

(Of course, if PMD is not resolved by October, then this whole thing will not happen.)

Lucas: Any foreseeable problems with Arak modification?

Nephew: Nope, at least not insofar as the important part, which is the removal of the “calandria”, basically the reactor core. Without that, no reactor.

Removing that will take time but less time than centrifuges.

Lucas: What is biggest potential problem re PMD resolution? Withholding by Iran of information? Or arrangements for inspections, e.g. of non-nuclear sites?

Nephew: Yes. If they don’t do their part on the deal they signed with [IAEA head Yukiya] Amano two weeks ago, then this thing dies.

Could be either of those things [withholding of information or inspections].

This is a real test of Iranian compliance with the deal. And that’s why I think they’ll overcome internal opposition to make it work.

This is their one shot to get out from under this cloud. I’d be really, really surprised that they not take it.

Lucas: My sense is that the US anti-deal coalition hasn’t figured this out, as the public objections have not really dwelt on this but on peripheral issues. Is that right?

Nephew: Generally, yes, though some have fixated on this [PMD] actually overly much — being concerned that without essentially a confession, PMD cannot really be resolved.

But, ultimately, these guys have inflated views of what Iran would do and could do. And, anyway, no one would believe that their confession would be full and total anyway, even if it was given.

Johnson: One more question on oil — there have been reports that Iran may be shipping crude oil from floating storage. One tanker sailed east, we know. Would this break existing sanctions rules in any way?

Nephew: Maybe. Maybe not. The sanctions cover exports, not what container the exports are in. So, if it is part of an existing, approved import level in say China or Japan, then no sanctions.

But a major increase in exports to any country would be a violation of the sanctions, and I’m certain that the U.S. government is telling that to importers now.

Lucas: Who is insuring the tanker? If it is European insurer, then that violates sanctions. If non-European, then no violation.

Nephew: Basically, yes, I agree, but if it is non-European and also in support of unauthorized imports, it
could also be sanctioned by the US Government.

If a European insurer, problem regardless.

Lucas: What are the latest oil export figures for Iran?

Johnson: About 1.4 million bpd in July, we think. Up from year-to-date 1.3 million bpd.

Lucas: In practice, they have been allowed to go to 1.4 million, despite a November 2013 level set at 1.1 million. So I presume that 1.4 million will be tolerated now?

Nephew: Well, I wouldn’t say that. It’s not been tolerated.

Part of the problem is that some of their exports could be going to Syria. Other exports are potential sanctions violations for which sanctions are yet to be imposed, which could be for a variety of reasons, including active investigations.

Lucas: Thanks. That’s a far better reading.