As the world waits to see whether a new nuclear deal will be agreed to with Iran, Cipher Brief CEO & Publisher Suzanne Kelly spoke with Cipher Brief Expert Norm Roule for the State Secrets Podcast. Roule serves as an energy expert and analyst in the private sector. Here is the full conversation, lightly edited.
The Cipher Brief: What do you think would absolutely need to be included in any deal to revive the Joint Comprehensive Plan of Action with Iran in order to make it worthwhile for the West?
Roule: Let me begin by saying diplomacy regarding Iran is always extraordinarily difficult. Wherever you stand on the nuclear deal, we need to show respect for all of our diplomatic and foreign service colleagues who are working on this issue in a variety of countries, which are also included in the negotiations themselves, because it's going to be impossible to come up with a deal that satisfies everyone and will satisfy all of our Iran concerns. It may even be that there is no such thing as a good deal. It will be very subjective based on who you are. I think the answer to the question of will we have a deal in the near term is, possibly. It's entirely dependent upon Iran. Many US and EU policy makers are willing to return to the deal in its original construct. It's Iran which continues to place demands or to place obstacles to seek additional concessions.
I think what is certain is that we are about to have a highly partisan and heated debate on the deal. As we think about the whole concept of what we should have in the deal, it may be good to turn off Twitter for a while and ignore some of the statements because you're going to hear from advocates of the deal some statements that are just not entirely supportable by the facts. They're going to say, "If we don't have a deal, we go to war. If we have a deal, that permanently constrains Iran's capacity." The sun isn't permanent, the deal won't be permanent. "It blocks Iran's path to nuclear weapons." These also isn’t true. "The region is more or less dangerous with or without a deal." That's not so either. Likewise, on the other hand, we're going to have opponents of the deal say that the deal unfetters Iran's capacity to build a nuclear weapon immediately, and immediately, that's not true.
I think what really is needed in the deal is the post-deal because in 2015, the international community failed because it did not use the time that the deal gave to come up with a comprehensive Iran policy to address other issues that complicate Iran. And this rapidly became a religion of JCPOA and the cardinals of that religion had the advocacy of, "Its JCPOA or war," and no other issue fit into that construct. So the question I think your listeners should be asking is if there's a deal, if there's no deal, what is our policy as an international community, of which the United States is a member, of moving forward to address such issues as hostage taking of Americans and other nationals; terrorist attempts made under diplomacy on our own soil this year; and hundreds of missiles and drones fired at almost exclusively civilian targets?
It’s important because I think if you were to ask me, "Will Iran build a nuclear weapon in the next 12 months?" I would say almost certainly not. But if you were to ask me, "Will Iran undertake activity that will almost certainly kill men, women and children, if successful," I would say, absolutely. So we need this broader plan. So I think the deal, wherever it goes or doesn't go, will be of interest to its proponents or adversaries, but we do ourselves a great disservice by not talking about what happens next and we should not assume that a deal will make it any easier to undertake follow-on discussions with Iran.
The Cipher Brief: How do you expect a new deal would need to be different from the 2015 deal?
Roule: It would need to be part bipartisan. It would need to be a deal that takes into consideration the legitimate security concerns of regional actors. Some advocates of the deal, candidly, are partisan hacks or just lunatics on the internet who will say, "The region wants to push us into war." Well, I am in routine contact with regional officials, and I've worked with many of these people for decades, and there is no one in the region that wants a war that will be fought on their soil, period. You need something thatdoesn't just produce a lot more resources for the Iranian elements that undertake the missile, terrorism, and militia activity, because there's a human cost to that. Now at the same time, Iran's got to get something out of this and it's got to get something that's sufficient to stabilize its regime. That's just what they're looking for. And to do that, there's going to have to be significant sanctions relief.
The biggest problem I have with the deal is that many of the constraints we have on Iran have what are often described as sunset clauses, but the relief we provide doesn't have a sunset clause. It has a hypothetical: if Iran doesn't cooperate, we will snap back sanctions. But history has shown that if Iran does not cooperate, it is more likely that the European Union, Russia and China, and sometimes the United States, will instead say, "Let's try and talk this through over many months," while Iran just creates a new normal of what is intolerable. Iran is now producing highly enriched uranium, has conducted metallurgy work and has denied the IAEA access. In 2015, any of this would've been considered sufficient to risk military activity. So we need to restore the sense of deterrence to Iran that if it stays in the deal, it will have significant financial support, but it can't use that support to kill men, women, and children in the region.
The Cipher Brief:There's been a lot of foot dragging over this deal and I'm wondering why might Iran be willing to move on concessions now that up until now, it seemed unwilling to budge on? What's happening here?
Roule: Iran came into the latest process with a very attractive set of circumstances. The incoming Biden team had publicly opposed maximum pressure, had publicly stated their interest in returning to the deal, and had public disagreements and talked about a reset of relations with Israel and our traditional Arab partners. The experienced and thoughtful people that were placed in charge of the nuclear negotiations had publicly come out to say they wanted a return to the deal and opposed maximum pressure. If you're Iran, on day one of the Biden administration you have everything you need to come back to the deal. But the Iranians chose to seek other concessions. And there's a reason for that.
You'll often hear people talk about mistrust between the two sides. There is significant mistrust on our side, and we have reason for it. But the mistrust on the Iranian side predated the Trump administration's decision to withdraw from the deal. And it was not that the US didn't execute its obligations. The US did. I saw this firsthand and anyone who tells you the US or the EU didn't do what they were supposed to do in that deal is either a shill for Iran or Iran itself because I watched it. The problem is Iran does not achieve the sanctions relief it requires if businesses and banks understand that although nuclear sanctions are lifted, terrorism, human rights and missile sanctions remain in place.
So, if you're the Supreme Leader and if you're Iran's leadership, you have a legitimate concern that, because of Iran’s malign criminal activity in terms of international law, that sanctions relief from the nuclear deal won't be enough. So, what Iran is looking for is broad sanctions relief, something that will protect key sectors of its economy. The nuclear deal provides this. It protects oil exports, it protects use of critical financial systems, and it protects the repatriation of revenues from non-petroleum exports. There will be many other sanctions on Iran, and you will hear proponents of the deal say this, but even they will admit there are no sanctions as significant on Iran as those imposed by the nuclear deal. Also, if Iran can lock in that sanctions relief, Iran can fence off those sanctions from other activities. Hypothetical situation: Iran fires a missile into the Arabian Peninsula and kills a large number of Americans. If we try to constrain oil exports as a punishment, Iran says we're not adhering to the nuclear deal and is therefore allowed to increase the pace of its nuclear activities.
So, Iran has a rationale for trying to protect those issues. Iran also tested whether we would legitimize the IRGC and lift sanctions on that. It is now denying it ever asked for that. That is a lie, but it sought to see if it could obtain that relief. And Iran is also attempting to put in guarantees that if the US were to pull out in the future, it would obtain some period of time, a couple of years at least, where European and Asian companies could continue to operate in Iran. That may be talked about, but I think that last one is a bit of a fiction. If a US president were to pull out of a deal, or another party, they could just simply say, "We're not allowing companies to work in Iran at the same time." So Iran is looking for broad concessions that undermine the entire sanctions regime and its diplomatic isolation.
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The Cipher Brief: There's an open investigation right now, and a very controversial one, between the IAEA and Iran and I'm wondering if it's possible that Iran and the IAEA can come to closure on that investigation and if not, what is that going to mean for this deal?
Roule: It's very important. So just a bit of background, what we have is a situation where the International Atomic Energy Agency has discovered physical evidence in its examination of some locations in Iran of radioactive particles. Now, Iran lied about its previous nuclear program. It lied that it had a weaponization effort. The United States and many other actors reasonably say, "Look, we don't really care what happened before 2004, we care what happens in the future." That's appropriate. The problem for the IAEA is if it has an agreement with Iran and Iran is obeying its IAEA requirements, the agency needs to understand the locations of radioactive material in country and the associated equipment, and perhaps even some of the personnel. So Iran is telling the IAEA there was no radioactive activity conducted at this location. For Iran to come to an agreement, it's going to have to admit it lied through its teeth, which is very unlikely, and then perhaps say, “Here is proof that when we lied, we nonetheless took this material into a location which is now under IAEA control.” That is a theoretical solution.
So, how is this likely to play out in coming months? Well, first, there is no evidence whatsoever that Iran will cooperate with the IAEA. There's plenty of evidence that it won't. There is some evidence that there is growing pressure within the IAEA board of governors to criticize Iran, which they've been very reluctant to do. There is an IAEA board of governors meeting, I think September 14th, and what this will mean is Iran is likely to delay talks until it can be assured that that meeting will not push the IAEA to do a major censure or even to refer Iran to the UN Security Council. I think if a deal were to go forward, you would probably see an expectation written into the language that Iran will cooperate with the IAEA in the first two to four months of the deal being rolled out.
Iran is not going to cooperate. But nonetheless, that expectation will be like every other pressure on Iran — something that we try to kick the can down on the road to work — and it will not stop the deal itself from rolling out. The problem is this puts Rafael Grossi, the head of the IAEA, under enormous and unprecedented political pressure. It's really unfair to the fellow because in essence, it's now on his shoulders. Does he live up to IAEA responsibilities and risk the nuclear deal? Does he forego those responsibilities and risk other countries, in essence, ignoring the IAEA as well? That would be catastrophic for the nonproliferation world. It's going to be a difficult time for the IAEA in coming months, but I'm not sure that this alone would derail a restoration of the Joint Comprehensive Plan of Action.
The Cipher Brief: How can the Biden administration respond to domestic and foreign critics of a deal and what assurances or protections might the US offer to assuage worries of an eventual Iranian nuclear weapon?
Roule: The Biden administration has consistently stated that it will not allow Iran to develop a nuclear weapon. President Biden, as then candidate Biden, made this statement publicly and has reiterated this consistently. Where I think there is a concern is that the narrative of Europe and the United States is that an Iran with a nuclear weapon makes every other problem in the region tougher. Okay, that's true. But how did Iran get a nuclear weapon if our military option is on the table? How exactly do they develop a military weaponization program, which would take months to execute, that we would then have tolerated? That we and the IAEA would've missed? How would we talk through endless diplomacy and allow them to build that nuclear weapon or several? So I think there's a bit vulnerability in some of the statements on this issue.
In order for the Biden administration to show that it is committed to this plan, it would have to maintain a robust military support program to our partners in the region, particularly Israel, which is under routine existential threats by Iran. It would also have to maintain robust intelligence and international cooperation to make sure we understand what is going in Iran and make sure that this doesn't appear to be an issue that we just drop as we move on.
There have been critics of the Biden administration that it has not spent enough time on Afghanistan in the year since we departed. The Biden administration would obviously disagree. There are critics that the Biden administration spends very little public attention or diplomatic bandwidth on Syria. We just don't talk about it - therefore it doesn't exist - as a problem. The same on Yemen. Will Iran fall into that category if there's a deal? I think the Biden administration has got to commit that Iran will not be placed, not just on the back burner, but just taken off the stove as many of these problems are. I should underscore, I'm sure that if Ned Price or any of my other old friends were present, they would be saying how none of that is true, but that is a perception that some have.
The Cipher Brief:I'd like to talk a little bit about how a potential deal might impact the energy markets, because obviously that's something that's going to have widespread impact.
Roule: I think you need to look at this in several different timelines. First, there's going to be an immediate impact. People will be focused on the 75 to 95 million barrels of oil and condensate that Iran has floating primarily off of Asia, the 10 to 14 million barrels in bonded warehouses in China and then the other 40 to 50 million barrels within Iran itself. What happens to that oil immediately? I would see the energy markets push down immediately as they looked at that, but it's going to take time to develop shipping costs, the insurance costs, and the contracts. Iran is also going to turn to its customers and say, "No more significant discounts,” or at least no more significant discounts because of Iran sanctions — it will have to consider discounts to compete with heavily discounted Russian oil.
So, then you move to your second phase which is in the long run, what does it mean to have Iran back on the market producing after the world has ingested, let’s call it, 90 million barrels of oil? Let's just throw this number out, which is about one day of the world's consumption of energy. I think it's going to be a lot less than people expect for two reasons. First, Iran is already exporting about a million barrels of oil a day to China, so that oil is already out there. And the second issue is Iran will probably be able to put another million barrels on within its current fiscal year, which would end in March 2023. But keep in mind, Libya puts and takes off, depending on its turmoil, a million barrels of oil a day, and that doesn't inject a lot of downward pressure on oil prices. I should also say Europe is likely to resume oil purchases of about 600,000 to 700,000 barrels of oil a day. That's good, it's useful, but it doesn't replace what it's getting from Russia.
I think in the long term, you ought to consider the holy grail of Iran and natural gas. Iran has vast natural gas holdings. They're primarily unexploited and it would require a terrific investment of capital and an architecture to do exploit this. As the world looks at natural gas as an interim solution or as part of the long-term solution for its energy requirements, that Iranian natural gas potential shouldn't be ignored.
The Cipher Brief: How would you expect a deal to impact specifically OPEC production?
Roule: Iran's production is outside of OPEC's quota system, but the OPEC plus leadership doesn’t ignore and wouldn't ignore such a producer. Iran has been a relatively mature, though sometimes churlish, member of the OPEC decision making process. Iran will want stable, high prices, reasonable access, and decent quotas. I think more broadly we would look at an OPEC that would want to probably produce less or at least reduce its quotas because they would want to bring Iran's production into that mix.
That might be easier said than done because I think many people would have concerns if OPEC were to announce a hundred thousand barrel a day cut. But we need to remember that OPEC plus is not producing what it's allowed to do under existing quotas. In fact, I think they overachieved their July quotas by 523%, if I have the number right. It’s like they're allowed to produce a hundred barrels of oil a day but can only produce 85. If they're allowed to produce 95, well, they can still only produce 85. So, it just comes down to the question of a couple of countries — mainly Saudi Arabia and the Emirates, and perhaps Kuwait and Iraq being in there somewhere – and how they're dealing with individual Asian and European client needs, particularly under the Russian dynamic. So my bottom line is I think Iran will not have a major impact on OPEC decision making that isn't already part of OPEC's decision calculus.
The Cipher Brief: How are you feeling about these efforts to try and cap oil prices?
Roule: This is probably one of the most complicated and important diplomatic dances underway in the energy sphere in memory. What we have here is in December — December 5th, I believe — EU sanctions will come into play on a number of issues relating to Russian oil, particularly insurance. Now, that's important because when you're bringing an oil tanker into a port or into a facility you want to be careful. If the tanker bumps it's going to be a heck of a bump and it's going to be a costly bump. So those facilities are heavily insured. These sanctions would immediately take away about 90% of the world's insured facilities from Russian capacity. So what this means is Russia won’t be able to deliver oil to these facilities unless they self-insured or Russia somehow self-insured and could offer a way to push the money. There are a variety of complicated issues here.
What the United States and the G7 have undertaken is a process by which they say, "Look, we'll go to major importers of Russian oil and set a price cap slightly above Russian production costs." Russia has a modest incentive to produce, though it's not making as much money as it did in the past to sustain the war, and its clients can acquire oil cheaply. If you're China or India, you're interested in acquiring oil as cheaply as possible, but at the same time, you're wary of Russia cutting that off. So you're seeing the United States, we just sent I think an important official to New Delhi, discussing how we might get this price cap.
Here's what this is going to require. Everyone's going to have to be on board. If it's just a number of countries, then you're going to get a very modest impact. Russia could refuse to play along. And in the last week, Russia has made several announcements that if it doesn't receive at least its production costs, it won't sell the oil to any country involved. And even then, unless it receives sufficient profit, it still might not issue that oil. So, this is not a foregone conclusion that we would get there, if only because at the very least Europe itself would have to renegotiate its sanctions and that is a slow process. I think Hungary opposes the sanctions right now. If I'm laying out a complicated picture, I'm doing so because I think your listeners should understand that if this is successful, it could constrain Russian resources and at the same time keep oil prices relatively low. But if this fails, you're going to have a crisis of diplomatic unity and you could have a significant spike on oil prices in January.
The Cipher Brief: What about negotiationsbetween Israel and Lebanon over gas? How might that further complicate this already complicated world?
Roule: In essence, what we have is a shared gas field between Israel and Lebanon. Lebanon is in desperate need of the revenue and the hard currency that such a gas sale would provide. It would be able to buy electricity, grain, pay for garbage pickup — just an incredible number of services that are denied to its own people. And there is some indication that the Lebanese government, which has dragged its feet over this deal, because it involves cooperation with Israel, is coming together to support this. For Israel, it not only gains the gas for its own purposes, but it can also provide the gas to Egypt to export to Europe, which desperately needs the gas. There’s a revenue angle in all of this that everyone benefits from.
So, what's the problem? Lebanese Hezbollah. Hezbollah leader Nasrallah has claimed the deal is skewed towards Israel, that Israel is stealing in Lebanon's patrimony, that he won't allow a deal to take place unless it's in Lebanon's interest and that he is certainly willing to attack Israel to prevent it from stealing Lebanon's gas. This obviously has an Iranian hand in it, as you would well expect, but I think your problem set is that Israel, at a certain point, is going to have to say, "We're not going to allow this magnificent and important resource to sit fallow simply because of threats from Lebanese Hezbollah.”
That means that resource is exploited — and that would probably happen towards the end of this year — you would have, if it's successful, revenue for the poor Lebanese people, revenue for Israel and Egypt and gas for Europe. But you could also have a sharp and rather focused conflict with Lebanese Hezbollah, which would impact a variety of global shipping costs, energy prices, as well as obviously the human cost such a conflict brings. So it's something else I think your listeners should have a weather eye on.
The Cipher Brief: You mentioned Europe. Let me ask you about Russia recently announcing that it was temporarily halting gas deliveries to Europe via the Nord Stream 1 pipeline. The Russian energy company, Gazprom, said the outage was due to maintenance. Gazprom also halted deliveries to France, it's saying, over a pay issue. What is happening there?
Roule: Well, it goes back to the issue of Russia trying to slow Europe's capacity to develop sufficient gas reserves to get through the winter. Europe is actually ahead of where it was last year at this time I think by about 8%, though the number may not be accurate. And Germany in particular is obviously sensitive to this and is trying to set a higher and faster goal for gas reserves by the end of this year. Russia is trying to fragment Europe by creating economic and political dissensions within the community.
I will say that based upon Russia's maintenance schedule for these pipelines, they are the best maintained pipes on the planet. They seem to go down for maintenance every two to three months. We should expect more of this, it should accelerate. Much will depend upon how Russia perceives the war going in its direction. What’s happening in Kherson will play out eventually with Nord Stream 1.
Within Europe itself, this will be a further test of their capacity to stay together. I think you're going to see a couple of things happen. Europe is going to push conservation; prices are going to skyrocket for consumers and there's going to be a massive fund set aside in Europe at some cost to provide money to its less fortunate energy users to allow them to heat their homes without taking money from food and medicine. I think you're going to have gas costs continue to remain high worldwide. And this is not a small amount of money. Europe, I believe, has spent about 50 billion dollars more on acquiring gas for its storage. The amount of money people are talking about in terms of this relief fund, it's astronomical – it’s more than 250 billion dollars. This is a serious economic blow to Europe, and Russia is able to just pulse the system every time it does this, using energy as a weapon.
The Cipher Brief: When we're talking about the energy markets, what does that picture look like for you in the next six to 12 months?
Roule: Well, you'll have considerable volatility. If you talk to energy experts, they've rarely seen a topography with so many distortions capable of pushing prices up and down. We are in recessionary modes in China and in Europe and that will have an impact. I think you're going to see gas prices continue to move upward, including in theUnited States, as we approach winter as exports become more critical to Europe and other locations.
I worry that beginning in December, particularly if there is a diminution of Chinese COVID controls, we could see a significant spike in oil prices. For this reason, the diplomacy associated with the price cap, with whether there's an Iran deal, whether we have capacity to get more oil out of the Emirates and Saudi Arabia — which is not likely since they're producing about as much as you can get — and whether we decide to put any bandwidth on Libya are all important. If all of those things happen, we have a chance of limiting that, but if not, January could see some significant upward price pressures.
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