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TERRORISM AND THE GLOBAL OIL MARKETS 

HEARING 

BEFORE THE 

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 10, 2015 

( 

Printed for the use of the 

Committee on Energy and Natural Resources 

Available via the World Wide Web: http://fdsys.gov 
(II) 

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

LISA MURKOWSKI, Alaska, Chairman 

JOHN BARRASSO, Wyoming 

JAMES E. RISCH, Idaho 

MIKE LEE, Utah 

JEFF FLAKE, Arizona 

STEVE DAINES, Montana 

BILL CASSIDY, Louisiana 

CORY GARDNER, Colorado 

ROB PORTMAN, Ohio 

JOHN HOEVEN, North Dakota 

LAMAR ALEXANDER, Tennessee 

SHELLEY MOORE CAPITO, West Virginia 

MARIA CANTWELL, Washington 

RON WYDEN, Oregon 

BERNARD SANDERS, Vermont 

DEBBIE STABENOW, Michigan 

AL FRANKEN, Minnesota 

JOE MANCHIN III, West Virginia 

MARTIN HEINRICH, New Mexico 

MAZIE K. HIRONO, Hawaii 

ANGUS S. KING, JR., Maine 

ELIZABETH WARREN, Massachusetts 

KAREN K. BILLUPS, Staff Director 

PATRICK J. MCCORMICK III, Chief Counsel 

TRISTAN ABBEY, Senior Professional Staff Member 

ANGELA BECKER-DIPPMAN, Democratic Staff Director 

SAM E. FOWLER, Democratic Chief Counsel 

DAVID GILLERS, Democratic Senior Counsel 
(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Murkowski, Hon. Lisa, Chairman and a U.S. Senator from Alaska ................... 1 

Cantwell, Hon. Maria, Ranking Member and a U.S. Senator from Washington .................................................................................................................... 2 

WITNESSES 

Crane, Dr. Keith, Senior Economist, RAND Corporation .................................... 5 

Harrell, Peter, Adjunct Senior Fellow, Energy, Economics and Security Program, Center for a New American Security ....................................................... 18 

Vakhshouri, Dr. Sara, President, SVB Energy International, and Non-Resident Senior Fellow, Global Energy Center, Atlantic Council ........................... 29 

Webster, Jamie, Senior Director of Global Oil Markets, IHS .............................. 65 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED 

Cantwell, Hon. Maria: 

Opening Statement ........................................................................................... 2 

Cassidy, Hon. Bill: 

Article in The Hill dated December 9, 2015 entitled ‘‘Obama’s climate 

hypocrisy’’ ...................................................................................................... 82 

Crane, Dr. Keith: 

Opening Statement ........................................................................................... 5 

Written Testimony ............................................................................................ 8 

Responses to Questions for the Record ........................................................... 104 

Harrell, Peter: 

Opening Statement ........................................................................................... 18 

Written Testimony ............................................................................................ 20 

Responses to Questions for the Record ........................................................... 110 

Murkowski, Hon. Lisa: 

Opening Statement ........................................................................................... 1 

Vakhshouri, Dr. Sara: 

Opening Statement ........................................................................................... 29 

Written Testimony ............................................................................................ 31 

Webster, Jamie: 

Opening Statement ........................................................................................... 65 

Written Testimony ............................................................................................ 67 

Responses to Questions for the Record ........................................................... 113 

(1) 

TERRORISM AND THE GLOBAL OIL MARKETS 

THURSDAY, DECEMBER 10, 2015 

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The Committee met, pursuant to notice, at 10:09 a.m. in Room 

SD–366, Dirksen Senate Office Building, Hon. Lisa Murkowski, 

Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. LISA MURKOWSKI, 

U.S. SENATOR FROM ALASKA 

The CHAIRMAN. We are calling the Committee to order this morning. This should be a very interesting and informative hearing as 

we conduct oversight on the intersection of terrorism and the global 

oil markets. 

Before we begin I would like to take a moment and introduce a 

former colleague here in the Senate and a former Chairman of the 

Energy Committee and longtime friend of mine, that would be my 

father, Frank Murkowski, who has placed a keen interest in trying 

to understand the role between oil and terrorism and the connect 

there. It just so happens that he is in town today. We did not do 

this hearing because of him, but the timing worked out. It is nice 

to have him before the Committee. 

More than half of global oil production occurs in regions of the 

world, whether it is the Middle East, Africa, Russia, Venezuela, 

that are subject to instability of various kinds including civil war 

and terrorism. Oil production in certain countries such as Iraq, 

Syria, Libya, Yemen, Sudan, has been knocked off line due to terrorism and related violence. The indisputable fact that we are dealing with is that North American barrels have largely replaced this 

disrupted production so far. In tandem with the machinations at 

OPEC, the global oil supply is simply saturated and may be for 

quite some time to come. 

We also know that Iran, one of the original and most deadly 

state sponsors of terrorism, will soon be rejoining the global oil 

market if President Obama gets his way, even as he continues to 

fight efforts by many of us to repeal the outdated oil export ban 

that would allow us here in this country to send oil to our allies. 

But I think it does beg the question and part of the discussion, 

hopefully this morning, will be with that new source of revenue 

that Iran is anticipated to receive, what do we do with it? What 

will the intentions of these mullahs be? Is it going to be to do good 

and build hospitals or is it going to be to direct yet additional 

sources of revenue to the terrorist organizations? 
2 

In recent months we have seen a great deal of discussion about 

ISIS oil production and distribution and coalition efforts to disrupt 

this source of revenue. Bottom line is that this oil is helping to finance terrorism and significantly finance terrorism. 

I have long argued that energy security is central to national security. Last year we released a series of staff reports. One was entitled ‘‘Oil Production Outages and Strategic Warning.’’ Another was 

‘‘Iraq through the Lens of Energy.’’ Also a report entitled ‘‘A Dark 

Pool in the Mideast, the Problem of ISIS Oil Sales.’’ Today I am 

re-releasing them for public education and review. I think it is just, 

kind of, a historical walk through understanding some of the ties 

that we have. 

But it is not just funding of terrorism by ISIS that we will explore this morning. I am concerned about continued violence in 

Libya which is a significant source of light crude for our allies in 

Europe. If we are smart enough to lift the ban on our oil exports, 

our nation could sell light crude to our partners in Europe and help 

in that way. 

Terrorists are also active in West Africa or Nigeria is a major oil 

producer and could potentially threaten vital choke points such as 

the Suez Canal, the Strait of Hormuz or elsewhere. That is, in 

part, why I have been so determined and I think my colleague 

here, Senator Cantwell, to make sure that we do not make reckless 

mistakes when it comes to sales of oil from our Strategic Petroleum 

Reserve (SPR). It is there for a reason. The word, strategic, is there 

in a very significant place. 

On that front there is a proposal by some to permanently ban 

production in a small sliver of the non-wilderness portion of ANWR 

which could be the West Coast Strategic Reserve. In my mind it 

is just wrong, it is dead wrong. As terrorists threaten oil supplies 

in the Middle East and as state sponsors of terrorism in Iran prepare to make billions of dollars from selling our oil to allies, some 

within Congress are talking about intentionally and severely hurting American energy production. 

This hearing this morning is chiefly about education. Members of 

the House and Senate and the Administration must understand 

the economic and the geopolitical context of the national interest 

that we are considering. 

This Committee has a unique perspective given that over 90 percent of Iraqi government revenues are due to oil exports, given that 

nearly 90 percent of Syria’s oil production is offline, and given that 

oil accounts for over 40 percent of ISIS’s monthly revenue, according to IHS. 

You can expect me, as Chairman, to continue this conversation 

into next year as we conduct oversight on the Federal Government’s energy-related activities in the counter terrorism fight. 

With that, I will turn to Senator Cantwell for your comments 

this morning. 

STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR FROM 

WASHINGTON 

Senator CANTWELL. Thank you, Madam Chair. 
3 

I, too, want to welcome the former Chair of this Committee, Senator Frank Murkowski, back to the hearing room and also welcome 

our witnesses and thank them for being here today. 

Today’s hearing is an important opportunity, as the Chairwoman 

said, to learn about the critical issues of the energy world, the relationship between terrorism and global oil networks and foremost, 

about energy security. 

I look forward to hearing the witnesses and I look forward, at 

some point in time, to having the Administration be a witness here 

as well. Perhaps we can do that in the future or have a hearing 

in a secure room to get into even more detail on this issue, but it 

is something I think we need to hear from them on. 

At the outset of the hearing I want to make sure that I am making my views known about how important global oil markets are 

and fighting terrorism and particularly the role of this Committee 

to consider the impacts of these activities on infrastructure, the 

risks for U.S. and global energy security and supply and understanding the global picture. 

Iran and Iraq have some of the largest oil reserves in the world 

by some estimates, fourth and fifth largest in the world, so control 

over this oil has a major impact on global supplies and prices of 

oil. Overall the movement of oil from the Middle East to world 

markets is also key to the stability of global supplies. Global energy 

security depends on diversity of supplies in different countries, but 

what happens to that oil from the largest reserves still matters because in addition to the United States, growing countries like 

China have an enormous energy need and they will continue to 

look for resources to meet their energy needs. 

In today’s market, where there is robust supply, it would take a 

significant disruption, maybe somewhere on the magnitude of five 

to ten percent, to really disrupt the market. To give that a sense 

of perspective, today’s global production is approximately 94 million 

barrels per day, and ISIS oil production is about 35,000. So that 

is less than one tenth of one percent. 

It is clear, though, that this is a constantly shifting dynamic. 

And in a tight market, a very, very small amount of disruption can 

have a very, very significant impact. 

I think today’s discussion is about where and when we might anticipate disruptions and what to do about them. As I predict, we 

will probably talk a lot today about following the money or tracking 

oil proceeds as a way to fight ISIS. 

In yesterday’s Armed Services Committee hearing, Defense Secretary Ash Carter laid out the Administration’s strategy in degrading ISIS’ oil infrastructure. He said, ‘‘Because of improved intelligence and understanding of ISIL’s operations we’ve intensified 

the air campaign against ISIL’s war sustaining oil enterprise, a 

critical pillar of ISIL’s financial infrastructure. In addition to destroying fixed facilities like well and processing facilities, we have 

destroyed nearly 400 of ISIL’s oil tankers, reduced the major source 

of its daily revenues and there’s more to come, too.’’ 

Well, we will certainly look forward to hearing more about what 

is to come, and I will be first to say, we do need to do more. 

According to Secretary Carter, what made the recent strategy 

possible was new intelligence that had previously not been avail-
4 

able. He said, ‘‘It allowed us to identify those parts of the oil infrastructure that are being used to actually fund ISIL.’’ 

I was recently briefed by a State Department Special Envoy for 

Energy. I was pleased to hear that over the past year, we have 

eliminated almost all of ISIS’ refining capacity. I was also pleased 

to hear that the raid on the home of former ISIS Oil Emir, Abu 

Sayyaf, in May produced actionable intelligence about following the 

money and more effective targeting. Whereas previously ISIS could 

repair the damage from air strikes within a matter of days, the 

current targeting inflicts damage that will take many months, even 

a year, to repair. 

Another piece of news is that ISIS no longer controls any of the 

fields in Iraq. 

While progress has been made, it is very important to understand how adaptable ISIS is and that is why it is important for us 

to adapt too. It is clear that ISIS adapts their strategies and they 

have continued to look at this as a main resource. We need to act 

swiftly and decisively as well. 

ISIS is supported by fuel purchases by the Assad regime. To me, 

that needs to end. One of the most troubling realities of the situation is that the ISIS oil is being purchased by their enemy, the 

Assad regime, either paying cash or other means. In fact, the U.S. 

Treasury recently sanctioned a Syrian individual for facilitating oil 

purchases from ISIS. 

Instead of focusing on alleged oil smuggling in Turkey, Russia 

needs to use its influence to stop the Assad regime from buying oil 

and gas from ISIS. I know Secretary Kerry is traveling to Moscow 

today, so maybe that is a conversation that he can have. 

But the large and troubling issue is that for years terrorist organizations have been funded through oil sales. The Chairwoman just 

mentioned a few of those incidents in her statement. 

In Nigeria, for example, oil has fueled conflicts since 2005. Boko 

Haram, the group that bombed the United Nations building in Nigeria’s capital and kidnapped 270 schoolgirls and killed over 10,000 

people, is likely funded through crude oil theft and sales. 

Nearly 40 percent of the U.S. energy demand is met by oil, and 

93 percent of transportation is fueled by oil. I also think it is important given the fact that these terrorists target oil, we need to 

continue to diversify our energy sources in the interest of national 

security. 

In the past, roughly six percent of our nation’s GDP has gone to 

purchasing petroleum. 

Forty years ago we created the Strategic Petroleum Reserve to 

prevent economic and security impacts of crude oil disruptions. The 

Chairwoman and I remain committed to making sure the Strategic 

Oil Reserve is a strong asset for our nation. 

We recently worked to make sure that the Quadrennial Energy 

Review’s identification of infrastructure investment needed for the 

Strategic Petroleum Reserve—given the shift change that we have 

seen in the United States over our resources and where they are— 

that those investments need to be made. 

The 2015 budget agreement and the Transportation Bill authorized sales of more than $13 billion worth of SPR Oil. The SPR, as 
5 

a safety net, is being shredded and we must keep this as a resource 

for us to protect against instability in oil markets. 

So while I am sure we are going to hear a lot of discussion today 

from our panelists about the larger implications of national security and our dependence on oil, we need to continue to make sure 

that we are doing everything here at home so that we are secure 

and that we are isolated to the greatest degree possible from these 

impacts on our economy. 

I thank you, Madam Chair, and again, I look forward to hearing 

the witnesses. 

The CHAIRMAN. Thank you, Senator Cantwell for a very strong 

statement. I appreciate it. 

Welcome to each of the panelists that have joined us here today. 

We appreciate you giving us this time and the attention on the 

subject of the day, terrorism and global oil markets. 

The panel will be led off by Dr. Keith Crane, who is the Senior 

Economist for RAND Corporation, welcome to the Committee. He 

will be followed by Mr. Peter Harrell, who is the Adjunct Senior 

Fellow for a Center for New American Security, welcome. Dr. Sara 

Vakhshouri is the Nonresident Senior Fellow for the Atlantic Council, thank you for joining us. And we will wrap up the panel with 

Mr. Jamie Webster, who is a Senior Director for IHS. We appreciate you being here this morning, and not only your contribution, 

but IHS has been a great source of information for the Committee. 

So we appreciate that as well. 

We ask that you try to confine your remarks to about five minutes. Your full statements will be included as part of the record. 

Once you have concluded your testimony we will have an opportunity for Members to ask questions. 

With that, Dr. Crane, if you would like to begin, please. 

Thank you. 

STATEMENT OF DR. KEITH CRANE, SENIOR ECONOMIST, 

RAND CORPORATION 

Dr. CRANE. Thank you, Chairman Murkowski and Ranking Member Cantwell for the opportunity to testify today. I’m going to talk 

about ISIL, the insurgency. 

ISIL has a large number of affiliates. We know, unfortunately, 

many people swear allegiance to it. It’s been used for branding in 

Afghanistan and elsewhere. 

Terrorist operations tend to cost relatively little so I’m going to 

focus on the big money which was really is insurgency. 

I’m going to talk about what it costs ISIL to run its operations 

in those areas of Iraq and Syria that it controls. How does ISIL 

cover those costs? What can we do to reduce those revenues and 

how effective those measures are likely to be? 

So what are ISIL’s major costs? The major costs are salaries, especially for fighters, but also there’s large numbers of other people, 

police and intelligence operatives. Roughly there could be 80,000 of 

those individuals. U.S. intelligence agencies think there’s about 

31,000 fighters. If you assume $400 a month, we’re looking at 

about $400 million there. Personnel costs are only a fraction of 

what they spend. There are other costs for hospitals and schools 
6 

and ammunition and other supplies. So, total costs are substantially higher. 

How does ISIL cover these costs? Oil and sales of oil and refined 

products are the single most important source of income running 

at about $500 million a year. In the past Syria used to produce 

about a third of what North Dakota produces today, maybe 400,000 

up to 500,000 barrels per day. That has collapsed over the course 

of the civil war. We’re now looking anywhere from 35,000 to 50,000 

barrels which ISIL controls most. So its sales are running from 

40,000 to 50,000 barrels per day. 

Most of those sales actually go to small entrepreneurs who run 

what they call teapot refineries in ISIL-controlled territory, and 

there are just scads of these if you looked at Google Maps or at 

area pictures. They refine those products and those refined products, diesel and gasoline, they go everywhere. So they go into Iraq. 

Of course they go into Syria. They’re sold to ISIL’s enemies. 

They’re used by ISIL. They go into Turkey, elsewhere. 

In addition to that, as the Chairman mentioned, a substantial 

number of barrels go to the Syrian Government through intermediaries. But that is the most important source of revenue. 

In addition to that ISIL has been selling antiquities which it has 

stolen from Palmyra and elsewhere which could run up to $100 

million a year. 

The largest source of revenue actually is the other category 

which consists of extortion, theft of cars, kidnapping and taxes, 

quotes and tolls. 

What can we do to reduce those revenues? We have been targeting oil field facilities like loading depots and tanker trucks. 

We’ve been, we can put financial sanctions on local businesses in 

the regions that are dealing with ISIL, we can focus more on dealers and individuals who are purchasing antiquities, and we have 

also, can use the oil trading network to try to locate and neutralize 

ISIL current leadership. 

How effective are these measures likely to be? It appears that 

the, our, strategy of hitting oil separation and loading facilities and 

empty tanks and tanker trucks have put a dent in terms of revenues from oil. In addition, you know, financial sanctions, there are 

some larger companies in Syria, in the Kurdish regions and elsewhere which have been dealing with ISIL that we could push back 

on or that we could put under sanction or threaten to do so. 

As there’s a limited number of dealers who deal in antiquities or 

people have the money to spend large amounts to purchase these 

products or these artifacts, that’s another area where I think we 

could clamp down on. 

And then I think that our intelligence agencies and the U.S. military can continue to focus on these networks. 

That said, these measures will not lead to the financial demise 

of ISIL. There’s other opportunities. There’s ways that they can do 

work around some oil refined products but they’re good things to 

do. 

To conclude. Measures to reduce funding for ISIL are an important component of our strategy to degrade the organization. Sales 

of oil and refined oil products are the most important, single source 
7 

of revenues and the tactics of focusing on that are an excellent way 

for our country to, kind of, go ahead. 

That said, we’re not going to halt all sources of revenue that that 

organization obtains. 

Thank you. 

[The prepared statement of Dr. Crane follows:] 
8 

Testimony 

The Role of Oil in ISIL Finances 

Keith Crane 

RAND Office of External Affairs 

CT-448 

December 2015 

Testimony presented before the Senate Energy and Natural Resources Committee on December 10, 2015 

This product is part of the RAND Corporation testimony series. RAND testimonies record testimony presented by RAND associates 

to federal, state, or local legislative committees; government-appointed commissions and panels; and private review and oversight 

bodies. The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address 

the challenges facing the public and private sectors around the world. RAND's publications do not necessarily reflect the opinions of 

its research clients and sponsors. RAN 0® is a registered trademark 
9 

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10 

Keith Crane 1 

The RAND Corporation 

The Role of Oil in ISIL Finances2 

Before the Committee on Energy and Natural Resources 

United States Senate 

December 10, 2015 

Thank you, Chairman Murkowski and Ranking Member Cantwell, for the opportunity to testify 

today on the role of oil in Islamic State in Iraq and the Levant (ISIL) finances. 

Financing Terrorists and Insurgent Groups 

RAND researchers have been actively engaged in research on the financing of terrorist groups 

and insurgencies for decades. This testimony is drawn from past RAND research and information 

from news reports, public government documents, and other researchers. 

Unfortunately, the costs of perpetrating a terrorist attack are srnall. The bombings in Madrid in 

March 2004 and the London bombings of July 2005 cost about $80,000 and $15,000, 

respectively. 3 Terrorists often finance these operations with their own resources or criminal 

activities. Oil plays little role in financing terrorist attacks because the costs of mounting these 

attacks are relatively low. 

In contrast, insurgent groups like ISIL need substantial sums of money to finance their operations. 

According to General James Clapper, director of U.S. national intelligence, the intelligence 

community estimates that ISIL fielded 31,000 fighters in 20144 Others estimate that ISIL has as 

1 The opinions and conclusions expressed in this testimony are the author's alone and should not be 

interpreted as representing those of RAND or any of the sponsors of its research. This product is part of the 

RAND Corporation testimony series. RAND testimonies record testimony presented by RAND associates to 

federal, state, or local legislative committees; government-appointed commissions and panels; and private 

review and oversight bodies. The RAND Corporation is a nonprofit research organization providing objective 

analysis and effective solutions that address the challenges facing the public and private sectors around the 

world. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors. 

2 This testimony is available for free download at http://www.rand.org/pubs/testimonies/CT 448/. 

3 Whitlock, Craig, "AI Qaeda Masters Terrorism on the Cheap: Financial Dragnet Largely Bypassed," 

Washington Post, August 24, 2008, p. A01. As of February 17, 2009: 

http://www. washingtonpost. comiwp-dyn/contentlstory/2008/06/23/ST2008062302295. html 4 Robert Windrem, "ISIS By the Numbers: Foreign Fighter Total Keeps Growing," NBC News, February 28, 

2015. 
11 

many as 80,000 members.5 ISIL members have to be paid a salary. ISIL also has to pay for 

ammunition, weapons, and vehicles, as well as fuel and spare parts. It also pays for intelligence 

and security personnel, schools, and some health care in the areas it controls. 

These expenditures add up. Members have reportedly been paid from $100 to $1,000 per month, 

although these figures have not been publicly confirmed by the group's own records 6 RAND 

researchers estimate that fighters, on average, have received $100 per month.7 Syrian opposition 

groups and others estimate an average of $400 per monthe Foreign fighters do not receive a 

salary, only food and housing.9 A membership of 80,000 averaging $400 a month in salary would 

have an annual wage bill of $384 million, while a force of 31 ,000 with an average wage of $100 

per month yields an annual wage bill of about $37 million. 10 In addition, there are the salaries and 

costs for the leadership, media, police, education, and health care, and even death benefits. 

According to analyst Aymenn Jawad al-Tamimi, in January 2015 in Deir az-Zor province in Syria, 

which is under the control of ISIL, total monthly expenditures ran $5.6 million, or about $70 million 

on an annual basis. Of this figure, monthly salaries for fighters are the largest budgetary costs, 

amounting to 43.6 percent or about $30 million a year. By comparison "base support" costs 

amount to 19.8 percent oftotal expenditures; media, 2.8 percent; Islamic Police, 10.4 percent; the 

Services Department, 17.7 percent; and aid to families 5.7 percent. 11 Including all costs, IHS 

Jane's estimates monthly costs of roughly $80 million or annual costs of close to $1 billion. 12 

5 "Russian Intelligence Says ISIS Has 80K Militants in Iraq and Syria," Rudaw.net, October 11, 2015, at 

http:l/rudaw.net/english/world/101120152; and "Islamic State 'Has 50,000 Fighters in Syria,'" AI Jazeera, 

August 19, 2014. 

6 "ISIS Pays Foreign Fighters $1,000 a Month: Jordan King,'' NBC News, September 22, 2014. 7 Benjamin W. Bahney, Radha K. Iyengar, Patrick B. Johnston, Daniells F. Jung, Jacob N. Shapiro, Howard 

J. Shatz, "Insurgent Compensation: Evidence from Iraq," American Economic Review. Papers & 

Proceedings 2013, 103(3): 518-522. 

8 Erin Banco, "Syrian Opposition told US Senior Officials It Cannot Stop ISIS Without More Weapons," 

International Business Times, August 25, 2014; "The Economist Explains: Where Islamic State Gets Its 

Money," The Economist, January 4, 2015. 

9 Heather Saul, "Senior Isis leader gives televised interview revealing exactly how group amassed its 

fortune," Independent, April 23, 2015, accessed on December 7, 2015 at 

http://www.independent.co.uklnewslworldlmiddle-east/senior-isis-leader-gives-televised-interview-revealingexactly-how-group-amassed-its-fortune-1 0196045. html. 

10 In earlier years most fighters received only $100 per month. Foreign fighters do not receive a salary, only 

food and housing. 

11 Aymen Jawad ai-Tamimi, "Unseen Islamic State Financial Accounts for Deir az-Zor Province,'' 

Jihadology.net, October 5, 2015, at http:l/jihadology.net/201511 0105/the-archivist-unseen-islamic-statefinancial-accounts-for-deir-az-zor-province/. 

12 "Islamic State Monthly Revenue Totals $80 million, IHS Says," IHS Newsroom, December 7, 2105 

accessed at http:l/press.ihs.com/press-release/aerospace-defense-security/islamic-state-monthly-revenuetotals-80-million-ihssays?utm_source=Sailthru&utm_medium=email&utm_campaign=New%20Campaign&utm_term=%2ASituati 

on%20Report on December 8, 2015. 

2 
12 

In addition to Deir az-Zor in Syria, ISIL also controls parts of Raqqa, Aleppo, and ldleb provinces. 

In Iraq, it controls most of An bar and Ninevah provinces, and parts of Salaheddin. 13 It is also 

active in Diyala and Kirkuk provinces. Deir az-Zor is an important province, and likely is 

representative of provinces under ISIL control. Assuming average expenditures per province 

elsewhere are equal to expenditures in Deir az-Zor, ISIL would be spending roughly $500 million 

per year in total. 

From Where Does the Money Come? 

Insurgencies or, in this case, proto-states, need much more money than terrorist groups. 

However, since the end of the Cold War, insurgencies have been increasingly on their own when 

it comes to financing. 14 Financial support from foreign governments or contributions from 

individuals have not been important sources of funding for insurgents in the Niger River delta and 

for Boko Haram in Nigeria, ISIL in Syria and Iraq, or the Revolutionary Armed Forces of Colombia 

(FARC). These groups finance themselves by taxing or trafficking in valuable commodities and by 

extorting money from the local population through "taxes," kidnapping, property theft, and threats 

to individuals and their families. The role of cocaine as a source of revenue for the FARC and of 

opium and heroin for the Taliban are cases in point 

In the case of ISIL, analysts and U.S. government officials have circulated a number of rough 

estimates concerning the group's revenues. ISIL revenues from the sale of oil and refined oil 

products ran at $40 rnillion in one rnonth this year, which annualized comes to $480 million per 

year. 15 Oil and refined oil products are the single most important source of incorne for ISIL Sales 

of antiquities pillaged from sites under ISIL control may bring in as much as $100 million this year, 

although this number is an upper bound. 16 Revenues from "taxes"; tolls; extortion payments frorn 

individuals, especially rnernbers of religious or ethnic groups targeted by ISIL; extortion frorn 

businesses; taking a share of salaries paid by the Iraqi government to its employees in ISIL 

territory; resale of stolen or expropriated cars; and sirnilar sources of funding could run as rnuch 

as $600 rnillion in 2015. 17 In total, these estimates suggest total annual funding in 2015 of as 

much as $1.2 billion. 

13 "Two Arab Countries Fall Apart," The Economist, June14, 2014. 

14 Daniel Byman, Peter Chalk, Bruce Hoffman, William Rosenau, and David Brannan, Trends in Outside 

Support for Insurgent Movements, Santa Monica, Calif.. RAND Corporation, MR-1405-0TI, 2001. 

15 Daniel Glaser, Assistant Secretary of Treasury, Aspen Security Forum, July 15, 2015. 

16 Presentation by the Ambassador of Iraq to the United Nations, April 2015. 

17 Sarah al Mukhtar, "ISIS Finances Are Strong," New York Times, May 19,2015. 

3 
13 

However, in 2015 the Iraqi government stopped making payments to civil servants and citizens in 

Mosul, depriving ISIL of an important source of funding. It has also lost oil fields, such as Ajil in 

Iraq. ISIL's revenues will fall further if it loses control of more oil fields, if more loading facilities 

and tanker trucks are destroyed, as occurred in the recent Tidal Wave II operation, ifthe 

international community puts on more pressure to halt trade in antiquities, and if people continue 

to flee territories controlled by ISIL and economic activity continues to decline. As of December 

2015, several of these conditions have come to pass, suggesting that ISIL revenues in 2016 will 

be lower than in 2015. 

However, ISIL has substantial amounts of cash on hand. At the beginning of 2015, ISIL may have 

had a strategic reserve of up to $2 billion. This figure is based on $875 million that ISIL reportedly 

had on hand before it invaded Mosul in summer 2014. After capturing Mosul, it plundered an 

estimated $1 billion to $1.2 billion from banks in the territory it took over, including $425 million to 

$450 million stolen from the Mosul branch ofthe Iraqi Central Bank, as well as funds from a 

number of other banks in other territories it seized in lraq. 18 Without continued revenues from oil, 

at current expenditure levels, these reserves would be consumed within five years. 

How Does ISIL Make Money from Oil? 

ISIL has captured the main oil fields in Syria. Its hold on Iraqi oil fields is now minimal. 19 1n the 

past decade, total Syrian production ran between 400,000 and 500,000 barrels per day,20 of 

which production from the main fields under ISIL's current control was about 300,000 barrels per 

day21 However, the lack of technical knowhow and the overall chaos in Syria have prevented 

ISIL from maintaining production at previous levels. Currently, the production from these fields 

may run as low as about 40,000 barrels per day22 Another source states that ISIL may be 

producing 50,000 barrels per day23 

Crude oil is not useful until it has been refined. Entrepreneurs in ISIL-controlled territory have set 

up small "teapot" refineries, unsophisticated operations that heat the crude oil to separate out 

low-quality gasoline and diesel, which are then sold locally. These entrepreneurs are reportedly 

18 Glaser, 2015. 

19 Ben Lando, "Q&A: Oil Minister Adil Abd ai-Mahdi- Part 1 ," Iraq Oil Reporl, December 8, 2015. 

20 U.S. Energy Information Administration, "Table: Total Oil Supply (Thousand Barrels Per Day)," web page, 

accessed on December 7, 2015 at 

http://www.eia.gov/cfappslipdbproject/IED1ndex3.cfm?tid=5&pid=53&aid=1#. 

21 Matthew M. Reed, "Taking Stock of ISIS Oil: Part 1," The Fuse, October 23, 2015a. 

22 Erika Solomon, Guy Chazan, and Sam Jones, "Isis Inc: How Oil Fuels the Jihadi Terrorists," Financial 

Times, October 14, 2015; Glaser, 2015. 

23 Matthew M. Reed, "Taking Stock Of ISIS Oil: Part 2," The Fuse, October29, 2015b. 

4 
14 

the most important buyers of oil from ISIL-controlled fields. Some oil finds its way to the Syrian 

government through intermediaries. One source estimates that the Syrian government purchases 

as much as 20,000 barrels per day from ISIL-controlled fields for its refineries through 

intermediaries24 Iraq, including the Kurdistan Region of Iraq and disputed territories; Turkey; and 

parts of Syria not controlled by ISIL have been reported to be destinations for smuggled refined 

oil products from the small refineries in ISIL-controlled territories; neither Iraq nor Turkey appears 

to be important destinations for crude oil.25 

Like almost all goods in Syria, all the crude oil and refined oil products under the control of ISIL 

are transported to buyers by truck. Before the civil war, Syria had a substantial trucking industry 

consisting of both fleet operators and owner-operators. The trucks that transport oil from ISILcontrolled territories are owned by these businesses. The drivers of these trucks may be the 

owner-operators or hired by fleet operators. 

Policies to Reduce Funding for Insurgencies 

Armies march on their stomachs. Without funds to pay for food, wages, and ammunition, 

insurgencies are hobbled as commanders are unable to launch and sustain operations. A major 

reason that guerrillas in El Salvador agreed to come to the negotiating table in 1991 was the end 

of financial and logistical support from the Soviet Union26 In the case of ISIL, previous RAND 

research has shown a direct correlation between the level of spending and the pace of attacks by 

its predecessor group, ai-Qa'ida in lraq27 

Although ideology, especially in the case of ISIL, is the primary motivation for individuals to join 

insurgencies, commercial activities associated with insurgencies, like cocaine production and 

smuggling in Colombia or opium and heroin production in Afghanistan, can become so lucrative 

that they become an important motivation for some individuals engaged in insurgencies. 

Commercial motivations can become so entrenched that some insurgent groups keep fighting 

even after material motivations have replaced ideological or religious motivations. 

24 Reed, 2015b. 

25 Reed, 2015b. 

26 James Dobbins, Seth G. Jones, Keith Crane, Andrew Rathmell, Brett Steele, Richard Teltschik, and Anga 

Timilsina, The UN's Role in Nation-Building: From the Congo to Iraq, Santa Monica, Calif.. RAND 

Corporation, MG-304-RC, 2005, p. 45. 

27 Benjamin Bahney, Howard J. Shatz, Carroll Ganier, Renny McPherson, and Barbara Sude, An Economic 

Analysis of the Financial Records of ai-Qa'ida in Iraq, Santa Monica, Calif.: RAND Corporation, MG-1026-

0SD, 2010. 

5 
15 

For these reasons, policies designed to reduce funding for insurgencies can have substantial 

payoffs in terms offewer resources for military operations and a reduction in commercial 

motivations to keep the insurgency going. To reduce ISIL revenues from oil, the U.S. government 

has been targeting oil field facilities, such as loading depots, and tanker trucks. It could also 

impose financial sanctions on businesses in the region engaged in transporting and trading oil 

and refined oil products sold by ISIL, like truck fleet operators and intermediaries for the Syrian 

regime or on any other buyers of ISIL oil. The U.S. government could also impose sanctions on 

banks that provide financial services for individuals and businesses associated with ISIL or 

businesses that engage in commercial activities, like the oil trade, that serve ISIL's needs. This 

would include banks that do businesses with ISIL-associated money exchanges (hawa/as), which 

might be beyond the reach of current U.S. sanctions laws. The U.S. government could also use 

oil-trading network analysis to locate and neutralize ISIL oil leadership, as it did earlier this year 

with ISIL oil emir Abu Sayyaf. 

How Effective Are These Measures Likely to Be? 

In an effort to reduce ISIL revenues, the United States has been targeting oil infrastructure, 

including oil loading and other facilities in oil fields controlled by ISIL, and tanker trucks hauling oil 

from these fields to buyers. To discourage truckers from hauling crude oil or refined oil products, 

the United States has leafleted truck drivers to inform them that trucks will be targeted28 The 

United States destroyed over a hundred trucks in its first campaign, using bombs and largecaliber machine guns on A-1 0 Warthogs. These trucks were sitting empty, waiting their turn to be 

filled at loading stations. The combination of hitting oil infrastructure and tanker trucks appears to 

have made a major dent in ISIL oil revenues, at least for the time being. However, despite these 

operations, truckers have not yet completely stopped hauling crude oil or refined products. 

How effective has this tactic been, and is it likely to be effective in the future? Hitting trucks 

remains a good tactic. Trucks are expensive. New heavy trucks cost over $100,000. Even used 

trucks cost tens of thousands of dollars. For any trucking business in Syria, the loss of a heavy 

truck would inflict a substantial financial blow. Repeated losses would eventually force the 

company out of business. Thus, destroying heavy trucks transporting crude oil or refined oil 

products should lead to a decline in the number oftrucks available and hence revenues for ISIL. 

Income is hard to come by in Syria; there has been no lack of individuals willing to drive trucks 

into ISIL-controlled territory to transport crude oil, refined oil products, or other cargos. For many, 

28 Michael R. Gordon, "U.S. Warplanes Strike ISIS Trucks in Syria," New York Times, November 16, 2015. 

6 
16 

if not most, of these individuals, hauling oil is a commercial, not an ideological decision. Targeting 

trucks, even after waming drivers that they are targets, may lead to the death of some truck 

drivers. 

Targeting oil infrastructure is also likely to lower ISIL oil revenues. This is particularly true of any 

infrastructure that facilitates the transfer of crude oil from the wellhead to trucks, and of any 

infrastructure that is expensive to replace or takes time to rebuild. While destroying a storage 

shed at an oilfield is unlikely to have an effect, destroying a fuel oil separator or a pumping station 

is likely to impair revenue flows. 

Imposing financial sanctions on larger businesses-and their banks-in the region engaged in 

transporting and trading oil and refined oil products sold by ISIL should have a tangible, if modest 

effect on ISIL. Larger businesses need banking services. Moreover, business that involves ISIL is 

almost certainly only part oftheir operations. A concerted effort on the part of the U.S. Treasury to 

target larger businesses and their banks would likely reduce or stop their engagement with ISILaffiliated activities, raising costs for ISIL. 

Imposing sanctions on banks that provide financial services for businesses engaged with ISIL 

would reduce access to financial services for these enterprises, also raising costs for ISIL as the 

number and willingness of businesses to engage with it would decline. 

Because of the severity of the punishments it inflicts and the extreme ideological positions it 

adopts, ISIL can be difficult to penetrate. Using oil trading networks to garner infonnation about 

ISIL provides another avenue for locating the leadership. 

These measures will not lead to the financial demise of ISIL. As noted above, ISIL draws on 

sources of income other than oil to finance its operations. Oil and refined oil products are valuable 

enough that light trucks, even pickups, can be used to haul smaller quantities, albeit more 

expensively and less efficiently than heavy trucks. The United States and its allies would be 

unable to target large numbers of light trucks hauling oil or refined oil products. Because light 

trucks are ubiquitous in Syria, targeting them could lead to civilian casualties without much effect 

on ISIL's overall financial revenues. 

ISIL operates heavily on cash, so measures targeting financial services although helpful will not 

lead to a total cutoff in funds. Smaller businesses that engage with ISIL are too small for the U.S. 

Treasury to target. In addition, those located on territory controlled by ISIL are subject to 

coercion, making it almost impossible for them to refuse to conduct business with ISIL. 

7 
17 

Conclusions 

Measures to reduce funding for ISIL are an important component of a strategy to degrade ISIL 

and end its control of territories in Iraq and eventually Syria. Revenues from sales of oil and 

refined oil products are the most important single source of recurrent revenues for ISIL. Provided 

the tactic is sustained, targeting oil loading facilities and heavy trucks hauling crude oil and 

refined oil products is a useful tool to reduce ISIL revenues. Although this tactic alone will not lead 

to the demise of ISIL, it can weaken it. 

Thank you Chairman Murkowski, Ranking Member Cantwell, and members of this committee for 

the opportunity to testify before you this morning. I look forward to answering your questions. 

8 
18 

The CHAIRMAN. Thank you, Dr. Crane. 

Mr. Harrell, welcome. 

STATEMENT OF PETER HARRELL, ADJUNCT SENIOR FELLOW, 

ENERGY, ECONOMICS, AND SECURITY PROGRAM, CENTER 

FOR A NEW AMERICAN SECURITY 

Mr. HARRELL. Thank you very much. 

Chairwoman Murkowski, Ranking Member Cantwell, honorable 

members of the Committee, thank you for inviting me here today 

to testify. It’s a privilege to be able to share my perspectives with 

you on the subject of today’s hearing, Terrorism and the Global Oil 

Markets. 

I intend to focus my spoken remarks today on the Islamic State’s 

oil trade which, as Dr. Crane said, is a principle source of revenue 

for the terrorist organization and one that must be shut down. 

I’m going to keep my spoken remarks brief but have submitted 

a longer statement for the record. 

In my view oil is actually, probably, the second largest source of 

revenue for the Islamic State when you add up all of the things 

that Dr. Crane said as other, I think, that those probably amount 

to slightly more than the oil revenue. 

To give just one example of the scale of what it is in the other 

category of ISIL revenue. Treasury Assistant Secretary Daniel 

Glaser estimated earlier this year, based on intelligence the U.S. 

Government had received, that ISIL has managed to loop between 

$500 million and $1 billion in cash out of bank vaults that they 

have opened in ISIL territory. But clearly you add back the taxes, 

the extortion that they’re able to get, all told, a very significant 

source of revenue. But clearly the oil revenues are also critically 

important to ISIL. 

Like Dr. Crane, I estimate that the Islamic State earns about 

$500 million per year from the oil trade, mostly through the sale 

of crude oil in Syria. Most, if not all of the Islamic States’ oil production occurs at small wells in Syria. There may be a small 

amount of oil production in Iraq, but the vast majority occurs in 

Syria. 

The oil is sold by ISIL at the well head for perhaps between $15 

and $40 per barrel. It’s sold to independent distributors who then 

onward sell it to these small refiners that Dr. Crane talked about 

or move it on elsewhere in ISIL territory. 

According to most estimates, ISIL is earning between $1 and 

$1.5 million per day in oil revenue. I should say those estimates 

are up to about three, four weeks ago when the U.S. Military began 

its escalated campaign against oil targets. And until about three or 

four weeks ago those estimates had been remarkably stable for 

about a year. If you look back a year ago the estimates were a million or slightly more per day and if you look three or four weeks 

ago, you were looking at broadly stable oil revenues in ISIL territory. 

As Dr. Crane said, this is not high tech business. These are very 

rudimentary kinds of techniques ISIS is using in order to extract 

the oil and what its refiners and distributors are using to refine 

and distribute it. 
19 

I assess that most of the oil produced in ISIS territory is consumed in ISIS territory. There are more than five million people 

living in that territory. There is certainly ample, local demand to 

consume virtually all of that production. 

That said, there is clearly some smuggling that is occurring, 

sales to the Assad regime. The sales to the Assad regime are actually, probably, more natural gas than crude oil. And there’s also 

ample evidence of smuggling into Turkey into the Kurdish autonomous regions of Iraq and potentially into Jordan as well. I assess 

that most of that oil that’s smuggled out is also consumed locally 

in those countries and is not entering in any meaningful way, global oil markets. 

So what can the U.S. Government and our coalition partners do 

to further attack this oil revenue? I think that the single most important step that the U.S. Government can take is to continue to 

escalate the military targeting of ISIL oil installations and the distribution network. The fact is the oil is being sold in ISIS’ territory. 

It’s being sold for cash. There’s not a lot of leverage that international sanctions can have on those operations that take place 

within their own territory and taking out the infrastructure is 

probably the most important step we can take. 

That said, there is, as I mentioned, obviously, some smuggling 

that is occurring into adjacent countries. I think the adjacent countries such as Turkey and the Kurdish autonomous government in 

Iraq need to step up their efforts to crack down on oil. Currently 

they’re turning back trucks where they can. 

Though smuggling is continuing I think those countries should 

increase their efforts by moving toward a posture of seizing and destroying both the trucks that are exiting and the oil that is exiting 

to create a deterrent rather than the current situation where the 

trucks will maybe be turned back at the border. They’ll wait a day 

or two and then try again to be smuggled across. 

Third, I think that we need to escalate our efforts to target ISIS’ 

ability using sanctions to import replacement oil equipment. As 

ISIS suffers more bombing of its oil equipment it will look to procure replacement parts. The region is, of course, awash in replacement parts, but I think there are sanctions efforts that the U.S. 

Government and our allies can take to prevent those replacement 

parts from flowing into ISIS territory. 

In closing I would just note that while I’ve focused my remarks 

today on ISIS and the oil trade, there are clearly, as both the 

Chairwoman and the Ranking Member mentioned, other linkages 

between terrorism and global oil markets that need to be considered as we look at the global oil security posture. 

And I’d like to thank you very much for inviting me again here 

to speak. 

[The prepared statement of Mr. Harrell follows:] 
20 

December 10, 2015 

Center fora 

New American 

Security 

Testimony before the U.S. Senate Committee on Energy and Natural 

Resources 

Hearing to examine terrorism and the global oil markets. 

Peter E. Harrell, Adjunct Senior Fellow, Energy, Economics, and Security Program 

Center for a New American Security 

Chainvoman :\furkmv:;;ki, Ranking :\{ember Cantwell, honorable members of the Senate Committee 

on and Natural Resources, thank you for inviting me to testify on this It is a 

to be to share with you on the subject of today's hearing, 

Global Oil Markets. 

Events of the past month, including the November 13 terrorist attacks in Paris and the terrorist 

attack on December 2 in San Bernardino, California~ have brought home that the United States 

faces no terrorist threat than the Islamic State. Between the Islamic St,1tc's base in Syria 

and and its to usc the internet and online communications to and 

terrorist attacks around the \vorld, the Islamic State has become the leading of the jihadi 

movement. The l'nitcd States and our allies must defeat it. 

the Islamic State will require us to apply the full range of American 

and diplomatic. \\le must \VOrk with allies and to defeat 

the ~·Iiddle East; to sanction ISIS's sources of revenue ISIS the ability to procure 

;:md move funds around the world; to enlist the support of allies and 

international coalition to ISIS; and to turn potential ISIS sy1:npatruzrors around the world and 

here at home in the away from ISIS's r-adical 

t\vo years, beginning in 2014 \vhen l had the honor of 

Assistant for Counter Threat Finance and 

as co~Chair of the U.S. 

the Center for a New 

Security, conducted extensive research on finances and written and spoken 

about [SIS's financial operations. 

I intend to focus my remarks on the Islamic State's oil trade, which is a 

rcyenue for the terrorist and one that must be shut do\vn. But 

Islamic State's oil trade in and recommending several to combat it, 1 would like to place 

the Islamic Statc>s oil business into the broader context overall financial picture. 
21 

ISIS Financial Overview 

ISIS is the best-funded terrorist organization in history, 

Unlike many of the other the C.S. has 

external sources like donations, blnonn;nn its 

income principally from the territory it 

The largest source of ISIS revenue to date appears to be and tLxarion of the people 

and that live ;md in ISIS-controlled territory. 

estimated that ISIS has at least $500 million and potentially up to $1 billion 

vaults in territory under ISIS control, the ~losul branch of the 

addition, ISIS extorts taxes from the live in its 

Department has 

looting bank 

Bank. In 

of dollars or morc. 1 reports and e .S. government officials, this extortion 

included that TSJS skimmed to civil servants 

in ISIS-controlled government at temporarily 

some in a robust system in place to 

ta.x owners, collect road tolls, charge electricity and other services, and to collect 

other fees from the people who suffer under its rule. 

Turning to oil revenue, which is the second largest source of ISIS funding, there is a ,,;d''''n"'"''" 

consensus that, at least prior to the escalated cotllition airs trikes ISIS oil targets that 

last month, ISIS has been $1 million and S1.5 from its oil 

For example, Treasury that ISIS pulls in 

million per month, million from oil. indicated that this 

estimate \vas based on collected during 2015 raid ag-ainst "'\bu an ISIS 

financial official \vho managed much ISIS's oil enterprise. officials ne\vspaper 

accounts have indicated that the raid provided a treasure troYe on ISIS's financial 

operations). In October of this of ISIS oil revenues by journalists and 

researchers from the oil production and sales prices of cmde 

oil in ISIS territory, also reached the that ISIS made million per from oil 

sales:• And a just released HIS study of 1S1S's current reycnue that oil and gas sales 

accounted for -1-3~/o of ISIS's $80 million monthly rcyenue, or just oYer $1 million per day. 5 

Aside from extortion/taxation and oil reyenues, lSIS derives income from kiclnapping 

and selling them on international markets, other criminal and 

and financiers in the ..\fiddle East and beyond. These other sources 
22 

howtTcr, arc 

2015 that ISIS 

less 

$20 

ISIS's Oil Enterprise 

There are three key facts that need to he understood in order to 

disrupt ISIS's oil reYenuc: First, ISIS's oil infrastructure is technically is 

production and oil refining. Second, the bulk of oil pmdmvdwithin ISIS-controlled territory is 

(Oit,mmtd-within ISIS-controlled territory. As a result, ISIS generates most of its oil reyenue 

indigenously from the territory it controls, not from selling oil to buyers in or other 

countncs to C.S. sanctions pressure. Third, ISIS has proYed to be an 

to military strikes and other coalition pressure. elaborate 

Let me begin by pro,"iding some basic estimates of the scale of ISIS's oil enterprise: Estimates of oil 

production in ISIS ten1tory, prior to the escalated bombing of ISIS oil infrastructure that last 

month, run bet\vccn 40,000 and :)0,000 barrels per day, with production m 

Syria's Ezzor U.S. goYemment officials haYe estimated that ISIS produces at least 

40,000 barrels Yirtually all of it in Syria, while an in-depth by the h'mmda! TimeJ 

estimated that 1SIS produces henveen 3-f-,000 and barrels per in Syria 

aDl>ro,xirnatclv another 8,000 barrels per day in Iraq. 7 These volumes arc signittcant, 

decline the Yolumcs of oil produced in the same fields prior to ISIS's rise. For 

example, Syria's total oil prior to the current 'ivar \vas 38:),000 barrels of 

oil per day. As I said estimates of ISIS's n.:~Yenue from its generally run <wcr St million per 

day, or some $500 million per year. 

oil within ISIS territory are low-tech. The primary oiltlclds under ISIS 

in Syria arc straightforward to and rich in oil resources. Industry experts 

describe the ttelds as ones where oil essentially to the surface \Vht:n tapped by basic pipes, and 

the oil can he lifted into trucks by simple buckets. 8 Furthermore, ISIS has 

shmvn th~lt it has the expertise needed ro damage to the ttdds follmving limited military 

strikes. ]ndecd, J h~JYC heard anecdotal reports that ISIS em repair some individual bombed 

1.-vcllhcads in as little as 24-48 hours after a coalition strike. 1 have also heard reports thr1t ISIS has 

taken to basing rep;tir technicians ncar \vel! heads in order to expedite repairs and return '\vcl1heads to 

operation. 
23 

The rcttncrics that 

o\·cr the past t\~.:o years, and outlllic:lv-<mULt.lllc 

Syrian desert. 9 These are using 

readily repaired or rebuilt in case of damage. 

Finally, the transport;ltion of crude oil and ret!ned 

itwolw.' compkx Oil is 

them, or by f'et1cr"l-ctmt1lnsc 

\vhi\c ISIS maintains direct 

have been built in TSIS territory 

the 

onto 

carry oil in stacked barrels or in plastic jugs. 

directly the diJ!Jilm!ion net\vork oil in its to 

indlepcmlerrtdistributors, \vho load crude oil into trucks either sell the oil to local small 

refineries or on to other middlemen \vho distribute it further atl.cld. Public reports 

anp:vhcre between $1) and $45 barrel at the wellhead, on the 

market conditions. 10 ISIS docs not directly control this disttilmtion 

;-md refined ISIS is able to generate additional re\·enuc from the oil distribution network 

to1\s to trucks and by t;uing fuel mcrdunts. I should note that lSlS oil trade is 

at the wellhead and rcttncrs and distributors 

I estimate that the bulk of the oil produced in ISIS territory is consumed within ISIS territory. Five 

or six million Jiyc in ISIS's territory, significant cities in both and Iraq, 

such as Raqqa, and :\fosul. Assuming territory produces 45,000 barrels oil per 

day, oil production would amount to only about <l third of one of cmdc oil per resident per 

quantity that could be easily consumed local needs. arc numerous reports of 

fuel markets inside IS IS trade of Syri~111 origin oil being transported into 

in Iraq, and ISIS also In addition, 

ISIS cnH.le oil is rettned in local ret!nerics, and other oil 

and unattractive in markets Yvhere higherThe fact that a majority of ISIS-origin oil is consumed \vi thin ISIS's own 

not mean that there is 110 smuggling of ISIS oil into adjacent there 

smuggling, and the l~.s. and our partners need to take steps to 

To giiT just a 

documented 

of cross~horder 

and individual 

howeYer, docs 

is cross-border 

<Uld Syria h;wc 

across the border 

9 \fatthe\Y i\1. Reed, "Taking Stock of ISlS Oil: Part 2," Tbe FNJI?, October 20, 2015. http://energyfusr.org/okitw;-stockI'-wong and Bernard, "Inside ISIS Inc.: The Journey of a Barrel of OiL" 

CNAS ORG j if @CNASDG 
24 

and informal pipe networks that straddle the border to send oil from ISIS 

Turkey. haYe been similar reports of oil tlm:•.rs from ISIS territory into the 

:\utonomous Region in northern I should note, ho\vCYCr, that there is not credible cYidencc to 

Russia's scale'' oil trade between ISIS and either 

\utonomous Region in ln1q. -:\"or is there credible that 

Oil is also 

\vbich is not 

ISIS. Just hst month, on ~0\'emher 25, the 

George I-Tas,vani, for scrYing as a middleman for 

In addition to oil, ISIS is in the natural 

important Syrian n:Hural g:ts fields, 

from TSIS tcn1tory arc entering global 

into Turkey and KRG territory occurs at a 

into territory controlled by the Assad regime, 

has lost control of most major Syrian oilficlds to 

Department sanctioned a Syrian businessman, 

regime oil purchases from lSIS. 12 

natural pre-\var 

sources ISIS sells natural gas to the Assad regime, 

and I have heard from C.S. that the natural 

creating \vealth that 

on oil and natural 

vehicles that ISIS 

harder-to-quantify onmacrat1da 

can use to project 

Recommended Actions: 

proYides ISIS with benefits itt additioN to c:1sh 

refiners, and merchants in ISlS territory, 

semblance of economic order. ISIS also depends 

nn1m1cnon and on oil to the trucks and other 

Over the past year, the C.S. and our coalition partners haYe taken sevenl important to beg-in 

ISIS's oil enterprise. L:.s. sanctions the U.S. authority 

to companies trading,:vith ISIS, oil Security Resolutions 2070 

(20q) and 2199 (2015) highlight ISIS's oil rewnues and direct all states to take steps to ensure that 

Solomon, I(wong and Bernard, "Im:ide JS[S Inc.: The Journey 

ofaihrrelofOil." 
25 

they arc not hcilitating ISIS's oil trade. The U.S. goycrnmcnt and our ftllies luYc launched an 

international to counter ISIS tlnancing, \vhich pro-vides a yaJuablc forum to share 

a collcctiYc strategy to pressure ISIS re-n:nues, oil. l\"cx:t \Vcek, 

over a meeting of C.:\. Security ,\!embers 

ISIS t!nancc. 

aclmc>wicccli;c that U.S. and coalition efforts to date luyc 

oil rcn:-nues. The current estimates ofS1 

uncmmRT'll from an estimate of S1 million day that 

ISIS earned from the oil oyer a year 

to increase border 

only a minority of 

had only limited success in fighting ISJS's oil revenues is not to 

no success in counlering ISIS more gener,11ly: the C.S. has 

progress on some issues. J<'or and State Departments have 

pressure to bear to ensure that not able to access the international 

from its and and to crack down on and 

that either or help ISlS move cash into territory. 

>W'ccrnrrtcnt. the Financial :\ction and other bodies \uye also 

service businesses to restrict the Hmvs related to foreign 

to join ISIS. But the fact remains that our efforts to combat 

its own territory haYe had limited impact. 

Clearly, more needs to be done. \Vhat steps can the C.S. and our coalition partners take? 

First, the single most important step that the U.S. government can take to undercut ISIS's 

oil and gas revenue is to keep escalating the military action against oil and gas targets in 

ISIS territory. ISIS generates most of its oil reycnues in cash from "\vithin the territory it 

controls, limiting the ability of ttnancial sanctions and other counter terrorist tlnancc 

tools to attack this source of ISIS revenue. Instead, we need to impact ISIS's oil enterprise where it 

occurs, inside ISIS territory in Syria and, to a lesser extent, Iraq. 

One of the lessons of the last year is that limited strikes on ISIS's oil infrastructure arc not 

su::nclnco<uv effective over time, given ISIS's ability to and build new 10\v-tech 

recent C.S. and coalition to tanker tmcks is a Yaluahle escalation of 

military pressure that is fllrcady disrupting oil operations and making it harder for ISIS to earn 
26 

oil revenue. I also commend the militarv's recent decision to 

infrastructure that arc more difficult to ~epair 

and gas separation plants in ISIS territory. 

important tool to shut dmvn ISIS's oil enterprise. 

of ISIS's oil 

But more needs to be done. Strikes against tanker trucks, like strikes against oil infrastructure, must 

be sustained in a \Videspread over time-or else the oil distributors in ISIS territory 

will simply be able to ;Kquire trucks and on oil 

infrastructure need to be cotnnrel-tcnsiYe. g,:>vcomtnet1t officials 

haYe concerns about avoiding permanent damage to Syrian oil infrastructure that oil will be a 

key those concerns 

may given nn'"""''ertce 

casualties. military and partners 

the maximum extent possible and there should be no part of ISIS's enterprise where people feel 

safe to Yl/ork. 

Second, the U.S. government should continue to put pressure on Turkey and the Kurdish 

Regional government in northern Iraq to crack down on the oil smuggling that does exist. 

The t~Kt that most ISIS oil is consumed within JSIS's mvn docs not mean that 

ISIS and 

continue to put 

to oil smug__g;ling and it should on 

Regional meanwhile, should adopt a zero-tolerance 

ISIS-controlled Tmcks and oil should not 

meamvhile, should continue working to identify oil smug_g;lers for 

even one or two oil smug,~Sling nct\vorks would haYe an 

deterrent effect.' fhc should also continue its sanctions and other efforts to 

expose the links bct\vecn ISIS's oil enterprise and the ,\ssad regime. 

Third, the U.S and our allies need to escalate our efforts to target the flow of oil-related 

equipment to ISIS territory . . '\s the U.S. and our coalition partners increase military strikes 

ISIS oil infrastructure, ISJS will seek to procure equipment. The 

and to reach out to businesses in 

opjprc,ptilate steps to aYoid 

that the region is 

and that the 

is not is importmt 

do not simply allo'\v ISIS to repair and replace infra.._<;tmcture 
27 

to ISIS territory and 

Current resolutions 

Dr<)hibitJton on sale of such 

potential legal issues that 

to ISIS territory. 

Finally, U.S. and coalition efforts to fight ISIS's oil revenues cannot and should not be 

addressed in a vacuum. They must be embedded in a comprehensi,-e strategy to tight all of ISIS's 

primary funding streams. 'l11is should include an oYer-all expanded military campaign against ISIS 

economic targets and contjnued robust sanctions enforccrnent. 

Other Linkages Between Terrorism and the Global Oil Trade: 

:\!though lluYe focused remarks to the Committee today on ISIS and its ability to 

reyenuc from the oil trade and Iraq, 1 should bridly note that the 

enterprise is by no means the time terrorism has intersected with the 

is the ftrst to effectively operate its O'\vn oil 

bet\vccn terrorist organi:-;ations the 

"-l<Jmippmg for ransom is a major source of 

reYcnuc for tctTorist org:tnizations 

politic,,l!y unstable parts of the planet 

rigorous efforts of oil companies to 

'\vorkers luvc been kidnapped in Libya, 

\\Thilc it is often difficult to identify reliable uu•urullclltuu 

in some of the most 

for kidnapping, the 

ransoms arc paid to, and indeed '\Vhether a ransom "\Vas eYcn to secure 

oil \Vorkers certainly make attractiYe targets for terrorist groups seeking to 

generate funds through KFR. 

State sponsors of terrorism: Finally, 

oil industTy, all three of the State Sponsors 

and Sudan, have nil as discussed, much 

industry is nmv under controL .'\ny comprehcnsiYe examination of the links 
28 

oil markets must also consider how oil sales affect these countries' ability to 

support 

Conclusion: 

1 >.vould be honored to ans\vcr any questions. 

CNAS ORG I w '"CNASDC 
29 

The CHAIRMAN. Thank you, Mr. Harrell. 

Dr. Vakhshouri. 

STATEMENT OF DR. SARA VAKHSHOURI, PRESIDENT, SVB 

ENERGY INTERNATIONAL, AND NON-RESIDENT SENIOR FELLOW, GLOBAL ENERGY CENTER, ATLANTIC COUNCIL 

Dr. VAKHSHOURI. Thank you, Chair Murkowski, Ranking Member Cantwell and members of the Committee. I would like to thank 

you for the opportunity you give me to be here before your Committee and discuss the important issue you posed. I’m looking forward to discussing this issue. I’m going to focus my remarks today 

on Iran’s oil policy and return to the global oil market. I also 

should mention that this testimony and my remarks are only my 

own views and not the Atlantic Council’s. 

Iran and Western powers after a decade of dispute over Tehran’s 

nuclear program reached a final agreement in July 14, 2015. And 

Iran being under different sanctions, economic and energy sanctions, is now getting ready to reintegrate into the energy market. 

In 2012 the EU put a ban on import of Iranian crude oil, also 

some complementary sanctions on ensuring the tankers that were 

carrying Iranian crude oil. These sanctions were coupled with U.S. 

sanctions on Iran’s oil revenue and export, and all of these caused 

Iran’s oil export to cut by half. 

Iran’s oil export in 2011 was about 2.5 million per barrel and it 

dropped to 1.5 million barrels per day in 2012. Also their production cut by 17 percent in compared to prior 2011. 

The overall sanctions, nuclear-related sanctions, that were posed 

on Iran since 2012 the investment of upstream both oil and gas in 

Iran were hurt. However, still Iran, despite of all the sanctions, 

was successful to increase its natural gas production. And in 2014, 

for the first time, the balance of its natural gas trade was positive. 

After the nuclear deal Iran is going to come back to the market 

with totally different approach. Iran had witnessed, despite all of 

its oil and gas resources, it witnessed many ups and downs with 

its relation to national oil companies and countries. So every time, 

in response to the challenges it was facing, it came out with more, 

with a policy and attitude of being more resilient. And this is going 

to be the case this time too. 

Iran’s supreme leader in 2014 announced the idea of economy of 

resistance. Economy of resistance was in response to 2012 sanctions that reduce Iran’s oil export and oil revenue. The most goal 

and aim of the economy of resistance would be to create more value 

added domestically by processing crude oil and natural gas domestically and export the product instead of the raw material. 

Therefore we are not going to see a huge amount of export from 

Iranian both on the gas and oil side come into the market after the 

nuclear deal, also in the long term in the next decade. Iran’s most 

focus would be on refinery capacity downstream and also on petrochemical side. So these are the important measures that Iran is 

going to take in order to reduce its dependency on its crude oil revenue. 

The current status of Iran’s oil and gas fields indicate that Iran 

is producing 2.9 million barrels per day of crude oil today, and its 
30 

NGL, natural gas liquid, and condensate production is about 692 

to 700, about 700,000 barrels per day. 

Iran’s plan is to—the plans after the deal. Its production is going 

to gradually rebound. We’re expecting by mid next year, in 2016, 

Iran’s crude oil production to reach about 500, 400 to 500 more 

than what is today. And they’re going to have additional 200,000 

barrels of crude oil condensate. 

The Iran oil minister is expected to announce that Iran is going 

to increase its export about 500,000 barrels per day, a day after the 

sanctions are removed and 500,000 barrels per day in the next six 

months. 

But as I mentioned, in the long-term Iran is going to increase 

mostly its natural gas. The focus would be on natural gas because 

it’s going to produce more condensate. The condensate has more 

value that its crude oil. And it’s going to use it as a feeding stock 

of its petrochemical factory and also can convert it into electricity 

for domestic use and international and for export too. 

So what would be important is that if Iran comes out of the isolation it’s not going to be dependent on its oil export revenue as 

much as it was before. 

The Energy Information Administration forecast indicates that 

prior to 2011 Iran’s net oil revenue from its oil export was about 

$92 million, billion, per year, but this number dropped to $65 billion after that. 

And also one thing that is important is the very low cost of production in Iran and their reform of their upstream investment regulation that could create incentives and opportunities for investors 

to invest in Iran considering a very low oil prices. 

Also, Iran has access by land to neighboring countries and could 

be potentially a transit point for the energy production and especially the oil and gas production in the Northern Caspian for countries like Azerbaijan or Kazakhstan. 

My other, fellow panelists already mentioned in detail about the 

Middle East oil being threatened by ISIS and terrorist groups. Iran 

could potentially be a transit point and this could make Iran a significant point for import and export of crude oil to these countries. 

The other issue that would be important is that Iran is going to 

expand its electricity export to these countries, neighboring countries like Iraq or Afghanistan or Pakistan so the number of countries even neighboring countries, even Turkey. So export of electricity instead of export of natural gas or crude oil would also be 

significant. 

Once again I would like to thank you for having me here today. 

And I’m looking forward to the questions. 

[The prepared statement of Dr. Vakhshouri follows:] 
31 

Statement before the Senate 

Energy and Natural Resources Committee 

A Statement by: 

Sara Vakhshouri, Ph.D. 

President, SVB Energy International and NonResident Senior Fellow, Global Energy Center, 

Atlantic Council 

December 10, 2015 

366 Dirksen Senate Office Building 

Statement before 

Senate Committee on Energy & Natural Resources 

Hearing on "Terrorism and Global Oil Markets" 

December 10, 2015 
32 

By Sara Vakhshouri, Ph.D., President, SVB Energy International and 

Non-Resident Senior Fellow, Global Energy Center, 

Atlantic Council 

'Iran's Energy Policy and Return to the global Energy Market' 

Chair Murkowski, Ranking Member Cantwell and members of the committee, 

thank you very much for the opportunity to appear before your Committee today 

and to discuss the important issue you have posed. I will focus my remarks on Iran's 

Energy Policy and Return to the global Energy Market. 

Iran and Western Powers after more than a decade of dispute over Tehran's 

nuclear program, reached to a final agreement in July 14 2015. Iran tackling with 

different types of economic and energy sanctions is now getting ready to reintegrate in to the global economy and energy market 

The EU oil embargo, coupled with US sanctions in 2012, created real 

challenges for Iran's oil production, export capacity and market access. The cutting 

in half of Iran's total oil exports, coupled with inadequate storage capacity, forced 

the National Iranian Oil Company (NIOC) to reduce its crude oil and condensate 

production up to 17 percent and to shut down some of its fieldsl. In 2012, the 

average export of Iran oil declined by 40 percent, from 2.5 million barrels a day 

(mb/d) in 2011 to about 1.5mb/din 2012. By 2014, Iran's position in the OPEC had 

fallen to the seventh exporter after Saudi Arabia, Iraq, the United Arab Emirates 

(UAE), Nigeria, Kuwait, and Angola.z The latest status of Iranian oil and gas fields 

indicate that Iran's current crude oil production is about 2.9 mbjd, and natural gas 

liquids (NGL) and condensate production has stayed level at about 692,000-710,000 

bjd.3 Out of this 2.9 mbjd, Iran consumed about 1.7- 1.9 mbjd domestically and 

exported about 1-1.2 mbjd. 

The nuclear related sanctions have had a general impact on the investment 

and progress of the upstream oil and gas projects but did not specifically target 

Iran's natural gas exports. Nevertheless Iran was able to increase its natural gas 

production since 2012, in spite of sanctions. In 2014, Iran's natural gas production 

increased and its natural gas trade balance was positive for the first time 

Iran's Post Nuclear Deal Energy Policy 

Iran, with its huge oil and gas reserves, has witnessed many ups and downs in 

its relations with other countries and international oil companies. In response to 

each challenge, Iran's energy policy changed, shifting toward self-reliance. After the 

1979 Islamic Revolution, years of sanctions and war prevented the energy industry 

from having continuous access to the necessary investment and technology. 

Furthermore Since 2012, sanctions against Iran's energy industry and oil exports 

intensified, due to conflict surrounding Iran's nuclear program. In 2014, Iran's 

Leader Ayatollah Khamenei announced the idea of the "Economy of Resistance," 

Testimony of Sara Vakhshouri, Ph.D. I Senate Energy & Natural Resources Committee 1 

December 10, 2015 
33 

with the aim of reducing dependency on oil revenue, and increasing value-added 

production by processing raw material domestically and exporting the processed 

material. Therefore, focusing on the downstream and refinery sector, as well as the 

petrochemical sector, will be a major component of Iran's energy industry after the 

nuclear deal and in the next decade. 

In regards to oil production, Iran will try to regain its pre-2012 crude oil 

production level of 4 mb/d of and its lost markt share of 2.5 mb/d of export.4 

National Iranian Oil Company (NIOC) seeks to achieve this by implementing 

reinjection techniques utilizing water or natural gas, and by developing new fields. 

Development of natural gas fields and increase of its natural gas production 

capacity is at highest priority of NIOC. South Pars, the giant non-associate gas field 

shared by Iran and Qatar, is the top priority. The advantages of increasing natural 

gas capacity are many. Iran can utilize natural gas production for: generating its 

domestic electricity needs; feedstock of its petrochemical factories; re-injecting 

natural gas to its mature oilfields to increase its oil production; signing long-term 

natural gas export contracts with international partners; or converting it to 

electricity for export to neighboring countries. 

As a byproduct of natural gas, condensate creates other significant advantages 

for lran.5 The value and international prices for condensate is higher than Iran's 

heavy and sour crude oil. There is also far less intense competition in the 

condensate market than does in crude oil. Iran could also process its condensate 

domestically, and produce light distillate products like gasoline for domestic use and 

export. 

Creating long-term energy trade ties and engaging international investors for 

longer periods of time are other important elements of Iran's energy diplomacy. 

Tehran is planning to strengthen its economic and energy ties with its Arab 

neighbors and its North Caspian neighbors by exporting oil, gas, refined petroleum 

products, and electricity. Also, by modifying its upstream investment contracts, Iran 

would create longer ties with international investors. It's noteworthy that Iran has 

revised its upstream investment regulations with the goal of increasing the 

incentives for the international investors. One significant change in the new 

contracts is the increase in duration of the agreement from 5-7 years to about 20-25 

years. NIOC's goal is to increase the quality of work and protect its oil and gas 

reservoirs by engaging the international companies for longer periods of time. This 

also on the other hand will give the investors a more vested stake and interest in 

Iran and could create political advantages for the country. 

Investment 

Iran's fifth five-year economic plan (March 2011 to March 2016), aimed to 

increase the country's oil production to from 4 mb/d to 5.152 mbjd by attracting 

$155 billion of investment to its upstream oil and gas industry.6 It is also estimated 

that a total investment of about $200-250 billion is needed to address Iran's whole 

oil and gas industry, including upstream exploration and production, downstream, 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 2 

December 10,2015 
34 

petrochemicals, midstream, and shipping. 7 However Iran could not obtain the 

required investment due to the international sanctions. 

For its mid-term production goals Iran needs about $50 billion of investment; $30 

billion of it would be for South Pars natural gas development plans, and at least $20 

billion to complete its ongoing oil development projects in the West Karun 

reservoirs within the next two to three years.8 Iran's National Development Fund 

(NDF) approved a $20 billion allocation for investment in West Karun, and the 

remaining funds would need to come from foreign investment. 

Impacts of Iran Return to the Energy Market 

As mentioned earlier, market expects that Iran's oil supply will gradually 

rebound upon the sanction removal. Depending on the timeline of the sanctionsunwinding process, Iran could increase its exports of crude oil about 400,000-

500,000 kb/d by mid to end of 2016. Iran could also add an additional 150,000-

200,000 bfd of condensate to its liquid export volumes by mid-2016. Iran's 

petroleum minister announced that he is ready to add 500,000 bfd of oil to its 

export upon the removal of sanctions, and an additional 500,000 by mid-2016, and 

part of this additional oil would be condensate. At the same time, the sanctions 

rollback on Iran, and the prospect of the country oil production hike, could have an 

immediate, psychological impact and downward effect on the international oil 

prices. 

In the mid to long-term Iran's main focus will be the development of its natural 

gas fields, particularly the South Pars gas field. Iran's natural gas and condensate 

production is expected to rise significantly in the next 3-5 years. Iran is going to 

utilize its additional natural gas capacity in different ways: 1) To export natural gas, 

particularly to its neighbors, in order to increase its gas export market share and 

also as part of its energy diplomacy to create long-term energy alliance; 2) To use its 

natural gas as the feedstock of its refinery plants. Iran's current petrochemical 

production capacity is about 60 million tonsjyear, and the country is planning to 

increase this capacity to 180 million tonsjyear by the end of 2025. 3) To convert 

part of its natural gas into electricity and export electricity to its neighboring 

countries, with the goal of increasing the value added to its natural gas and also 

diversifying its exports products. This diversifies Iran's options for utilizing its 

natural gas, at a time of the oversupply in the market and low energy prices and also 

creates stronger trade ties and alliances with Iran's consumers and neighbors. Iran 

plans to allocate 6 bern of its natural gas for conversion to electricity by 2020, which 

yields additional 5,000 megawatts of electricity per year, solely for export.9 Iran 

current electricity generation capacity is about 7 4,000 megawatts per year.1° 

Iran's condensate production will also increase to 1 million bfd by 2017, and 

Iran is planning to increase its condensate refinery capacity by the next 2-3 years, in 

order to refine most of its condensate domestically and export the refined products 

instead of condensate. Iran plans to increase its oil refinery capacity to 2 mbjd, and 

to expand its condensate refinery capacity to 1 mb/d by 2020, thereby reaching a 

total refinery capacity of 3 mbjd. NIOC is almost on track to meet this goal; by the 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 3 

December 10, 2015 
35 

end of 2014, Iran reached its nominal oil refinery capacity of 2 mbfd. On the 

condensate side, Iran can achieve a 1 mb/d condensate refinery capacity by 2020. 

Its is expected that by 2017 Iran become self-sufficient in producing its gasoline 

needs and by 2020 can replace almost all of its condensate export with the light 

distillates produced in its refineries. This also means that in the medium to longterm, Iran's oil export share in the market will remain same as its pre-2012. 

Therefore, it is important to note that Iran's major energy impact in the medium 

and long terms will be on the downstream, refined petroleum products, and 

petrochemical markets. 

Madam Chair, Members ofthe Committee; 

If Iran complies with the Joint Comprehensive Plan of Action (JCPOA) as the 

result of the nuclear deal, its re-integration to the energy market would be under a 

new policy and with a different approach from its pre-2012 dynamics. This shift 

would be based on two major components: 1) increasing its self-reliance and 2) 

maintaining a more active energy diplomacy to create long-term ties with its 

neighbors and international partners. 

It is important to note that since 2012, Iran's dependency on its oil revenue 

was substantially reduced. The Energy Information Administration (EIA) estimates 

that Iran's net oil export revenue in 2012 was $69 billion, down from $95 billion in 

2011,11 Iran's oil export revenue prior to 2011 was above 80 percent of Iran's total 

export earnings and about 60 percent of the government's revenue. The share of oil 

export in Iran's annual budget plunged from above 70% prior to 2012 to about 33% 

in 2015. This is reflected in its 2015 budget. In 2015, the Iranian government is 

substituting its lost oil revenue with increased taxes, privatizing some government 

firms, coupled with savings from its fuel subsidy reduction plan.1 2 Therefore, 

increasing its crude oil export share is not in Iran's medium to long-term energy 

policy, nor its necessity. Instead Iran will focus on expanding its refined products, 

petrochemical and natural gas export capacity. So the idea of a sudden glut of 

Iranian oil on world markets - and the revenue accrued to such - is not entirely 

accurate. 

Another important factor that would affect the global energy industry's 

approach toward Iran is its relatively very low production costs. This is highly 

attractive to international investors, particularly at such current low prices. The cost 

of producing one barrel of oil from onshore and offshore fields in Iran varies from 

between $2 to $5 (production maintenance costs increase it to $7- $10).13 Sanctions 

against Russia since 2014, combined with turmoil in Iraq, have made Iran's 

potential for investment comparatively favorable. Saudi Arabia also has very low 

production costs, but the Kingdom has no plan for increasing its production capacity 

at the moment.14 Massive untapped natural gas resources with a high rate of return, 

coupled with land access to major consumers, are other attractive factors for 

investors and international oil companies. 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 4 

December 10,2015 
36 

Having Iran out of isolation would have a significant impact on involving 

partners inside Iran and also energy trade movements. At the time of sanctions and 

restricted access to the international resources, Iran has no economic choice but to 

partner with countries like China and Russia. However there has been a strong 

signal from Iranian officials that in fact they would prefer to do business with 

European and American companies. Hence energy and industry involvement of 

those companies and countries that their policies and interests are in the same line 

and direction as US policy might be of an advantage. 

Energy supplies and trade movements from Iran, particularly when energy 

supplies in the region, particularly in Iraq and Syria, are threatened by the terrorist 

groups such as Daesh, is important. It is noteworthy that damage to the energy 

facilities in the mentioned countries could have long-term impact on their supplies. 

On the natural gas side; in the next 2-5 years Iran could expand its natural gas 

export capacity and potentially could export its gas via pipeline and LNG to its 

neighboring countries or to Asian and European markets. Iran could conceivably 

become a transit point for energy resources in the North Caspian, transferring oil 

and natural gas from countries like Azerbaijan or Kazakhstan to the global energy 

market. Therefore Iran could potentially have an important role in the energy trade 

movement in the region and to the global oil market, specifically at the time that 

Middle East's energy supplies are tackling with terrorist threats and overall 

instability. 

I would like to also note that I discussed the details of this testimony and 

more in a report that I recently wrote for Atlantic Council titled 'Iran's Energy Policy 

After the Nuclear Deal'. 

Once again thanks for the opportunity you gave to present this important topic 

before your committee and I am looking forward to the questions. 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 5 

December 10, 2015 
37 

Appendix 

Table 1: NIOC's Plan to Increase Crude Oil and Condensate By 2017-201815 

Hydrocarbon Type By June 2015 End of2017- Mid- Major Source of 

2018 Increase 

Crude Oil About2.9mb/d 4.7 mbjd EOR/IOR of mature 

fields 

700 kb/d new oil 

from West Karun 

oilfields 

Condensate 480 kb/d 1mb/d South Pars Phases: 

12, 15-16,17-18 

Table 2: NIOC's Plan to Increase Natural Gas By 2017-201816 

By June 2015 End of2017- Mid 

2018 

Table 3: Additional Condensate Production from South Pars, 2015-201617 

South Pars 

Phases 

Phase 12 

Latest Status 

Completed and 

inaugurated in 

March2015 

Expected to be 

complete by the end 

,+-~~~--~-~-·~---~-~4~of2015 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 6 

December 10, 2015 
38 

Endnotes 

1 Offshore Post, 'Oil Prices Slide As Global Leaders Reach Iran Deal', 

http://www.offshorepostcomjoil-prices-slide-as-global-leaders-reach-iran-dealf, Sara Vakhshouri, 

"Iran Faces Hurdles Hiking Oil Production when Sanctions Lifted," Oil and Gas Journal, vol. 113, issue 

5, June 1, 2015. 

z Organization of the Petroleum Exporting Countries, "Annual Statistical Bulletin, 2015." 3 SVB Energy International, "Iran Upstream Oil and Gas Report" 4 "Iran Oil Minister Describes the Oil Policy of Economy of Resistance," SHANA, April19, 2014, 

www.shana.ir jfajnewsagency /pdf/215340. 5 Condensate, or natural gas condensate, is light hydrocarbon liquid with low density that is the 

byproduct of natural gas from a gas field. It is also called natural gasoline, because it contains 

hydrocarbons with the boiling range of gasoline. 

6 SVB Energy International, "Iran Upstream Oil and Gas Report" 7 lbid. 

o "Iran's Shared Oil, Gas Fields Need $50 Billion," Press TV, September 3, 2015, 

http: jjwww. press tv. com /Detail/2 015/09/03/42 7 618 /iran-oil-gas-production -shared-fieldszangeneh. 

9 "Iran's Priorities for Developing Its Shared Oil and Gas Fields," !RNA. 

1o "Iran's Electricity Production Increased," Mehr News Agency, September 9, 2015, 

http:/ jwww.mehrnews.comjnews/2912331. 

"EIA, Country Analysis Brief, Iran, June 19 2015, EIA: 

http: I jwww.eia .gov /beta I in tern a tiona I I ana lysis _in dudes I countries J ong/I ran/iran. pdf 12 Iranian new year starts from March 

13 The Economist, 'Iran Oil: Sanctions Response', 20 February 2012. 

14 'Too much energy? Asia at 2030', American Enterprise Institute (AEI), February 2015, 

https:/ jwww.aei.org/wp-contentjuploads/2015/02/Too-Much-Energy.pdf 

1s Sara Vakhshouri, "Iran Energy Policy after the Nuclear Deal", Atlantic Council, November 2015, 

http:/ jwww.atlanticcouncil.orgjimagesjpublicationsjlran_Energy_Policy.pdf, SVB Energy 

International, "Iran Upstream Oil and Gas Report", June 2015 

16 Ibid 

17 Ibid 

Testimony of Sara Vakhshouri, Ph.D. 1 Senate Energy & Natural Resources Committee 7 

December 10,2015 
39 
40 

IRAN'S ENERGY POLICY 

AFTER THE NUCLEAR DEAL 

Sara Vakhshouri 

ISBN: 978·1·61977·977·8 

Cover photo credit: Raheb HomavandijReuters. Gas flares from an oil production platform at the Soroush oil fields with an 

Iranian flag in the foreground. 

This report is written and published in accordance with the Atlantic Council Policy on Intellectual 

Independence. The author is solely responsible for its analysis and recommendations. The Atlantic Council and its 

donors do not determine, nor do they necessarily endorse or advocate for. any of this report's conclusions. 

November 2015 
41 

TABLE OF CONTENTS 

Executive Summary 

1. Background 

2. Crude Oil and Natural Gas Production Policy 

3. Oil and Gas Export Policy 

4. Iran's Policy toward Its Downstream and Refinery Sector 

5. Iran's Policy toward Its Petrochemical Industry 

6. Upstream Investment Policy: Attracting Foreign Investment. 

7. Conclusion 

About the Author 

3 

4 

8 

13 

15 

15 

18 

21 
42 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

EXECUTIVE SUMMARY 

This report looks at changes to Iran's energy policy in 

light of the 2012 acceleration of economic and energy 

sanctions that the country faced because a fits nuclear 

program, as well as Iran's july 2015 nuclear deal with 

the Western powers. To gain a better understanding 

of the psychology and rationale of the Iranian leaders 

with regard to their energy policy, this report starts by 

discussing the history of Iran's energy industry, including 

the country's conflicts with the international community 

over its energy resources. These historical examples, which 

are discussed in detail, indicate that after any conflict and 

relief from international sanctions, Iran took steps toward 

increasing its domestic capability in order to become more 

independent. 

The next section of the report is dedicated to changes in 

Iran's energy policy since 2012, including the impact of the 

sanctions relief that was part of the july 2015 nuclear deal. 

It compares Iran's crude oil and natural gas production and 

export policy after the 1979 Revolution with those from 

after the 2012 sanctions and the 2015 nuclear agreement. 

Iran's upstream and downstream energy policy, its plans 

for its petrochemical industry, and its new upstream 

investment regulation (Iran Petroleum Contract) are 

discussed in detail. Other emphasized topics include Iran's: 

energy diplomacy; plans for reintegrating with the global 

energy market; strengthening its political and economic 

ties with its Arab neighbors; increasing incentives for 

international investors to invest in its energy industry; 

attempts to regain its lost oil market share; controlling 

its domestic energy consumption; and other specific 

measures to increase the country's resistance toward 

possible sanctions and limitations in the future, based on 

the doctrine of "Economy of Resistance." It is important to 

note that this report only discusses the changes in Iran's 

energy policy and diplomacy since 2012. Hence, analyzing 

the viability of each policy is above the scope of this 

report. Oil is not only the main driver of Iran's economy 

and its primary source of income, but also an important 

diplomatic tool. Nuclear-related sanctions on Iran's energy 

industry, particularly since 2012, have created a new 

approach among Iranian leaders toward the economy, 

energy industry, and oil diplomacy. This will be particularly 

true in light of the possible sanctions relief prompted by 

the nuclear agreement between Iran and the P5+ 1 (China, 

France, Germany, Russia, the United Kingdom, and the 

United States) reached on july 14,2015. 

This new approach is mostly based on Iranian Supreme 

Leader Ayatollah Ali Khamenei's doctrine of the "Economy 

of Resistance," which seeks to create resistance toward 

current and possible future sanctions or international 

pressures on the Iranian economy, particularly on its oil 

and gas exports. The "Economy of Resistance" seeks to 

increase the value of non-oil exports and of the valueadded chain of production inside the country, lower 

energy consumption, and boost economic self-reliance.1 

The doctrine also places special emphasis on exporting 

downstream products (such as refined petroleum 

products) and petrochemical products. The "Economy 

of Resistance" also focuses on converting part of Iran's 

natural gas into electricity, and on exporting that electricity. 

One of Iran's other major policies is to increase investment 

incentives by modifying its upstream investment 

regulations for oil and gas, and its terms and conditions 

for foreign investment. These newly reformed regulations 

consider flexible ceilings for profit and cost, and also 

focus on integrating the exploration, development, and 

production processes. Iranian petroleum officials called 

the new upstream investment contract the Iran Petroleum 

Contract (!PC). This model is introduced only for upstream 

investment contracts and covers exploration, development, 

and production of the oil and gas fields. Iran reformed 

its upstream energy contracts because, given the risks of 

investment in Iran (particularly International sanctions), 

the existing contracts were not attractive enough to 

engage and maintain the international investors active in 

its energy industry. (This is discussed in detail in section 

6.1.) According to the !PC economic model, the profit 

rate per barrel increases in correlation with the risk of 

investment in each project.' Although the details of the !PC 

have not yet been officially introduced by the Ministry of 

Petroleum, the contract will most likely extend the duration 

of investment from seven years to twenty years by involving 

foreign investors in the production process.3 Iran hopes to 

increase the quality of its work and protect its hydrocarbon 

reservoirs by involving investors for longer periods of 

time, and by giving them a more vested stake in the field.4 

This factor could have a political advantage for the Iranian 

side, as international partners would have shared profits 

and interests in Iran for longer periods of time.5 Involving 

international oil companies (IOCs) in the production process 

will also help Iran to better market and sell its oilfield 

products, thereby increasing its market share. 

Allocating its foreign currency reserves to investment in 

the energy sector, and to international companies, allows 

Iran to utilize part of its oil revenue that has been in 

international escrow accounts outside of Iran since 2012. 

The top priorities of Iran's petroleum ministry and the 

1 This means that, instead of exporting raw materials such as crude oil 

or natura! gas, Iran would process them domestically and export the final 

product. For instance, Iran could refine its crude oil or condensate domestically and export the refined petroleum products. It could also convert 

its natural gas to electricity or petrochemical products, and export these 

instead of natural gas. 

2 In other words, as the risk of investment increases for each field, the 

investor's reward or profit for each barrel it produces will increase. In· 

terview with Seyed Mehdi Hosseini, SHANA, February 2014, http:/ jwww. 

shana.irjfajnewsagency/212965/JJJ-ll.l>l..s-.JJ<J,)-~-lc .. U..:r;:•l,).;I..J-)-

Y"·J"Jd-tJ.)..tJ10J. 

3 Sara Vakhshouri, "Iran Offers New Terms for Oil Contracts," Al-Mon· 

itor, February 26, 2014, http:/ jwww.al·monitor.comjpulsejor!gi· 

nals /2 0 14 I 02 /iran ·oil-contract -sanctions-energy-n uclear.html. 

41bid. 

Slbid. 

ATLANTIC COUNCIL 
43 

Nationallranian Oil Company (NIOC) include: increasing 

Iran's oil and natural gas production; regaining its lost 

market share of more than one million barrels per day 

and its position as the second-leading exporter in the 

Organization of the Petroleum Exporting Countries (OPEC); 

and increasing its share of exports in the global natural gas 

market. Beyond that, exchanging oil for goods or services, 

along with other incentives such as discounting oil, would 

be an important strategy for Iran to try to regain its lost 

market share. 

Iran has twelve shared oil and gas fields with its neighbors. 

Tehran has adopted a new approach toward its neighbors 

with regard to its energy diplomacy. One of Iran's priorities 

is to increase the export of crude oil, refined petroleum 

products, natural gas, and electricity to Turkey, Iraq, and 

other Gulf Cooperation Council (GCC) neighbors. It aims to 

use these countries as transit points to send Iranian natural 

gas to international markets-the European Union (EU) in 

particular-and vice versa (e.g., exporting natural gas to 

Oman and using its liquefied natural gas (LNG) facilities to 

ATLANTIC COUNCIL 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

re-export gas; pursuing oil-swap plans with its neighbors 

north of the Caspian Sea such as Azerbaijan). Both before 

and after 1979, Iran's policy for securing market share was 

to build or purchase a share of refineries outside of Iran, 

but the country never obtained a significant share of any 

refinery outside of its borders. Recently, however, Iran has 

been actively attempting to build refineries in countries 

like Iraq; the chairman of N!OC announced in August that 

his company had opened an office in Iraq.' Iran is also 

actively seeking to increase economic and energy ties with 

its neighbors through industrial exports and engineering 

services. 7 

6 "NIOC Opened an Office in Iraq," SHANA, August 31, 2015, http:/ jwww. 

shana.ir /fa/newsagency /246128. 

7 Ibid. Iranian oil officials announced that they have exported $450 million of engineering services to Turkmenistan, and this number is planned 

to increase to $1 billion by the end of March 2015. 
44 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

1. BACKGROUND 

The history of Iran's hydrocarbon industry is one of 

ups and downs. It has engendered a palpable sense 

among Iranian leaders of the need for self-reliance 

and increased "resistance" of the Iranian economy 

against international pressures. As a result, Iranian 

energy policy has become predicated upon survival and 

preparing for the worst. 

Iran's oil discovery dates back to 1901, when Iranian King 

Mozaffar a-Din Shah of the Qajar dynasty gave the British 

William Knox Dl\rcy a sixty-year oil concession with the 

exclusive right to explore, process, and export oil and 

petroleum products.8 The agreement stipulated that the 

Iranian government would receive only 16 percent of the 

net profit from all oil and petroleum-related operations. 

In 1908, DJ\.rcy and his team drilled the first oil well in 

the southwestern city of Masjid Solei man. And in 1909, 

the Anglo-Persian Oil Company (APOC), now known as 

BP, was established in London to control DJ\.rcy's rights 

and operations in Iran. The British government became 

APOC's major shareholder in 1914, with a 51 percentshare of the company. 

The long-lasting conflicts over rights and profit sharing 

between Iran and APOC, which changed its name to 

the Anglo-Iranian Oil Company (AIOC), escalated in the 

1940s. In March 1951, the Iranian Parliament, under the 

leadership of Prime Minister Mohammad Mossadegh, 

nationalized the Iranian oil industry.9 The British 

government immediately instituted an international ban 

(read sanctions) on the purchase of Iranian oil, causing 

the AIOC to withdraw its engineers from the Iranian 

oilfields. In spite of this, the Iranian government was able 

to continue production. It was finally able to break the 

international embargo in 1953, by selling its first cargo 

of oil (with a 30 percent-discount on global prices) to 

both the Italian government and the japanese company 

Idemitsu Kosan. 

Then, in September 1954, an eight-member consortium 

called the Iranian Oil Participants (lOP) formed, with the 

following composition: British Petroleum Company (BP) 

held 40 percent, Shell14 percent, Chevron 8 percent, 

Exxon 8 percent, Gulf 8 percent, Mobil8 percent, Texaco 8 

percent, and Compagnie Fran~aise des Petroles 6 percent. 

The National Iranian Oil Company (NIOC) was the owner 

of Iran's oil deposits and the Iranian oil industry's installed 

assets. However, actual control over the industry was 

8 Mohammad Malek. "Oil in Iran between the Two World Wars," Iron 

Chamber Society, http;/ jwww.iranchamber.comjhistory jartic!esjoiUran_ 

between_world_wars.php. 

9 Oil production rose from 51 million barrels per year in 1933 to 232 mil· 

lion barrels per year in 1950. During this time, most of the oil was sold to 

Great Britain for domestic use and to fuel ships during World War H. See 

Sara Vakhshouri, Marketing and Sale of Iranian Crude Oil after the Islamic 

Revolution (Tehran: Sobh Qalam Publishing House, 2011). 

firmly in the hands of the consortium members.10 NIOC, 

therefore, had no influence or control over the production, 

refining, and export of Iranian crude oil and products. 

As a result of this lack of control, in addition to lessons 

learned from the oil embargo, the Iranians began to 

increase their self-reliance. The Iranian government 

realized that one of its main weaknesses was the inability 

to transport its own oil to global markets. In 1955, 

Iran established the National Iranian Tanker Company 

(NITC), which today is one of the largest oil-transporting 

companies in the world, owning at least forty-two very 

large crude carriers (VLCC). NITC had a major role in 

transporting Iranian oil to international markets during the 

eight years of war with Iraq (1980-1988), and also after 

EU and US sanctions on Iranian oil exports, transportation, 

and insurance in 2012. 

The 1979 Islamic Revolution, and the subsequent eight 

years of the Iran-Iraq War, upended Iran's energy policy 

once again. After 1979, the consortium was dissolved, 

and NIOC took control of Iran's energy industry and the 

export of crude oil and refined petroleum products. Iran 

also announced that it would not export its crude oil and 

products to Israel-ending a once-robust relationshipand that Islamic countries would be preferred customers. 11 

US-Iranian relations hit a low point in the early days of 

the Iranian revolution, and were further damaged by the 

hostage crisis of 1979-81. Diplomatic relations between 

the two countries were broken off, and have not been 

reestablished. As a result, the United States stopped 

purchasing and importing Iranian oil, causing Iran's 

broader oil trade and flow to shift toward Asian markets. 

The United States has also implemented unilateral 

sanctions on Iran since 1996, when President Bill 

Clinton prohibited US investment in Iran's energy sector. 

Successive US administrations tightened sanctions and 

limitations against Iran on the basis that Iran was pursuing 

nuclear weapons, as well as Tehran's support for groups 

such as Hamas, Islamic Jihad, and Hezbollah. 

In 1996, the United States passed the Iran-Libya Sanctions 

Act, later renamed the Iran Sanctions Act (!SA), which 

imposed sanctions on firms making financial and 

technological investments in Iran's energy industry. 

However, ISA did not prevent non-US firms from investing 

there. By 2012, the EU implemented its own sanctions, 

which complemented US sanctions by also banning imports 

of oil, investments in the hydrocarbon industries, and 

10 The National Iranian Oil Company (NIOC) is a government-owned 

company under the direction of Iran's Ministry of Petroleum. NIOC was es· 

tablished in 1948 and is responsible for oil and natural gas development, 

production, and export. 

11 In 1957, the Eilat-Ashkelon Pipeline was built in Israel to transport 

Iranian crude oil to Europe. In 1968, the Eilat·Ashkelon Pipeline Company 

(EAPC) was founded as a joint venture, with a S0-50 share between Iran 

and Israel, in terms of operation and oil transport to Europe. Between the 

Arab-Oil embargo of 1973 and the revolution of1979, !ran supplied most 

of israel's oil. 

ATLANTIC COUNCIL 
45 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Figure 1. Iran Crude Oil Production 

8000 

Peak Production 

"""' 7000 Ul 

-o 

c 

<U 6000 V1 

;:) 

0 

.s:: 5000 fc 

0 

;>, 4000 <U 

0 

... 

Q) 3000 Q. 

V1 

~ 2000 

ro 

Ill 1000 Beginning of lrarHraq War 

Source: http:/ /www.ofwcorgjlibrary/Anoual'!'iJ20Stc1listJra!%20Bul!etin/illl<'ractJVt'/<urrent/FileZ/XL/T37.]-{TM, 

other financial transactions. This hindered Iran's financial 

dealings with the international community. 

Total of France, which was the first major international oil 

company that refused to consider the American sanctions as 

legally binding, invested in and developed the Siri A and E 

oilfields. 12 Iran could attract $15 billion of investment under 

sanctions, even though this was far less than what was 

required to rehabilitate its energy productionP As a result of 

two decades of war and sanctions, Iran's oil production had 

dropped from its peak of6 million barrels per day (mbjd) in 

late 1970 to about 4.2 mbjd in early 2000. 

The 2000s saw further decreases in Iranian hydrocarbon 

production and exports, as the West sought to limit 

Tehran's nuclear program. However, the real changes came 

in 2012, because of the additional sanctions implemented 

by both the United States and the EU, which caused Iran's 

production to drop below 3 mbjd. 

As a result of these turbulent decades and additional 

international sanctions, Iran's strategic energy policy is largely 

based on two pillars: building an "Economy of Resistance" 

and creating strategic alliances. First, Khamenei's "Economy 

of Resistance" doctrine, announced in February 2014, 

suggests that Iran should increase self~ reliance by focusing 

on developing or adding value to the production chain inside 

12 Sara Vakhshouri, "Iran Oil Minister Confront Sanctions," (Washington, 

DC: Atlantic Councl!, August 21, 2013), http:/ /www.attanticcouncil.org/ 

pub!icationsjartic!esjiran~s-oil-minister-confronts-sanctions. 

13lbid. 

ATLANTIC COUNCIL 

the country, instead of exporting raw material, and also by 

reducing its dependence on oil-export revenue.14 Second, 

Iran seeks to create long-term energy ties and alliances with 

international oil companies and neighboring countries to 

raise their interest and stakes in Iran. 

This historical context lays the framework for understanding 

Iran's current energy policies, which were adopted as a 

response to the 2012 sanctions against its energy industry 

and exports, and in anticipation of the possible removal of 

sanctions following the nuclear deal between Tehran and 

the PS+ 1. The following sections are dedicated to discussing 

Iran's policy toward domestic oil and gas production, 

exports, the downstream and refinery sectors, the 

petrochemical industry, and new investment regulations. 

2. CRUDE Oil AND NATURAl 

GAS PRODUCTION POLICY 

Iran holds the fourth·largest proven oil reserves after Saudi 

Arabia, Venezuela, and Canada. The country also possesses 

the second-largest natural gas reserves after Russia. 15 In 

2015, estimates indicated that Iran had the largest natural 

14 Center for Preserving and Publishing the Works of Grand Ayatollah 

Sayyid Ali Khamenei, "General Policies of Economy of Resistance;' http:/ f 

farsi.khamenei.irjnews-content?id:25370. 

15 US Energy Information Administration, "Country Analysis Brief, !ran," 

http:/ jWVI-'W.eia.gov /beta/ international fanalysisjncl udes f countries_ 

longjlranjiran. 
46 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

gas reserves in the world." In 2013, Iran produced 3.2 

mb/d of oil and 5.6 trillion cubicfeet (Tcf) of natural gas. 

Iran is among the top-five global oil and gas producers in 

the market. However, because of sanctions, Iran's share of 

oil exports in the global market has plummeted since 2012. 

Also, despite having substantial natural gas reserves, Iran 

has never obtained even 1 percent of the global gas market. 

Iranian Minister of Petroleum Bijan Zangeneh said Iran's 

crude oil policy is to regain its pre-2012 production level 

of 4 mb/d of crude oil and its lost OPEC share of 2.5 mb/d 

of crude oil export. 17 NIOC seeks to achieve this by implementing reinjection techniques utilizing water or natural 

gas, and by developing new fields. 

NIOC also sees developing natural gas fields and expanding production capacity as its highest priority. South 

Pars, the giant non~associate gas field shared by Iran and 

Qatar, is the top priority. 18 The advantages of increasing 

natural gas capacity are many. Iran can utilize natural gas 

production for: domestic electricity generation, thereby 

releasing its oil liquid capacity for export; feedstock of its 

petrochemical factories, where natural gas is in higher 

demand than crude oil; export via land or LNG for neighbors and other international buyers; or electricity export 

to neighboring countries. 

As a byproduct of natural gas, condensate creates other 

significant advantages for Iran.19 Indeed, condensate is 

of higher quality than Iran's heavy and sour crude oil, is 

priced higher than its crude oil, and enjoys far less intense 

competition in the market than does crude oil. Iran could 

also refine its condensate in house, and produce light 

distillates like gasoline for domestic use or export. 

2.1. CRUDE OIL AND CONDENSATE 

PRODUCTION POLICY 

Iran has 547 billion barrels (b/b) of initial oil in place, 

with 158-159 b/b of it recoverable." This constitutes 

approximately 10 percent of global crude oil resources.21 

Onshore oilfields constitute 70 percent of Iran's total 

oil reserves.22 Almost 86 percent of the country's 

production comes from southwestern reservoirs located 

in central Zagros, particularly the Asmari and Bangestan 

16 BP Statistical Review of World Energy june 2015, http:/ jwww.bp.com/ 

contentjdamjbpjpdf/Energy·economicsjstatistical-review·2015/bp-statistical-review-of-world-energy-2015-full-report.pdf. 

17 Hi ran Oil Minister Describes the Oil Policy of Economy of Resistance," 

SHANA, Apri119, 2014, www.shana.ir/fa/newsagencyjpdf/215340. 

18 Ibid. 

19 Condensate, or natural gas condensate, is light hydrocarbon liquid with 

low density that is the byproduct of natural gas from a gas field. It is also 

called natural gasoline, because it contains hydrocarbons with the boiling 

range of gasoline. 

20 HRecoverable" or "proven~ reserves are the amount of natural resources that is extractable using current technological capabilities. "Initial" 

or "in place" resources indicate all of the explored hydrocarbon in the 

reservoir. 

21 BP Statistical Review of World Energy june 2015, op. cit 

22 US Energy Information Administration, "Country Analysis Brief, Iran:' 

formations. 23 The Asmari formation has the highest amount 

of oil production, and the Bangestan (Sarvak) formation 

holds a considerable volume of recoverable oil. 

Iran suffers from the long-term negative effects of 

international sanctions that have prevented investment 

and technologies from entering the Iranian energy market. 

Prior to the 2012 sanctions, Iran's oil production was about 

4 mbfd.24 The latest status of Iranian oil and gas fields 

indicate that Iran's current crude oil production is about 

2.9 mbfd, and natural gas liquids (NGL) and condensate 

production has stayed level at about 692,000-710,000 

bfd.25 Out of this 2.9 mbfd, Iran consumed about 1.5-1.7 

mbfd domestically and exported about 1-1.2 mbfd. (See 

2.4.1 for Crude Oil and Condensate Exports.)" 

About 75 percent of Iran's non-crude~oilliquid is 

condensate and the byproduct of non~associated gas in the 

South Pars gas field, and the rest is liquid that comes from 

Kangan, Nar, and other fields. 27 Iran's current condensate 

production is about 480,000 bfd, and is expected to rise to 

630,000 by mid-2016. 

Most Iranian oilfields are old and mature, which means 

they require further investment, and treatments like gas 

reinjection, in order to maintain current production levels. 

"The country's oil wells are mostly in the second half of 

their lives, and are facing continued natural depletion of 

production capacity at the rate of 8~ 11 percent per year."28 

It is estimated that Iranian oilfields lose between 300-

500,000 b/d of natural reduction every year due to the 

maturity of the fields." 

As sanctions roll back, Iran's supply will gradually rebound. 

Iran's oil minister announced that he will increase oil 

production by 500,000 bfd after the sanctions are lifted, 

and will add an extra 500,000 bfd six months after that." 

In the most conservative view, if sanctions are lifted by the 

end of2015, Iran could possibly add 500,000-700,000 b/d 

of crude oil and liquids to its production by mid-to-late 

2016. NIOC can add 150,000-200,000 bfd of condensates 

to its liquid production by mid-2016. This additional 

condensate will be from phases31 12, 15-16, and 17-18 

23 Ibid. 

24 EIA, Country Analysis Brief, Iran, Iune 19 2015, EIA: http:/ jwww.eia. 

govjbetajinternationaljanalysis_includesjcountriesJongjlranjiran.pdf. 

25 SVB Energy International, "Iran Upstream Oil and Gas Report." 

261bid. 

271bid. 

28 US Energy Information Administration, "Country Analysis Brief, Iran." 

29 Ibid. 

30 Grant Smith, 'What Iran's Nuclear Deal Means for the Global Crude Oil 

Market;' Bloomberg, July 14, 2015, http:/ jwww.bloomberg.com/news/ 

articlesj2015-07-14jwhat-iran-s-nudear-deal-means-for-the-globalcrude-oil-market. 

31 South Pars is a giant gas field that was discovered in 1990 and is located in the Persian Gulf. Pars Oil and Gas Company is In charge of development of this field, and defined twenty-four developmental phases for this 

field. Each field is expected to produce both natural gas and condensate. 

Currently, the phases 1-10 and 12 are completed. Phases 15-16 are also 

partially completed, and are expected to finish by mid-2016. 

ATLANTIC COUNCIL 
47 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Figure 2. Iran Oil Production and Consumption' 

5.0 

4.5 ,-. 

(/) 

c 4.0 .Q 

f 3.5 

c 3.0 v 

» 

ro 2.5 

0 

(i; 2.0 CL 

(/) 1.5 (j) 

.... 

.... 

ro 1.0 

---- aJ 

0.5 

0 

of South Pars gas field. 32 lmmediately after the removal 

of sanctions, Iran will also start sales negotiations for 

exporting the 37-45 million barrels of additional stored 

liquid on its floating storages. More than half of Iran's 

floating storages are estimated to be filled by condensate; 

the other half are crude oil, fuel oil, and a blend of crude oil 

and condensate. 

Over the next few years, NIOC will work to increase its 

crude oil production capacity by: 

preventing any further production drop and restoring 

the lost production capacity from mature fields, 

particularly in the southern oilftelds, by enhanced oil 

recovery (EOR) and international oil companies (!OC) 

operation; and 

producing new resources of crude oil from heavy 

oilfields located west of the Karun River, known as 

"West Karun" oilfields (North and South Azadegan, 

Yadavaran, jufeyr, Sohrab, Susangerd, and Yaran).33 

NIOC announced that its oil production capacity would 

reach 5.7 mbfd by 2017-2018, of which 1 mb/d would be 

32 Sara Vakhshouri, ''fran's Oil Production Boost Scenarios in a Post~Sanc· 

tions Era,~ Middle East Econol1?)' Survey, july 3, 2015, https:/ jwww.mees. 

cornjdocsjpublicjiran·oil-production-boost-scenarios-in-a-post-sancations-era,pdf. 

33 "Iran Oil Minister Describes the Oil Policy of Economy of Resistance," 

SHANA. 

ATLANTIC COUNCIL 

....... " "-- .... 

--- Consumption I--

-- Production 1--

condensate.34 Most of this condensate would be produced 

from the South Pars giant gas field. 35 As a result of easing 

sanctions, enhanced oil recovery and improved oil recovery 

(EOR/!OR) projects from mature oilfields, as well as new 

development projects in the West Karun oilfields, could add 

an additional650,000-700,000 b/d of crude oil production. 

This could also increase condensate production in South 

Pars to 1 mb/d by 2017-2018.36 

2.2. NATURAL GAS PRODUCTION 

POLICY 

Iran has the world's largest proven natural gas reserves, 

and the country is the home of 17-18 percent of the world's 

natural gas reserves.37 Iran's original gas in place is estimated 

to be 1,201 Tcf (about 34 trillion cubic meters)." 

Iran is now the third-largest global producer of natural 

gas behind Russia and the United States." Additionally, the 

34 !bid. 

35 SVB Energy International, "Iran Upstream Oil and Gas Report"; 

Vakhshouri, "Iran's Oil Production Boost Scenarios in a Post-Sanctions 

Era." 

36 "Iran Oil Minister Describes the Oil Policy of Economy of Resis· 

tance," SHANA,April19, 2014, http:jjwww.shana.ir/fa/newsagencyj 

pdf/215340. 

37 BP Statistical Review o[World Energy june 2015. 

38 Ibid. 

39 !bid. 
48 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 1: NIOC's Plan to Increase Crude Oil and Condensate By 2017-2018 

Table 2. Additional Condensate Production from South Pars, 2015-2016 

Completed and inaugurated in March 2015 

75,000 Expected to be complete by the end of 2015 

80,000 Expected to be complete by mid-2016 

Source: SVB Energy lnt\'rnational, '!ran Upstrt•am Oil and Gas Report." 

Table 3: NIOC's Plan to Increase Natural Gas By 2017-2018 

country's natural gas exploration success rate is high, at 

79 percent compared to the average success rate of30-35 

percent.40 Most of the natural gas production occurs in the 

Deh Ram and Khami formations in Fars province. In 2014, 

Iran produced 172.6 billion cubic meters (bern) of natural gas, 

up 5 percent from the production rate of 164 bern in 2013." 

By March 2015, Iran's daily natural gas production increased 

to 600 mcmfd.42 

NIOC plans to increase its natural gas production from 

about 600 mcmfd in 2015 to 1 bcmfd by the end of2017 

40 US Energy Information Administration, "Country Analysis Brief. Iran." 

41 BP Statistical Review of World Energy june 2015. 

42 SVB Energy International. "Iran Upstream Oil and Gas Report"; "Iran's 

Natural Gas Production Capacity Reaches to 1 bcmjd," Entekhab, AprillS, 

2015, http:/ jwww.entekhab.irjfa/news/156467; "Iran's Priorities for 

Developing Its Shared Oil and Gas Fields," JRNA, March 15, 2015, http:/ f 

www.ima.irjfa/News/81543026. 

to mid-2018." Most of this will be produced from twenty· 

seven out of the twenty~eight phases of the South Pars44 

giant gas field, with the exception of phase 11, which is still 

undeveloped. Phases 12, 15·16, and 17·18 of South Pars 

are expected to be completed between mid-2015 and late 

2016." Completion of these phases will add more than 

100 mcmjd to Iran's natural gas production. According 

to NIOC, South Pars is currently producing 54 percent of 

43 "Iran's Natural Gas Production Capacity Reaches to 1 bcmfd," En· 

tekhab; "Iran's Priorities for Developing Its Shared Oil and Gas Fields," 

TRNA 

44 South Pars is the world's largest-known gas structure, comprising 470 

Tcf of gas, around 9 percent of global gas reserves. 

45 SVB Energy International, "Iran Upstream Oil and Gas Report"; "Iran's 

Natural Gas Production Capacity Reaches to 1 bcmjd," Entekhab, AprillS, 

2015, http:/ fwww.entekhab.ir/fa/news/156467; "Iran's Priorities for 

Developing Its Shared Oil and Gas Fields," !RNA, March 15,2015, http:// 

www.ima.ir/fa/News/81543026. 

ATLANTIC COUNCIL 
49 

Iran's natural gas production, at an average daily rate of 

365 mcm."According NIOC, South Pars produced 111 bern 

of natural gas in 2014.47 

However. Iran also faces substantial growth in annual 

domestic gas consumption, which prevents it from 

achieving significant export capacity. In 2013, 60 percent 

of Iran's total energy consumption came from natural gas, 

and only 38 percent was from oil (meaning 98 percent of 

Iran's consumption was from oil or gas). The remainder, 

less than 2 percent, included hydropower, nuclear, and 

non~hydro renewables.48 In 2014, Iran consumed nearly 

7 percent more gas than it did in 2013. Yet, according to 

National Iranian Gas Company (NIGC),49 Iran's natural gas 

consumption is growing at an average rate of 3.1 percent 

per year, making it the third-largest consumer of natural 

gas after the United States and Russia. 5° It is noteworthy 

that in 2013,67 percent of Iran's electricity was produced 

from natural gas, and that the share of natural gas in Iran's 

transportation system is 14 percent. 5

1 

2.3. INVESTMENT REQUIREMENTS TO 

REACH THE MID-TERM OIL AND GAS 

PRODUCTION GOALS 

Iran's Minister of Petroleum, Bijan Zangeneh, recently 

announced an urgent demand for approximately $30 billion 

to pursue South Pars development plans, and at least $20 

billion to complete the ongoing development projects in the 

West Karun reservoirs within three years. 52 Iran's National 

Development Fund (NDF) approved a $20 billion allocation 

for investment in West Karun, and the remaining funds 

would need to come from foreign investment. 

According to the fifth five-year economic plan for the 

period from March 2011 to March 2016, Iran aimed to 

increase oil production to 5.152 mb/d by attracting $155 

billion of investment to its upstream oil and gas industry. 5

3 

It is also estimated that a total investment of about $200-

250 billion is needed to address Iran's whole oil and gas 

industry, including upstream exploration and production, 

46 ulran's Priorities for Developing Its Shared Oil and Gas Fields," !RNA; 

"Iran's Condensate Production Reached to 500 kbfd," SHANA, August 

2015, http:/ jwww.shana.ir /fajnewsagency /244595/. 

47 Ibid; "Iran Produced 111 bern of Natura! Gas from South Pars;' Mizan 

Online, April27, 2015, http:/ jwww.mizanonline.ir/fa/newsj47624. 

48 US Energy Information Administration, "Country Analysis Brief, !ran," 

49 The National Iranian Gas Company (NIGC) was established in 1965, is 

under the direction of Iran's Ministry of Petroleum, and is responsible for 

the treatment, transmission, transpiration, and distribution of natural gas to 

the domestic, industrial, and commercial sectors, as well as power plants. 

50 SVB Energy International, "Iran Upstream Oil and Gas Report"; US 

Energy Information Administration, "Country Analysis Brief, Iran," 

51 Iran Fuel Conservation Company, http:/ /ifco.ir/transportation/trans· 

portation_index.asp. 

52 "Iran's Shared Oil, Gas Fields Need $50 Billion," Press 11', September 3, 

2015, http:/ jwww.presstv.com/Detail/2015/09 /03/427618/iran·oil-gas· 

production-shared·fields-zangeneh. 

53 SVB Energy International, "Iran Upstream Oil and Gas Report" 

ATLANTIC COUNCIL 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

downstream, petrochemicals, midstream, and shipping. 54 

But international sanctions will need to be removed before 

the industry can attract enough financial investment to 

help this plan come to fruition. 

3. OIL AND GAS EXPORT 

POLICY 

The historical context of Iran's crude oil export policy has been discussed earlier. As mentioned, after the 

Islamic Revolution, the consortium of international oil 

companies that were in charge of marketing and sales of 

Iranian oil was dissolved, and NIOC took over the entire 

export process. After the 2012 sanctions that targeted 

Iranian oil sales, the country's oil production and export 

dropped by more than 1 mbfd. Given the low oil prices of the current environment, Iran could face hurdles 

in terms of marketing and selling its oil. This section 

discusses different strategies that NIOC would adopt to 

regain its lost market share and sell additional quantities, after the removal of sanctions. 

3.1. CRUDE OIL EXPORT POLICY 

Prior to the 2012 sanctions, Iran exported around 2.5 mb/d 

and was the second-largest oil exporter in OPEC. 55 However, 

due to sanctions, the average export of crude oil dedined 

around 40 percent to about 1.5mb/din 2012, and to 1 mb/d 

in 2014.50 By 2014, Iran had fallen to the seventh-largest 

exporter in OPEC after Saudi Arabia, Iraq, the United Arab 

Emirates (UAE), Nigeria, Kuwait, and Angola. 57 

In order to increase crude oil production to pre-2012 

levels, Iran will have to tackle significant technical 

challenges, as well as daunting marketing and sales hurdles 

such as lost market share, oversupply in the market, and 

low oil prices. 

Market Share. As sanctions are lifted, Iran will try to 

regain its lost market share of more than 1 mbfd, which 

is particularly acute at a time of oversupply and low oil 

prices. Most of Iran's crude oil competitors, primarily 

Saudi Arabia and Kuwait, have already signed long-term 

agreements with their customers. These commitments 

are usually for at least one year. As Saudi Arabia has given 

no indication that it will cut production, Tehran will have 

no choice but to sell most of its excess oil supplies on the 

spot market for the next year. Selling oil on the spot market 

is not usually a desirable option for major oil suppliers, 

particularly at the time of oversupply and tight competition 

54 Ibid. 

55 Energy Information Administration, "Total Petroleum and Other Liquids Production- 2014," http:/ fwww.eia.govjcountriesjcab.cfm?fips=ir. 

56 Ibid; Organization of the Petroleum Exporting Countries, 'i\nnual Sta· 

tistical Bulletin, 2015," http:/ /www.opec.orgjopec_webjstatk_files_proj· 

ectjmediajdownloadsjpublications/ASB2015.pdf. 

57 Organization of the Petroleum Exporting Countries, "Annual Statistical 

Bulletin, 2015." 
50 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Figure 3. Iran Natural Gas Production and Consumption• 

200 

...? 

~ 150 ~ 

Cll 

..... 

Cll 

::E: 

u 

u 

:0 

:::l 

c 

100 .. ~ 

~ i:i'i 50 

0 

in the market. It is expected that Iran will regain part of its 

lost market share of 600,000· 700,000 b/ din Europe after 

the removal of sanctions on its oil exports. 

In order to regain market share, Iran will have to create 

incentives for signing long-term contracts. Iran will try 

to regain its lost market share of about 700,000 b/d in 

Europe, and will also increase its exports to the AsiaPacific region: China, India, and japan. Part of this oil will 

be arranged as oil for goods and services with companies 

from countries that provide investment and procurement 

to the Iranian energy sector and other industries. (See 

below for more details.) Iran could also conduct a crude 

oil swap with its northern neighbors-importing oil 

from Azerbaijan, refining it in its northern refineries, and 

delivering the same amount of oil from its southern fields 

to Azerbaijan's customers in the Persian Gulf. 

However, since Iran lacks a huge storage capacity for its 

unsold oi1, it can only increase its crude oil production 

slowly and cautiously. With such low prices, it is 

counterproductive for Iran to rent tankers as floating 

storage and sell its oil at further discounts. Having excess 

oil stored at sea will also encourage Iran's customers to 

push for further discounts. Another hurdle for Iran is 

the lack of enough vessels and tankers in the market for 

transporting extra oil. Iran's own tanker fleet would not 

be sufficient for transporting the extra daily production, 

particularly given that some of the tankers are usually 

occupied as floating storage. The National Iranian Tanker 

Company (NITC) has forty-two Very Large Crude Career 

-- Consumption -

-- Production 

(VLCC), each of which has a capacity of2 mbfd.58 

Condensate vs. Crude Oil. Some of Iran's production 

boost, about 200,000 b/d, will be condensate, which is a 

lighter liquid than crude oil and sells in a different market. 

Despite the fact that Iran's condensate has high levels of 

sulfur, it is still considered a light crude oil, and is traded 

at higher prices than is heavy oil. Iran also has few rivals in 

the condensate market, competing mainly with the United 

States and Russia. 5

9 Additionally, condensate is in high 

demand, particularly in Asia." 

Discounts. Offering discounts or lower price premiums for 

comparable quality crude oil is one of the easiest ways of 

creating incentives for customers. The production cost in 

Iran is $3-7 per barrel,61 so even with a market price range 

of $40-50, Iran still has space for offering discounts and 

increasing its market share. 

58 "!ran's Supertanker Fleet, World's Largest;' Press TV, july 3, 2015, 

http:/ /presstv.comjDetail/2015/07 /03/418583/iran·oil-tanker-fieet· 

sardashti·exports. 

59 ':Asia Condensate Demand to Double by 2016, Opening Market to 

New Suppliers," Reuters, August 24, 2012, http:/ fwww.reuters.com/arti· 

cle/2012/08/)fcondensate-asia-idUSL4E8j81HT20120824. 

60 Asia's condensate demand is expected to double by 2016, as new 

splitters are going to be built to process this very light liquid. South Korea, 

China, and Singapore are building distillation units to split the condensate 

with one-seventh the cost of a normal refinery unit. On the other hand, 

the condensate supplies of Qatar, the biggest supplier to this region, are 

expected to drop as the country's domestic use of condensate is increas· 

ing. See "Asia Condensate Demand to Double by 2016, Opening Market to 

New Suppliers;· Reuters. 

61 Sara Vakhshouri, "Why Does Iran Resist Oil Price Discounts?" Middle 

East Economic Survey, September 10, 2012. 

ATLANTIC COUNCIL 
51 

It is unclear, however, whether Iran would pursue this 

course of action. Even under sanctions, when prices were 

above $100 per barrel, there was no evidence that Iran 

substantially discounted its oil. Instead, it offered official 

discounts of$2-5 per barrel, never more than $7.62 NIOC 

understands that discounting is a slippery slope. If it begins 

offering substantial discounts, its customers will demand 

increasingly lower prices, especially if the country is seen 

as weakened from sanctions and international pressure.63 

In addition, discounts are even less effective during a time 

of low oil prices, as other suppliers could easily match the 

discounted price, given their own low production costs. 

Oil for Goods and Services. An exchange or barter of oil 

for goods and services could be an effective way for Iran 

to increase its market share. For instance, Iran could take 

loans from Chinese banks to import industrial goods, and 

then repay its debts to China with crude oil.64 lran could 

also use oil to repay any services rendered. NIOC has had 

significant experience with this type of exchange due to 

Iran's eight-year war with Iraq, and when it could not 

access its oil revenue due to sanctions. One of the benefits 

of exchanging oil for goods and services is that it would not 

only create incentives for companies to purchase Iranian 

oil, but would also help Iran import what it needs without 

resorting to hard currency. 

In january 2014, at the height of sanctions, Iran signed 

a $20 billion oil-for-goods deal with Russia, exchanging 

500,000 b/d of Iranian oil for Russian goods and services." 

Russia could redirect this crude oil to Belarus and 

Kazakhstan and, in return, export its military and industrial 

goods to Iran." In june 2015, Bijan Zangeneh said that 

Russia would start importing the first cargo from the oilfor~goods agreement very soon.67 This strategy could help 

Iran regain part of its lost market share in Europe. Signing 

an oil-for-goods or oil-for-services deal with European 

companies could increase their interest both in investing in 

Iran and in purchasing Iranian oiL 

3.2. NATURAL GAS EXPORT POLICY 

Part of Iran's 2025 National Vision Document and the 

"Economy of Resistance" includes increasing natural gas 

production and expanding the natural gas market from 1.5 

percent to 10 percent by the end of2025.68 This is also the 

62 Ibid, 

63 Ibid. 

64 Amir Hossein Zamaninia, "Iran's Oil Diplomacy after the Sanctions," 

SHANA, http://www.shana.ir jfajnewsagency /246022/. 

65 Jonathan Saul and Parisa Hafezi, uExclusive: Iran, Russia Negotiating 

Big OiHor-Goods Deal," Reuters, January 10, 2014, http://v.ww.reuters. 

com/ article /20 14/01/1 0 jus·iran-russia-oil·idUSBREA090DK20 140 110. 

66 "Russia Set to Start Iran Crude Imports Under Oil-for-Goods Deal." Bloomberg, 

june 5, 2015, http://wwwbloomberg.comjnewsjarticlesj201&-06-06/russia· 

seHo·struNran-.crude-imports-under·oil·for·goods-deal. 

671bid. 

68 "Iran's Priorities for Developing Its Shared Oil and Gas Fields;' !RNA; 

Center for Preserving and Publishing the Works of Grand Ayatollah Sayyld 

Ali Khamenei, "General Policies of Economy of Resistance." 

ATLANTIC COUNCIL 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

target date for reaching Iran's goals for exporting natural 

gas or converting it to electricity and then exporting it. 

Jf sanctions are lifted and Iran succeeds in attracting the 

required foreign investment and technology to develop its 

natural gas fields, this target would be a realistic goal. 

As mentioned earlier, sanctions on foreign investment 

and technology, along with high levels of domestic 

consumption, have kept Iran's share of the global gas 

export market relatively low, despite Iran's success in 

increasing natural gas production and exportation during 

the past few years. 

Overall, Iran produced 159.9 bern of natural gas in 2011, 

while it consumed 162.4.8 bern, which means that Iran had 

little to no export capacity.69 Iran's natural gas trade balance 

became positive for the first time in 2014 (see below) when 

its production of natural gas increased to 172.6 bern and its 

consumption of natural gas rose to 170.2 bcm.7° 

According to Zangeneh, Iran is planning to increase 

natural gas production to 1,000 million cubic meters a 

day (mcm/d) by 2018, and to increase natural gas exports 

to 80 mcm per year by 2020.71 Iran consumes almost all 

of its gas production domestically; 65 percent of Iranian 

primary energy consumption is supplied by its own natural 

gas. Iranian households "account for 48 percent of annual 

gas consumption, power plants for 27 percent, and major 

industries for about 16 percent:•n Iran utilizes gas injection 

to maintain pressure in its oil wells. It injected about 100 

million cubic meters a day (em/d) of gas into its oilfields 

last year, and is planning to raise the volume to 270 million 

cm/d by 2015.73 

The international sanctions did not target Iran's natural 

gas exports, so the country was able to increase its natural 

gas production since the 2012 sanctions. In 2014, Iran's 

natural gas production increased and, as noted above, its 

natural gas trade balance was positive for the first time.74 

Iran exported 9.6 bern, and its natural gas imports were 

only 6.9 bcm.75 

Turkey accounts for 90 percent of Iran's exports. In 1996, 

Iran and Turkey signed a contract for the sale of 10 billion 

cubic meters per year (bcm/y) of natural gas from Iran 

to Turkey for twenty-five years. In 2009, Iran exported 

only 5.25 billion cubic meters (bern) of gas to Turkey. But 

in 2010, this rose to 7.77 bern, and in 2011 to 8.4 bern, 

69 ''Russia Set to Start Iran Crude Imports Under Oil-for-Goods Deal;' 

Bloomberg. 

70 Ibid. 

71 "Interview with Iran's Minister of Petroleum, Bijan Zangeneh,u ISNA 

New Agency, May 1, 2015, http:jjisnair/fajnews/93031808646/. 

72 Sara Vakhshouri, "Sanctions Raise Questions about Iran's Export Capacity,u Middle East Economic Survey, November 9, 2012, http:jjarchives. 

mees.comjissuesj1448jarticlesj49566. 

73 Ibid. 

74 Ibid. 

75 BP SW.tistical Review of World Energy june 2012, http:jjwww.bp.com/ 

contentjdamjbpjpdf/Statistical-Review-2012/statistical_review_of_ 

world_energy_2012.pdf. 

10 
52 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 4: Iran's Export Destinations and Volume, 2010-2014 (1,000 b/d) 

Source: Orgamzalion of the Petroleum E.\!Wrlmg C\lwltrws. "Annual Stall~tlcal Hull<>tu1, 20iS" 

ultimately hitting 8.9 in 2014 (out of a total export of9.6 

bcm).76 1ran also exports less than 1 bcmfy of natural gas 

to Azerbaijan, and barters gas with Armenia in exchange 

for electricity.77 Azerbaijan supplies gas to Iran's northern 

provinces, in return for Iran sending equal amounts of gas 

to the Azeri exclave Nakhjavan. 

On the other hand, Iran imports substantial volumes of 

natural gas from Turkmenistan. In 2011, it imported 10.2 

bcrn.76 However, as previously mentioned, Iran's natural gas 

trade balance became positive in 2014, and its production 

will increase even further by mid~2016 to 2017 upon 

completion of phases 12,15-16, and 17-18. 

One significant advantage Iran has is its land connections 

with its neighbors. Despite fruitless efforts to build LNG 

plants, because sanctions prevented Iran from obtaining 

the mostly American LNG technology, Iran's geopolitical 

location offers the opportunity to easily export gas via 

pipelines, to China via Pakistan and India, to Syria and 

Lebanon via Iraq, and to Europe via Turkey. 

Europe. On the consumer side, EU economies have 

been searching for secure and more diversified energy 

sources. Iran could send its gas to Europe through the 

Turkey corridor, and conceivably play a role in exporting 

gas through the Trans-Anatolian Natural Gas Pipeline 

(TANAP).79 1ran's geographical location could also allow it 

to be a conduit for transporting energy resources from the 

Caspian Sea and Central Asia energy producers into Europe, 

via routes such as TANAP and the Trans-Adriatic Pipeline 

76 BP Statistkal Review of World Energy june 2012, http:/ jwww.bp.com/ 

content/damjbpjpdf/Statistical-Review-2012/statistical_review_of_ 

world_energy_2012.pdf.; BP Statistical Review of World Energy june 2015; 

US Energy Information Administration, "Country Analysis Brief, !ran." 

77lbid. 

78 BP Statistical Review ofWorld Energy june 2012. 

79 "Post-Iran Deal, Azerbaijan Eyes Energy Transit Opportunities," 

EuarsiaNet, June 15, 2015, http:/ jwww.eurasianet.orgjnode/74236. The 

Trans-Anatolian Natural Gas Pipeline (TANAP) is a natural gas pipeline 

from Azerbaijan to Europe through Georgia and Turkey. TANAP, South 

Caucasus Pipeline (SCP), and Trans Adriatic Pipeline are all designed to 

connect the Shah Deniz giant gas field in Azerbaijan to Europe. 

11 

(TAP).130 Both Tehran and Baku have shown an interest in 

Iran sending gas to Azerbaijan and participating in projects 

like TAP and TANAP." It should be noted that there are 

many political and geopolitical complexities involved in 

Iran sending its gas to Europe via these mentioned routs. 

However, this is only discussed as an option, and analysis of 

its viability is above the scope of this report. 

Gulf Cooperation Council Neighbors. One aspect of Iran's 

energy diplomacy is to export natural gas and electricity to 

its Gulf Cooperation Council neighbors in order to increase 

its market share and create long~term economic-and 

perhaps political-alliances with its Arab neighbors. One of 

the priorities of Iranian President Hassan Rouhani's foreign 

policy is to focus on building and strengthening positive 

relations with Iran's Arab neighbors. Iranian energy 

officials also recently announced that they are engaging 

in serious talks about exporting natural gas, and possibly 

electricity, to Iran's Arab neighbors.82 

Many of the GCC member countries are major producers 

of oil and are highly dependent on it for revenue. However; 

their oil consumption is increasing. Having another source 

of supply, like Iranian gas, could free up some of their 

export capacity and allow them to export more oil to help 

their economies. Oman, UAE, and Kuwait are among the 

first Arab countries to engage in gas-deal negotiations 

with Tehran. Iran could also look to redirect its natural gas 

onto the global market with the help of LNG facilities in 

Oman. Iran could make the same arrangement with UAE, 

particularly with regard to its Salman gas field, which is a 

shared field between the two countries. 

Theoretically, there is also significant potential for energy 

cooperation between Iran and Saudi Arabia. However; any 

long-term gas~export commitment must be built on trust. 

80 The Trans-Adriatic Pipeline (TAP) Is a pipeHne that connects Azerbaijan's natural gas to Europe. TAP connects Azerbaijan's natural gas to Italy 

and Western Europe via Albania and the Adriatic Sea. 

81 "Post-Iran Deal, Azerbaijan Eyes Energy Transit Opportunities," Euar· 

siaNet. 

82 "!ran in 'Serious' Gas Talks with Its Arab Neighbors," Iran Daily Online, 

August 29, 2015, http:/ jwwwJran·daily.com/News/125670,html. 

ATLANTIC COUNCIL 
53 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 5: Iran's Plans for Natural Gas Export by Destination 

2013, an agreement to export Iranian natural gas from South Pars to Iraq (two 

routes to Basra and Baghdad), 

Total export to Iraq is planned to reach 70 mcm/d, and NIGC is planning to 

increase it to 90 mcm/d. 

Iraq 

First phase: Through Baghdad route (to AI-Mansour power plant) with total 

capacity of 40 mcm/d. It is planned to start with 7 mcm/d and have a gradual 

increase. 

Second Phase: through Basra route (to Basra power plant) with total capacity of 

35 mcm/d. 

The first phase was planned to start exporting 4 mcm/d in March 2015. Iranian 

officials announced the export hasn't started due to political and security 

reasons. 

Saudi Arabia is planning to increase its petrochemical 

capacity, and is using liquid fuel in its petrochemical 

refineries. Therefore, if Saudi Arabia could gain access to 

Iran's massive gas resources, it could use natural gas instead 

of liquid fuel in its petrochemical facilities. Saudi Arabia could 

also use Iranian gas in power generation and, instead of 

burning liquid fuel, could burn gas for producing electricity." 

However, the history of conflict and mistrust between Iran 

and some of its Arab neighbors, particularly Saudi Arabia, 

makes it hard to believe that the kingdom would commit 

to twenty years of gas imports from Iran in the near 

future. There is also not a significant natural gas trade deal 

between Saudi Arabia and its other Arab neighbor, Qatar. 

83 Sara Vakhshouri, "Iran and the Arab World: Implications of the Nuclear 

Negotiations,~ Middle East Policy vol. 22, no. 3, 2015. 

ATLANTIC COUNCIL 

It seems that relying on external energy resources is not 

part of Saudi energy security policy, at least for now. The 

kingdom is mostly focusing on integration of its upstream 

oil industry with its petrochemical industry. Considering 

the low price of oil in the current environment, consuming 

its oil and liquid fuel in its petrochemical industry and 

power plants could make economic sense for the kingdom. 

Iraq. In 2013, the governments of Iran and Iraq signed an 

agreement to export Iranian natural gas from South Pars to 

Iraq. Two separate pipelines will take Iranian gas to power 

plants in Basra and Baghdad. The total export to Iraq is 

planned to reach 70 mcmfd, and NIGC is planning to increase 

12 
54 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

production to 90 mcmfd.84 According to this agreement, the 

first phase transports a total capacity of 40 mcmfd of gas 

to Al-Mansour power plant in Baghdad." The gas export is 

planned to start at 7 mcmfd and gradually increase from 

there. N!GC announced that it had finalized the construction 

of 97 kilometers (km) of a 48-inch pipeline with primary 

capacity of 5 mcmfd. This pipeline would transfer gas to 

the power plant in Baghdad. Iran would need to construct 

a total 227 km of pipeline in its own land to transfer the gas 

to the Baghdad and Al-Mansour power plants.86 However, 

Iranian officials announced that the export had not started, 

due to political and security reasons.87 The second phase 

would see a total capacity of 35 mcmfd of gas transported 

to Basra.88 

Electricity vs. Natural Gas. One possible use for Iranian 

natural gas would be to convert it into electricity and 

export it. This is beneficial because it would seemingly 

resemble an "Economy of Resistance" by increasing the 

value added to natural gas instead of just exporting it in 

its original form. It would also create stronger trade ties 

and alliances with Iran's consumers and neighbors, and 

it would be harder to convince these countries to stop 

purchasing electricity from Iran in the event of a "snap 

back" of sanctions. It would also diversify Iran's options 

for utilizing its natural gas, at a time the market is facing 

oversupply and low energy prices. 

Iran plans to allocate 6 bern of its natural gas for 

conversion to electricity by 2020. This amount will yield 

additional 5,000 megawatts of electricity per year, solely 

for export.89 Iran currently has the capacity to produce 

74,000 megawatts of electricity per year." 

4. IRAN'S POLICY TOWARD 

ITS DOWNSTREAM AND 

REFINERY SECTOR 

Increasing the refinery capacity of crude oil, natural gas, and 

condensate is part of Iran's policy to expand its production 

chain and increase the value added by preventing the export 

of raw materials. According to the official website of Iran's 

Supreme Leader Sayyed Ali Khamenei, article thirteen 

of"The General Policies of the 'Economy of Resistance"' 

suggests that, in order to reduce Iran's vulnerability and 

84 Arash Karami, "Iran to Export Gas to Iraq Soon, Says Iranian Offi· 

cia!." Al-Monitor, August 19, 2015, http:/ fwww.al-monitor.comjpulsej 

originalsj2015/08jiran-iraq-gas.html#ixzz3m3lizHiy; "Iran Can't 

Export Gas to Europe," Shargh Daily, May 5, 2014, http:/ fsharghdailyJrj 

News/33539/; "Iran Gas Export to Iraq,'' JFNAA, August 2015, http:/ f 

www.ifnaa.ir/fajnewsj26852; SVB Energy International, "Iran Upstream 

Oil and Gas Report." 

85 Ibid. 

86 Ibid 

87 Ibid. 

88 Ibid. 

89 "Iran's Priorities for Developing Its Shared Oil and Gas Fields," !RNA. 

90 "Iran's Electricity Production Increased," Mehr News Agency, September 9, 2015, http:/ jwww.mehrnews.comjnewsj2912331. 

13 

dependence on its crude oil exports, Iran needs to increase 

exports of natural gas, electricity, petrochemical products, 

and refined petroleum products.91 

After Saudi Arabia, Iran is the second~ largest consumer 

of refined products in the Middle East, with average 

domestic oil consumption of 1.8mb/din 2014.92 This 

number was 3 percent higher than Iran's domestic oil 

consumption in 2012. Gasoline, diesel, and fuel oil have 

the highest share in Iran's domestic consumed-fuel 

basket. International sanctions that have limited Iran's 

access to the importation of refined petroleum products, 

particularly gasoline, have minimized Iran's ability to 

export crude oil, and have forced Iran to expand its 

refinery capacity. Its refinery capacity increased from 1.5 

mb/d to around 1.86mb/din 2011, 1.98 mbfd in 2013, 

and 2.03 mbfd in 2014.93 Most of the refining-capacity 

expansion came from completion of two refineries at 

Lavan and Arak, complemented by capacity expansion at 

the Bandar Abbas refinery (see table 6). 

In 2013, Iranian refineries produced most of Iran's demand 

for refined petroleum products. In that same year, Iran 

imported only 17,000 b/d of refined products, mostly 

gasoline with 85 percent of import share.94 It is expected 

that Iran's refinery capacity, and particularly gasoline 

production, will increase further by the end of the Iranian 

year (ending in March 2016), mainly from capacity 

expansion in two refineries of Isfahan and Bandar Abbas.95 

Iran is planning to increase its oil refinery capacity even 

further. By 2017, it is expected to export gasoline upon 

the completion of its Persian Gulf Star refinery in Bushehr 

province, in the southern part of Iran. The mentioned 

refinery has three phases (or units), and each phase has a 

capacity of refining 120,000 barrels of condensate per day 

(total amount of360,000 b/d). Iran's gasoline production 

capacity will reach 96 million liters per day when the 

Persian Gulf Star refinery starts to produce at its maximum 

capacity in 2017. 

Iran wants to increase its oil refinery capacity to 2 mbjd, 

and to expand its condensate refinery capacity to 1 mb/d 

by 2020, thereby reaching a total refinery capacity of 3 

mbfd. Iran is on track to meet this goal; by the end of 

2014, Iran reached its nominal oil refinery capacity of2 

mbfd.96 

On the condensate side, if Iran achieves a 1 mb/d 

refinery capacity by 2020, it can replace almost all of its 

condensate export with the light distillates produced 

in its refineries. Three major condensate refineries 

91 Center for Preserving and Publishing the Works of Grand Ayatollah 

Sayyid Ali Khamenel, "General Policies of Economy of Resistance." 

92 US Energy Information Administration, "Country Analysis Brief, Iran." 

93 SVB Energy International, "Iran Upstream Oil and Gas Report"; US 

Energy Information Administration, "Country Analysis Brief, Iran." 

94 US Energy Information Administration, "Country Analysis Brief, Iran." 

95 Ibid; "Interview with Iran's Minister of Petroleum, Bijan Zangeneh," 

lSNA, May 1, 2015, http:/ jisna.irjfajnews/93031808646. 

96 Ibid. 

ATLANTIC COUNCIL 
55 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 6. Oil Refinery Capacity in Iran 

are to be built: the Persian Gulf Star refinery, with the 

capacity of 360 thousand barrels per day (kbjd); the 

Fars refinery, with the capacity of 120 kbjd; and the 

new Assalouyeh refinery project, with the capacity of 

480 kb/d. 97 The Assalouyeh refineries are defined in a 

project called Siraf, which includes eight refineries, each 

having a capacity of 60 kb/d.98 To complete construction 

of Siraf refineries, Iran would need $250-300 million for 

each refinery unit.99 The investment and construction 

of the Persian Gulf Star refinery has already started, 

and is expected to reach completion by 2017. 100 Upon 

completion, Iran would become self-reliant for domestic 

gasoline production.Hn 

4.1. DOMESTIC CONSUMPTION AND 

FUEL SUBSIDY REFORM PLAN 

Lowering the Iranian domestic energy consumption rate 

is another part of Khamenei's doctrine of an "Economy of 

Resistance." Article 4 indicates that a significant reduction 

of domestic energy use could be achieved by implementing 

97 "Zangeneh: Even Under Sanctions We Will Increase Oil and Condensate Production to 5.7 mbjd," ISNA, June 2014, http://isna.ir/fa/ 

news/93031808646. 

98 SVB Energy International, "Iran Upstream Oi! and Gas Report." 

99 !bid. 

100 Ibid. 

101 !bid. 

ATLANTIC COUNCIL 

targeted, more focused, and effective subsidies. 102 

Reduction of fuel subsidies on the one hand, and increasing 

the refinery capacity on the othec are key factors in helping 

Iran control its domestic oil consumption. Both of these 

tactics could help Iran achieve independence in terms of 

domestic demand for fuel and gasoline. Although the Iranian government introduced an energy subsidy reform plan, 

in order to reduce the price subsidies on petroleum, natu~ 

ral gas, and electricity (and, by extension, overall domestic 

consumption), it still has a long way to go before achieving 

its goal.103 

In 2012, Iran consumed 9.6 quadrillion British thermal 

units (BTU) of energy, of which oil and gas accounted for 

almost 98 percent of total energy consumption. 104 Iran's 

domestic consumption growth increased by 50 percent 

in the past ten years, and is expected to have an upward 

trend by 2030. Nevertheless, Iran's subsidy reform plan 

helped with controlling the bullish trend in consumption of 

domestic refined petroleum, particularly gasoline. 

The Iranian government introduced the subsidy reform 

program to reduce subsidies on domestic fuel prices. The 

subsidy reform was designed to happen gradually, in order 

to prevent a shock in the domestic market. The first phase 

102 Center for Preserving and Publishing the Work<; of Grand Ayatollah 

Sayyid Ali Khamenei, "General Policies of Economy of Resistance." 

103 US Energy Information Administration, "Country Analysis Brief, Iran." 

104lbid. 

14 
56 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

of this plan was implemented at the end of 2010. The second phase of this program was launched in April2014, and 

the price for subsidized105 gasoline increased from 4,000 

rials (16 cents) per liter to 7,000 rials (27 cents) per liter, 

and from 7,000 rials (27 cents) to 10,000 rials (42 cents) 

for free-market gasoline. 106 

The subsidy reform plan was designed to reduce the 

gap between international and domestic prices, save the 

government money, and allow Iran to better manage its 

domestic consumption. Iran's Fifth Five~Year Development 

Plan (2011-2015) suggested that domestic gasoline prices 

should rise to about 90 percent of the free-on-board (FOB) 

prices of the Persian Gulf by the end of the plan (March 

2015). Yet since 2011, mainly due to its sanctions-caused 

currency devaluation, the Iranian government has not 

saved significant money from reducing fuel subsidies. The 

rial's devaluation since 2011 has increased the gap between international and domestic prices for fuels, particularly gasoline. When the first phase of the plan was implemented in 2010, the US dollar was equal to 10,000 rials. In 

this scenario, Iran could manage to increase gasoline prices 

from 10 to 40 cents per liter, and save about 30 cents per 

liter. However, when the value of the rial dropped between 

2012 and 2014, Iran's maximum savings from the fuel price 

subsidy reduction was only 16 cents per liter. 

S. IRAN'S POLICY TOWARD 

ITS PETROCHEMICAL 

INDUSTRY 

During Bijan Zangeneh's first term as oil Minister, from 

1997 to 2005, he massively expanded Iran's petrochemical 

industry, increasing the value of annual petrochemical 

production from $1 billion to $18 billion.'" Investment 

in and development of Iran's downstream sector has 

always been part ofZangeneh's strategy, and, since his 

reappointment in 2013, this will continue to be part 

of his new team's plan. In 2014, Iran's petrochemical 

industry consumed 5 percent of Iran's total liquid and gas 

hydrocarbon production and produced about 41 million 

ton of products. Iran's petrochemical products represented 

40 percent of Iran's non~oil export in the same year.108 

Zangeneh is planning to increase the petrochemical 

production nominal capadty from today's 60 million tons 

per year to 180 million tons by 2025.109 lt is important to 

note that due to sanctions and lack of adequate feedstock, 

Iran's petrochemical production in 2014 was only 41 

million tons per year below its nominal capacity of 60 

105 The Iranian government issues a smart fuel card for each card, with 

60 liters of semi-subsidized gasoline a month. Once the 60 liters in the 

card is used up, the extra amount of gasoline has to be purchased at the 

free market price. 

106 SVB Energy International, ~Iran Upstream Oil and Gas Report." 

107 Sara Vakhshouri, ulran's Oil Minister Confronts Sanctions:' 

108 'Iran's Petrochemical Products reaches to 180 million tonjyear', 

Islamic Republic News Agency (!RNA), january 2015, http:/ /www.irna.ir/ 

fajNews/81442405/ 

109 "Iran's Priorities for Developing Its Shared Oil and Gas Fields," !RNA. 

15 

million tonsfyear.110 Iran plans to supply most of the 

natural gas feedstock for its petrochemical factories from 

tbe South Pars gas field. 

Expanding the petrochemical sector makes economic 

sense for Iran's economy, mainly because the country holds 

massive natural gas reserves. Being able to use natural gas 

as tbe feedstock of its petrochemical factories gives Iran a 

substantial economic advantage over its regional competitors. 

Expansion of the petrochemical industry is also desirable 

because it is in line with Khamenei's "Economy of 

Resistance." Because sanctions have largely targeted 

Iranian crude oil exports, expanding downstream 

capability increases the share of non~oil petroleum 

products in the country's economy and serves as a way to 

lessen the impact of sanctions. 

6.UPSTREAMINVESTMENT 

POLICY: ATTRACTING 

FOREIGN INVESTMENT 

US and EU sanctions have had a significant long-term toll 

on Iran's infrastructure and have prevented adequate 

investment and technology from entering the country. 

According to Iran's latest five-year energy investment plan 

(2011-2015), Iran needs $255 billion worth of investment 

in its oil and gas industry in order to reach its target plans 

(see table 7). According to this plan, Iran needs to drill 

2,500 wells-2,000 wells onshore and 500 wells offshoreto increase its crude oil production to the target level of 5 

mbfd.111 lran's petroleum ministry could not absorb the 

required investment, however, and is far behind its scheduled oil and gas development plans. This has hindered key 

natural gas reinjection projects, which are necessary to 

sustain production from matured oilfields, and completion 

and development of the South Pars gas field. 

6.1. MODIFYING THE UPSTREAM 

INVESTMENT REGULATIONS 

After 1979, Iran modified its policy toward foreign 

investors in its energy industry. In the late 1990s, Minister 

Zangeneh introduced a new type of contract that, for the 

first time since the 1979 revolution, allowed international 

investment in Iran's development projects of old oilfields. 

The new contract was named buy-back and its main 

goal was to enhance Iran's recovery factors.U2 Later, Iran 

110 'Managing Director of National Iranian Petrochemical Company: 

~By the end of 2015, additional 8.4 million tonsjyear will be added to 

the total petrochemical production capacity," Iran's Ministry of Petroleum website, January 2015, http:/ jwww.mop.ir/PortaljHomej 

ShowPage.aspx?Object=NEWS&ID=-80177a72-eaa7-43ec·80d2·22fe07b· 

2caad&LayoutlD=912a60ab-89b6-4c35-8cc9-ae59d0709689&Category· 

ID=6949fd08-0b05-417 d-9828-7 f7 c4022aeb0 

111 Reza Zandi, "The $50 Billion Game of Drilling Rig,~ Sed a Weekly, 

August 2015. 

112 Iran's average recovery factor is around 20 percent. 

ATLANTIC COUNCIL 
57 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 7. Iran's Fifth Five-Year Energy Investment Plan, 2011-2015 

Source: Iran's Ministry of Petroleum; US Energy Information Administration, "Country Analysis BrieL Iran." 

allowed the international investors to participate on 

exploration projects and work on its green fields. Iran's 

petroleum ministry revised buy~ back contracts for a 

third time in order to increase their incentives, to reduce 

investment risks, and to increase the flexibility of the 

contract terms for the investors. 

Iran could attract around $50 billion of investment 

for its energy industry by offering buyMback contracts 

to international companies. Nevertheless, this 

type of contract was not successful in maintaining 

the investments and activities of international oil 

companies, such as Total and Eni, in its energy industry. 

Lack of IOC interest in the buyMback contract was 

further reinforced by international sanctions on Iran 

and by the situation in Iraq in 2004 and 2005. The Iraqi 

government and, in particular,. the Kurdistan region 

offered more desirable contract models for investors. 

These hurdles along with tighter sanctions on Iran's 

energy industry forced the country's decision-makers to 

revise their investment contracts. 

In 2013, for the first time, Iran's Minister of Petroleum 

Rostam Ghasemi, former head of IRGC-affiliated 

Khatam-al Anbiya Construction Headquarters, offered 

production~sharing contracts for investment in upstream 

energy fields. 113 During Ghasemi's time, NIOC offered such 

a contract to an Indian consortium to develop the offshore 

Farzad B gas field, a shared field with Saudi Arabia 

located in the Farsi exploration block in the Persian Gulf. 

Upon resuming office, Zangeneh put a lot of effort and focus 

on revising Iran's upstream investment contract models in 

order to once again attract international investors in the 

country's energy sector. In February 2014, the committee 

that Zangeneh assigned for revising the investment 

regulations introduced a new type of investment contract. 

113 Sara Vakhshouri, "Iran Offers New Terms for Oil Contracts:' 

ATLANTIC COUNCIL 

The new contract model was named 'Iran Petroleum 

Contract; or I PC. According to this committee, IPC offers 

more desirable terms and incentives by providing investors 

with higher profits and implementing fees that are in 

correlation with the investment risksY4 

The IPC proposes a joint venture between an Iranian company and international companies for exploration, developM 

ment, and production projects (see table 8.) Involvement of 

foreign companies in the production process is one of the 

major differences between the !PC and the buy-back contract. Previously, international investors were only allowed 

to participate in exploration and development projects and 

had to leave the field by the time the production started. 

Under the IPC, international oil companies will have an 

active role in the production process-a very unusual concession, unseen since the inception of the Islamic Republic 

in 1979. This is the first time since the 1979 revolution that 

Iran will involve international oil companies and investors 

in the production process. 

The terms for the exploration projects are the other 

noticeable difference between the IPC and the buy-back 

contract. If no commercial resources are discovered during 

an exploration project, IPC allows the investing company 

to participate in another exploration project. According to 

the Iranian Constitution, "the ownership of the reservoir 

belongs to the nation and cannot be transferred." 115 But 

according to the IPC committee, the new investment model 

allows investors to include their revenue from projects 

in Iranian oil and gas fields in their annual monetary and 

financial reports. 116 

The duration of Iran's new investment contracts is almost 

double the length of buy-back contracts, between twenty 

114lnteiView with Seyyed Mehdi Hossein,SHANA, February 2014, 

http:ffwww.shanaJr /fajnewsagency /212965/ ,_;Jybol, .. hi.J<S.J-.:..~~ 

l.s .. A.:re:;:•lj.;;"IJ-)~...,_...'-""J<S·tY.·tJIJ-l .. 

115 Ibid .. 

116 Interview with Seyed Mehdi Hosseini, SHANA, February 2014 .. 

16 
58 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

International Oil Companies Activities in Iran Oil and Gas Fields prior to 2012 sanctions 

Sourtt': M:JttPiotmwski. "Gas Could Trump Oil in !r<~n':-.l\1St-Si1m:t~<m<> VVn!hl, Energy Fuse, Septl'mhf'r 16,2015, http:/fw\\'W.t>twrgyfusi:'.Prg/gas·nHiltl· 

trump-nil·ln-irans-poo,t·o,anctwns·\VIlrld 

and twenty-five years. NIOC hopes to increase the quality 

of work and protect its oil and gas reservoirs by engaging 

international companies for longer periods of time. This 

will give the investors a more vested stake in the field 

and could create political advantages for the country, as 

investing companies would have long~ term interests in 

Iran. Nevertheless, committing to a long~term investment 

contract involves more risk evaluation from the investing 

company, particularly given the current low-oil price 

environment. 

The IPC model also creates an integrated investment plan 

for exploration, development, and production processes. 

By comparison, in the previous buy~back contracts, the 

investor had to enter a new bidding round after the 

exploration process and compete with other investors to 

gain a development project for the same field. 

It is worth mentioning that, although the proposed terms 

in the new IPCs are much more flexible and have higher 

incentives than buy-back contracts, no international oil 

company will be able to invest in the Iranian oil industry 

until international sanctions are eased, following the 

implementation of the nuclear agreement reached between 

Iran and the PS+ 1. The true test of the attractiveness of the 

IPC contracts will be seen in the months and years after 

sanctions are lifted. 

17 

6.2. NATIONAL DEVELOPMENT FUND 

The National Development Fund of Iran (NDFI) was 

founded in 2011, based on Article 84 of the country's 

five~ year "socioeconomic development plan." The NDFI 

was established as independent from Iran's budget, and 

holds about 20 percent of all oil, condensate, and natural 

gas export revenue (after cost deductions) for investment 

purposes.117 In 2014, the Sovereign Wealth Fund Institute 

estimated that the NDFI is worth about $62 billion, which 

has since risen to $70 billion, according to the latest official 

estimate. us Upon the removal of sanctions, Iran would 

have access to an estimated $100-120 billion of its foreign 

exchange reserves, currently frozen in escrow accounts 

abroad due to sanctions. 119 The Iranian government is 

planning to provide international investors with some 

of these international reserves through agreements with 

international banks,120 This way, if Iran could not gain full 

access to its escrow accounts for some reason, it would still 

117 fn the case of natural gas, the central bank has to transfer 20 percent 

of the export revenue after deducting the value of imported gas. See: 

http:ffndfi.ir jl,y(;.•,Jli"'·J-<>0~yj#1 09314. 

118 "Iran to Draw on Sovereign Fund to Withstand Oil Price Slide," Reu· 

ters, November 14, 2014, http:/ jwwwxeuters.com/artide/2014/11/15/ 

us-iran·economy~idUSKCNO!ZOMV20141115; Sharagim Sham, remarks 

during the Second South Caspian Summit, April16, 2015. 

119 Bijan Khajehpour, "What Will Happen Once !ran's Assets are Unfrozen?" AI-Monitor, May 26, 2015, http:jjwww.al·monitor.comjpulsej 

origina!s/2015/05/iran-import-sanctions-investment-consumer-foreign·assets.html. 

120 Sham, Second South Caspian Summit. 

ATLANTIC COUNCIL 
59 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 8. Comparison between the Terms of the IPC and Buy-Backs 

Buy-Back IPC 

3-5 years 20-25 years 

Exploration and development Exploration, development, and 

production 

If the project doesn't lead to 

development and production, 

the IOC's investment will not be 

reimbursed 

If the project doesn't lead to 

development and production, 

the IOC's investment will not be 

reimbursed 

The IOC has priority to participate in 

another exploration project 

Low flexibility Higher flexibility 

Limited Flexible (higher fees and bonuses in 

the fields with higher risks) 

Fixed Open /flexible 

Source: Iran's Ministry of Petroleum; SVH Energy International, "fran Upstream Oil and Gas Report." 

be able to use these resources for investment domestically. 

However, lower oil prices and Iran's budget deficit, along 

with lack of access to its oil income, will limit the NDFI's 

resources. Moreover, Iranian officials have not yet clarified 

their priorities, or the procedure for allocating these 

resources to private investors. 

6.3. INTEGRATING THE INVESTMENT 

PROCESS IN UPSTREAM, DOWNSTREAM 

AND PETROCHEMICAL 

Iran is planning to offer an investment package to 

international investors, to integrate their investment in 

Iran's energy industry so they can extract the hydrocarbon 

in the upstream sector, and then convert it to the final 

product in the downstream sector or petrochemical 

process. This will integrate the investment in upstream 

with downstream and petrochemical. International 

investors can take advantage of the discounted raw 

feedstock that they produced from oil or gas fields, and 

use it in a refinery or petrochemical industry in which 

they have invested. For instance, we could refer to Iran's 

agreement with India for developing the Farzad B field, 

and involving Indian companies in investing in and sharing 

ATLANTIC COUNCIL 

a petrochemical project in Chabahr. In other words, 

integrating India's investment from developing a gas field 

all the way to developing a petrochemical factory, with the 

purpose of exporting the final product to lndia. 

7. CONCLUSION 

Iran, with its huge oil and gas reserves, has witnessed many 

ups and downs in its relations with other countries and 

international oil companies. In response to each challenge, 

Iran's energy policy changed, moving it toward self-reliance. 

After the 1979 Islamic Revolution, years of sanctions and 

war prevented the energy industry from having continuous 

access to the necessary investment and technology. Since 

2012, sanctions against Iran's energy industry and oil 

exports intensified, due to conflict surrounding Iran's 

nuclear program. In 2014, Khamenei announced the idea 

of the "Economy of Resistance," with the aim of reducing 

dependency on oil revenue, and increasing value-added 

production by processing raw material domestically and 

exporting the processed material. Therefore, focusing 

on the downstream and refinery sector, as well as the 

petrochemical sector, will be a major component of 

Iran's energy industry in the next decade. In regards to 

18 
60 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

Table 9. Iran's Energy Policy and Diplomacy after the Nuclear Deal 

- Offer discounts on oil prices and transportation. 

- Engage buyers in investment contracts and production processes throughout 

the value chain (e.g., Iran's agreement with India for developing the Farzad 8 field 

and involving Indian companies in investing and sharing a petrochemical project in 

Chabahr. In other words, integrating India's investment from developing a gas field 

all the way to developing a petrochemical factory with the purpose of exporting 

the final product to India). 

- Involve IOCs in the production and exportation of the field's product for a longer 

time in the upstream 

Create new upstream investment regulations with higher incentives (Iran 

Petroleum Contract). 

-Use the NDFI's resources to lend money or share the investment project with 

foreign partners. 

- Integrate investments in upstream to downstream and petrochemical, in order to 

sell the final product to the investing company or its country. 

- Increase the domestic refinery capacity (for oil, natural gas, and condensate). 

- Increase the petrochemical capacity. 

-Convert natural gas to electricity and export electricity instead of natural gas. 

Increase the non-oil export share. 

Export the refined petroleum products and electricity, instead of raw resources. 

Reduce and control domestic energy use. 

Gain foreign technology as part of the upstream investment agreements. 

Create long-term interests and increase the stakes of foreign companies and 

countries. 

- Create new channels for redirecting foreign reserves to international escrow 

accounts by giving funds to companies to reinvest in Iran or importing 

- Expand the energy exports to neighboring countries, particularly the GCC. 

- Increase economic ties with neighbors through investments and exportation of 

goods and engineering services. 

- Use neighbors as transit points for exporting energy resources, and vice versa. 

- Create long-term political relations with other countries, particularly GCC 

neighbors, European countries, India, China, and Japan, through long-term energy 

export agreements or involving them in long-term energy investments. 

Smme: Iran's Mmhtry of Pt>tro!emn: SVB Energy !nternathlna!, "fran Upstr{'am Oil and Ga.'> Report'' 

19 ATLANTIC COUNCIL 
61 

hydrocarbon production, Iran will try to regain its pre· 

2012 crude oil production level, and put most of its effort 

and emphasis on the expansion of its natural gas capacity. 

The export of natural gas and the conversion of natural 

gas into electricity and petrochemical products are major 

components of Iran's energy policy. Iran could also increase 

its condensate production as a byproduct of its natural gas 

production. Iran will also need to focus on controlling its 

domestic consumption growth, particularly to prevent a 

rapid growth in domestic fuel consumption. 

Creating long-term energy trade ties is an important part 

of Iran's energy diplomacy, as is engaging international 

investors for longer periods of time. Reaching a nuclear 

deal with the P5+ 1, and the prospect of rolling back 

sanctions, gives Iran an opportunity to come out of 

isolation and once again create ties with international 

partners. Tehran is planning to strengthen its economic 

ties witb its Arab neighbors and its neighbors north 

of the Caspian by exporting oil, gas, refined petroleum 

products, and electricity. Also, by reforming its upstream 

investment regulations, Iran would create longer ties with 

international investors. 

The outline of Iran's energy policy and diplomacy after the 

nuclear deal are detailed in table 9. 

MARKET IMPACTS TAKEAWAYS 

Sanctions removal and immediate impact on tbe global 

energy market: Since the start of sanctions in 2012, Iran 

lost more than nearly half of its market share, and its exports 

dropped by more than 1 mbfd. Hence, NIOC's primary 

goal after the sanction rollback would be to gain its pre2012 position as tbe second-leading oil exporter in OPEC, 

and to try to increase its oil exports to 2.5 mbfd. However 

this increase will be gradual, botb because of technical 

issues and because of the required time for marketing and 

sale of its extra oil at a time of oversupply in the market. 

Depending on the tirneline of the sanctions~ unwinding 

process, Iran could increase its exports of crude oil about 

ATLANTIC COUNCIL 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

400,000-500,000 kb/d by mid to end of2016. Iran could 

also add an additional150,000-200,000 b/d of condensate 

to its liquid export volumes by mid-2016. Iran's petroleum 

minister announced that he is ready to add 500,000 bfd 

of oil to its export upon the removal of sanctions, and an 

additional 500,000 bymid-2016, and part of this additional 

oil would be condensate. At the same time, the sanctions 

rollback on Iran, and the prospect of the country increasing 

production, could have an immediate, psychological effect 

and downward impact on the international oil prices. 

Long-term impact: Iran's main focus will be the 

development of its natural gas fields, particularly the South 

Pars giant gas field. Iran's natural gas and condensate 

(byproduct of its natural gas fields) production is expected 

to increase significantly in the next 3~5 years. Iran is going 

to utilize its additional natural gas capacity in different 

ways: 1) To export natural gas, particularly to its neighbors, 

in order to increase its gas export market share and also 

as part of its energy diplomacy to create long~ term energy 

alliance; 2) To convert part of its natural gas into electricity 

and export electricity to its neighboring countries, witb the 

goal of increasing the value added to its natural gas and 

also diversifying its exports products. 3) To use its natural 

gas as the feedstock of its refinery plants. Iran's current 

petrochemical production capacity is about 60 million 

tons/year, and the country is planning to increase this 

capacity to 180 million tons/year by the end of 2025. Most 

of the natural gas feedstock of its petrochemical factories is 

expected to be supplied from South Pars gas field. 

Iran's condensate production will also increase to 1 

million b/d by 2017, and Iran is planning to increase its 

condensate refinery capacity by the next 2-3 years, in order 

to refine most of its condensate domestically and export 

the refined products instead of condensate. 

Therefore, it is important to note that Iran's major energy 

impact in the middle and long terms will be on the 

global downstream (refined petroleum products) and 

petrochemical markets. 

20 
62 

IRAN'S ENERGY POLICY AFTER THE NUCLEAR DEAL 

ABOUT THE AUTHOR 

Dr. Sara Vakhshouri is a Nonresident Senior Fellow at the 

Global Energy Center and the President of SVB Energy 

International. 

21 ATLANTIC COUNCIL 
63 

CHAIRMAN john E. Chapoton Henry A. Kissinger Richard J.A. Steele 

*Jon M. Huntsman, Jr. Ahmed Charai Franklin D. Kramer *Paula Stern 

CHAIRMAN, Sandra Charles Philip Lader Robert J. Stevens 

INTERNATIONAL Melanie Chen *Richard L. Lawson johnS. Tanner 

ADVISORY BOARD George Chopivsky *Jan M. Lodal *Ellen 0. Tauscher 

Brent Scowcroft Wesley K. Clark jane Holl Lute Karen Tramontano 

PRESIDENT AND CEO David W. Craig William J. Lynn Clyde C. Tuggle 

*Frederick Kempe *Ralph D. Crosby, Jr. lzzat Majeed Paul Twomey 

Nelson Cunningham Wendy W. Makins Melanne Verveer EXECUTIVE VICE Ivo H. Daalder Mian M. Mansha Enzo Viscusi CHAIRS *Paula J. Dobriansky Gerardo Mato Charles F. Wald *Adrienne Arsht Christopher). Dodd William E. Mayer jayWalker *Stephen J. Hadley Conrado Dornier Allan McArtor Michael F. Walsh 

VICE CHAIRS Thomas J. Edelman Eric D.K. Melby Mark R. Warner 

*Robert J. Abernethy Thomas J. Egan, Jr. Franklin C. Miller David A. Wilson 

*Richard Edelman *Stuart E. Eizenstat james N. Miller Maciej Witucki 

*C. Boyden Gray Thomas R. Eldridge *Judith A. Miller Neal$. Wolin 

*George Lund julie Finley *Alexander V. Mirtchev Mary C. Yates 

*Virginia A. Mulberger Lawrence P. Fisher, II Karl Moor Dov S. Zakheim 

*W. De Vier Pierson Alan H. Fleischmann Obie L. Moore HONORARY *John Studzinski *Ronald M. Freeman Michael Morell DIRECTORS 

TREASURER Laurie Fulton Georgette Mosbacher David C. Acheson 

*Brian C. McK. Henderson Courtney Geduldig Steve C. Nicandros Madeleine K. Albright 

SECRETARY *RobertS. Gelbard Thomas R. Nides james A. Baker, Ill 

*Walter B. Slocombe Thomas Glocer Franco Nuschese Harold Brown 

*Sherri W. Goodman joseph S. Nye Frank C. Carlucci, III DIRECTORS Mikael Hagstrom Sean O'Keefe Robert M. Gates Stephane Abrial Ian Hague Hilda Ochoa· Michael G. Mullen Odeh Aburdene John D. Harris, II Brillembourg Leon E. Panetta Peter Ackerman FrankHaun AhmetOren William). Perry Timothy D. Adams Michael V. Hayden *Ana Palacio Colin L. Powell john Allen Annette Heuser Carlos Pascual Condoleezza Rice Michael Andersson *Karl Hopkins Thomas R. Pickering Edward L. Rowny Michael Ansari Robert Hormats Daniel B. Poneman George P. Shultz Richard L. Armitage Miroslav Hornak Daniel M. Price john W. Warner David D. Aufhauser *Mary L. Howell Arnold L. Punaro William H. Webster Elizabeth F. Bagley Wolfgang lschinger *Kirk A. Radke Peter Bass Reuben Jeffery, lii Robert Rangel *Rafic Bizri *james L. jones, Jr. Charles 0. Rossotti *Executive Committee 

*Thomas L. Blair George A. J oulwan Stanley 0. Roth Members 

Francis Bouchard Lawrence S. Kanarek Robert Rowland Myron Brilliant Stephen R. Kappes Harry Sachinis List as of November 5, 2015 Esther Brimmer Maria Pica Karp john P. Schmitz *R. Nicholas Burns Francis J. Kelly, Jr. Brent Scowcroft William J. Burns Sean Kevelighan RajivShah *Richard R. Burt Zalmay M. Khalilzad Alan J. Spence Michael Calvey Robert M. Kimmitt james Stavridis James E. Cartwright 
64 

(202) 778-4952 

AtlanticCouncil.org 
65 

The CHAIRMAN. Thank you, Doctor. 

Mr. Webster, welcome. 

STATEMENT OF JAMIE WEBSTER, SENIOR DIRECTOR OF 

GLOBAL OIL MARKETS, IHS 

Mr. WEBSTER. Thank you very much, Chairman Murkowski, 

Ranking Member Cantwell, members of the Committee, I appreciate the opportunity to testify before you today on global oil markets and the potential and actual impacts of terrorism on oil prices 

and energy security both globally and here in the United States. 

Today I appear before you in my capacity as Senior Director for 

IHS where I lead the company’s global oil markets team. IHS is a 

research consultancy that specializes in energy, capital intensive 

industries, data and analysis with a worldwide presence. 

The current era of oil abundance and low oil prices does not 

eliminate the issues with geopolitical and terror risk though they 

may seem to have faded, at least from a global oil standpoint at 

this point. With the rise of ISIS via the gaining of significant Syrian and Iraqi territory in 2014 and an increase in terrorism globally, this risk is going to be growing over the next several years. 

And the likelihood of what is called the risk premium or the fear 

premium in oil, oil prices, is likely to return. 

But this, so this temporary measure where we don’t have that is 

as a result of low oil prices due to the United States bringing on 

increased production as well as OPEC deciding not to change its 

policy, both at the Thanksgiving, November 27th, meeting last year 

and most recently last Friday where they had decided not to have 

any sort of production level at all. 

Instead actually OPEC has actually increased its production by 

about 1.5 million barrels a day since last fall with significant increases from Saudi Arabia and Iraq. These have helped to push 

down prices even further but are coming at a cost. And that cost 

is lower OPEC spare capacity or the amount of additional production that a country could bring on should it choose to do so. 

This past summer the increased production out of OPEC caused 

their spare capacity to reach levels as low as 2.6 percent. The historic rule of thumb for OPEC’s spare capacity for stable prices is 

generally four percent. The reason why we’ve been able to go so low 

at this particular point without price spikes is precisely because we 

are in a very oversupplied market and this is partly due to the 

United States. 

This calculus, however, may shift as soon as the middle of next 

year when the daily over supply, that is that amount of barrels 

that we are putting into global stocks around the world, stops 

building and we actually start potentially drawing at the same 

time that OPEC’s spare capacity effectively vanishes and moves 

back down on a seasonal basis. This then spare capacity level 

means that in a time of heightened supply risks it will be incumbent upon available stock piles, both strategic and commercial, as 

well as the ability to bring on incremental supply, most likely from 

the United States to assuage any real or perceived shortfall. 

This shift from OPEC’s spare capacity to a new form of supply 

security that is provided in part by U.S. productive capacities will 

take time for the market to calibrate and clear signals in terms of 
66 

a policy standpoint would be greatly appreciated by the market at 

this particular time. 

The flexibility of U.S. production growth really comes from a timing issue on both the up and down side that is that they can increase production quite quickly because the amount of time that is 

needed to bring production on is only about four months verses 

conventional production where it can take several years to bring 

that production on. This means it can have a much greater effect 

in terms of bringing production back on line. 

These production outages that have plagued the oil market for 

the last several years are likely to increase in the future. Right 

now, since 2012 we’ve got an increase in terrorist attacks per IHS 

of about 25 percent with increases in attacks on energy infrastructure by about five percent. This means that over the next couple 

of years geopolitical risk is very much going to come back into the 

market. 

In order to address these or now that this shift from the OPEC 

toward the United States, comes with it a huge opportunity for the 

United States to help shore up not just national energy security 

but global energy security and the two ways that I would say that 

it would be most helpful is one, by allowing U.S. crude oil exports. 

And allowing U.S. crude oil exports gives U.S. producers the opportunity, should it make sense, to export oil in an order to both allow 

them to increase their own production and be able to get more oil 

out on to the global market. 

The other aspect is one of having a very clear stock policy both 

on a commercial side and on a strategic stock pile side. By having 

significant stocks within the United States that are in areas that 

we know that are safe, we can actually increase overall energy security. 

With that, I appreciate, Chairman Murkowski, your leadership 

and Ranking Member Cantwell, your leadership as well on this and 

would appreciate and happy to take any questions. 

[The prepared statement of Mr. Webster follows:] 
67 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

U.S. Senate Committee on Energy and Natural Resources Hearing 

Terrorism and Global Oil Markets 

Testimony by: 

Jamie Webster 

Senior Director, IHS 

December 10, 2015 

Chairman Murkowski, Ranking Member Cantwell, and members of the Committee, I 

appreciate the opportunity to testify before you on global oil markets and the potential 

and actual impacts of terrorism on oil prices and energy security. 

I appear before you in my capacity as Senior Director for IHS where I lead the 

company's short term crude oil markets team. IHS is a global research consultancy that 

specializes in energy, capital-intensive industries, data and analysis with a worldwide 

presence. 

The current era of oil abundance and low oil price does not eliminate the issues 

associated with geopolitical and terror risk. With the rise of ISIS, via the gaining of 

significant Iraqi and Syrian territory in 2014 and an increase in terrorism globally, 

geopolitical and terror risk is likely to be a growing issue for oil markets over the next 

several years. The capture of Iraqi territory by ISIS in summer 2014 was quickly 

followed by the start of the oil price decline in summer of 2014. However it was the rise 

of US shale oil production amid OPEC policy inaction, plus weaker demand growth that 

has helped keep the price at lower levels. Because of the surplus supply there is much 

less talk of a "risk" or "fear" premium in oil markets than has been the case in years 

past. However, this does not mean that the current era of abundance eliminates the 

issues associated with geopolitical and terror risk. Instead it has temporarily expanded 

1 
68 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

the markets ability to cope with such stresses. However, geopolitical and terror risk 

have not gone away and are likely to be a much bigger issue over the next several 

years. 

A large and still growing global stockpile of oil and petroleum products, and the looming 

full return of Iranian oil have allowed the market to internalize a view that oil prices will 

remain lower for longer. Despite this view, risks are rising. According to IHS Country 

Risk raw data, terrorist attacks on upstream and downstream oil infrastructure have 

risen 5% since 2012, while total terrorist attacks have increased 25% through 

November of this year. These numbers may make it appear that energy infrastructure 

is not a key priority for terrorists, but the outsized impact a successful attack could have 

on energy security is a concern. 

For now, successful attacks are largely concentrated in just a few countries-more than 

90% of attacks have occurred in ten countries each year-though those countries have 

shifted over the last several years. Among the top 1 0 countries sustaining the most 

attacks since the start of the Arab Spring, Iraq, Nigeria and Egypt are of particular 

concern given their importance for crude oil supply or oil transit. 

In November 2014, OPEC took a stance that it would not cut production in the face of 

oversupply given the view that it could not compete against the large volumes of higher 

cost oil elsewhere in the world amid weak demand growth. There was also some 

concern from Saudi Arabia about maintaining exported volumes in the face of potential 

and actual production increases from Iraq and Iran. This stance was reaffirmed in the 

meeting on December 4 of this year, with the organization abandoning any attempt at 

identifying a production target. Despite the lack of policy action, the OPEC countries as 

2 
69 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

a whole have rapidly increased production. As a result, production from OPEC 

members is up approximately 1.5 million barrels per day since last fall, with significant 

increases from Saudi Arabia and Iraq. These increases have helped to push prices 

down further but are also coming at a cost-- lower OPEC spare capacity or the amount 

of additional production a country could bring on should it choose to do so. This past 

summer, increased OPEC production caused their spare capacity to reach levels as low 

as 2.6%. The historic rule of thumb for adequate spare capacity for OPEC was around 

4%. Recent low spare capacity occurred in an oversupplied market with the added 

cushion of more than 700 million barrels of additional crude and refined products in 

inventories since the beginning of last year. 

Lower oil prices are slowing supply growth, and by the middle of next year the calculus 

will shift as the daily oversupply likely vanishes from the tightening market as supply 

slows enough to meet demand growth and OPEC spare capacity again decreases 

seasonally. This thin spare capacity level means that in a time of heightened supply 

risks, it will be incumbent upon available stockpiles, both commercial and strategic 

reserves, as well as any available incremental US supply, to assuage any real or 

perceived supply shortfalls. This shift from OPEC spare capacity to a new form of 

supply security that is provided, in part by US productive capacities, will take time for 

the market to calibrate and be able to assess effectively. 

The flexibility of US production growth comes from a timing issue on both the up and 

down side. Conventional production projects can take years to finance, plan and bring 

to the market. US shale producers can do it in 4 months. Globally, conventional 

production has a decline rate of 5-6%, meaning a project will be producing that much 

3 
70 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

less each year. US shale production has an initial decline rate of about 50%. These two 

factors allow the US shale system to react quickly to market signals bringing more oil 

onto the market, and reducing supply through lower investment when prices turn 

downward can reduce supply. 

Production outages have plagued the oil market for the last several years and have 

been caused by war, strife as well as terrorism and sanctions. Historically, outages 

have generally been assumed by IHS to be about half a million barrels per day, but 

since early 2011 with the decline of Libyan production due to the civil war, this number 

has been much higher, with some months since then as high as 3.5 million barrels per 

day. Historically, one would expect this number to decline, but due to the greater 

instability in the region, there is just as much likelihood that it could rise. Some of these 

production outages have since been captured by ISIS, which uses these revenues to 

help fuel its operations. 

IHS released a new report that ISIS, before the most recent campaign, was deriving 

about 45% of its revenues from oil, around $33 million dollars per month, with the bulk 

of revenue coming from taxation and confiscation 1

. This figure assumes about 30,000 

barrels per day of oil, a number that provides significant revenues to the group but does 

not impact global oil markets. For comparison US production increased last year by 1.4 

million barrels per day. It is likely the ISIS volume has since declined in recent weeks 

from recent bombing attacks. The group has also established a foothold in Libya. With 

Libya production, now at about 400,000 b/d, well down from the pre-civil war level of 1.6 

million barrels per day, there is much less production downside for oil markets, but it 

creates immense potential additional revenues should it be able to secure some of the 

1 See IHS press release at http://on.ihs.com/1TS9esP 

4 
71 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

multiple terminals along the coast. In addition, the country is well positioned to be a 

springboard to launch attacks against energy assets in Egypt and Algeria, in line with 

the strategy employed in Iraq and Syria 

Given the risks posed by terrorism and outages in the future, addressing energy 

security issues in oil markets is key to ensure available energy to meet demand in the 

future without the deleterious effects of high prices. The United States production 

growth helped to push prices lower. These lower prices have brought dramatic benefits 

for consumers and put additional pressure on groups that have traditionally relied on oil 

revenue to sustain their economies. 

The shift from OPEC toward the United States, in terms of oil supply response contains 

within it a huge opportunity for the United States to help shore up not just national 

energy security but global energy security. US imports of crude and refined products 

have diminished markedly over the past several years but this does not mean that the 

country has disconnected from global oil markets. Increasing US and global energy 

security can be helped by assisting the capacity for a rapid supply response from the 

United States when needed. Market incentives alone will help push US oil producers to 

produce more as prices rise, but the current crude oil export policy can also limit the full 

upside of this production increase. 

The US has a liberal trade policy for natural gas, coal, refined products and processed 

condensate. It is seeking new agreements to further promote trade with both Asia and 

Europe. It also allows crude oil exports to other countries in certain, very specific 

cases. Allowing US producers to seek out international markets for their product will 

5 
72 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

allow them to receive global prices, while supporting job growth across many industries 

and in places far from the oil fields. It would also help to lower the price of Brent, the 

benchmark price for global oil, much as the increase in production already has. 

Lowering the Brent price is the access point to lower US gasoline prices as U.S. 

gasoline prices are linked to the Brent world price, not the domestic WTI price. 

To fully maximize US savings at the pump, exports should be liberalized to ensure this 

dated policy does not cause an unnecessary drag on American productivity, while 

hampering our ability to exploit fully the national security benefits from this energy 

resurgence. The reasons are intertwined with the nature of the American refinery 

system and the price discounts that American oil producers must frequently take in 

order to sell their products competitively to refineries, particularly along the Gulf Coast, 

which holds over half of the nation's total refining capacity. Over $85 billion has been 

spent in the past quarter century to reconfigure these refineries to process lower cost 

heavy oil imported from countries like Venezuela, Mexico and Canada. The United 

States contains the largest refining capacity of any country in the world, with 139 

operating refineries with a combined crude oil distillation capacity of about 18 million 

B/0. The US refining system is characterized not only by the number and size of 

refineries but also by a high number of world-class, high-complexity, full conversion 

refineries with a substantial degree of petrochemical and specialty products integration. 

Allowing crude oil exports increases market efficiencies and ensure higher value US 

crude oil is unhampered by a price discount to international markets. 

The ability to hold crude and refined product stocks is also key to reducing the risk by 

providing the ability to supply customers if oil supply is disrupted. Inventories are high 

6 
73 

Jamie Webster, Senior Director of Global Oil Markets, IHS 

with nearly 700 million barrels per day accumulated in stockpiles around the world, but 

of this most of the stocks that can be easily drawn down are in the United States. This 

commercial capacity, along with substantial stocks in the US Strategic Petroleum 

Reserve remains critical in a supply shortfall despite the US' lower imports (as a result 

of the production boom in the country). Terrorism and instability will become a bigger 

risk for oil markets over the coming year, but the US has a real opportunity to address 

these risks in a way not possible prior to the US shale boom. 

I appreciate, Chairman Murkowski, your leadership and that of this Committee to 

address these critical issues for US, regional and global energy security. Thank you for 

this opportunity to testify before your committee. I welcome the chance to respond to 

your questions. 

### 

About IHS (www.ihs.com) 

IHS (NYSE: IHS) is the leading source of insight, analytics and expertise in critical areas 

that shape today's business landscape. Businesses and governments in more than 150 

countries around the globe rely on the comprehensive content, expert independent 

analysis and flexible delivery methods of IHS to make high-impact decisions and 

develop strategies with speed and confidence. IHS has been in business since 1959 

and became a publicly traded company on the New York Stock Exchange in 2005. 

Headquartered in Englewood, Colorado, USA, IHS employs almost 9000 people in 32 

countries around the world. 

7 
74 

The CHAIRMAN. Thank you, Mr. Webster. 

A lot of issues have been raised here this morning. It seems to 

me that we could have two separate hearings. The points that you 

have hit on in your testimony, Mr. Webster, talking about the energy security, national security implications of all that is happening within these oil markets is certainly one aspect of it. Then, 

kind of, following off Senator Cantwell’s words of following the 

money in terms of what is funding terrorist activities, is certainly 

something that again, we could spend all day trying to understand 

how and where we can make a difference. 

Mr. Harrell, I want to begin with you because you have helped 

break it down in terms of how we see the financing. Oil is a very 

significant piece, as we have mentioned maybe about 40 percent, 

but this other category is also quite substantial. 

You have suggested that one of the better ways to choke off the 

supply of funding is to escalate military targets, but you also indicated that you do not feel international sanctions can be that helpful. You did indicate though that sanctions on import of oil production equipment is one area where we can specifically target it. 

We try to figure out here what sanctions may or may not be effective. Can you go a little bit more into detail in terms of other 

areas where you think that sanctions are helpful or where they 

really are not helping given the situation on the ground in the Islamic State? 

Mr. HARRELL. Thank you very much, Senator Murkowski, for 

that question and giving me the chance to elaborate. 

I certainly did not mean to imply that sanctions are not useful. 

I think sanctions are absolutely useful in this context. But I think 

that given that the majority of the revenue that ISIS generates 

from its oil sales is generated internally sanctions are going to 

have to play a supporting role, an important role, but a supporting 

role with the military effort being the most important way of targeting the income. 

A couple of areas where I think sanctions can and should be deployed, and I should begin by noting that I think that my former 

colleagues at the Treasury Department are working very actively 

on this set of issues. 

First, as I discussed, there is some oil seeping out from ISIS-controlled territory into adjacent countries. And clearly, both the U.S. 

Government and our partners should be taking every step they can 

both to seal the borders and to destroy the oil coming out and 

should also be working to impose financial sanctions on the buyers 

of that oil whether in the Kurdish autonomous part of Iraq, in Turkey, in Jordan or elsewhere. 

Another area that I think sanctions could be quite useful is to 

go after ISIS’ procurement networks, particularly for spare parts 

related to oil infrastructure. As the military tempo increases, ISIS 

is obviously going to be seeking to increase its procurement of replacement parts. 

Now as I discussed and as Dr. Crane discussed, a lot of this is 

fairly low tech kinds of equipment that they need and the Middle 

East, Syria, Iraq, Turkey, are awash in oil equipment. So this is 

not going to be an easy task, but clearly sanctions should be im-
75 

posed on anyone looking at selling oil-related parts into ISIS-controlled territory to keep those out of ISIS. 

The final area that I think sanctions could be useful is in ensuring that ISIS continues to be cutoff from the international financial 

system. Most of their revenue is cash. They’re piling up increasing 

quantities of cash in their own territory in cash houses and elsewhere. 

It is a cash-based economy there. They probably want to keep 

most of their revenue in cash. But as the cash piles up and as they 

try to support affiliates and allies outside of their core territory, 

they’re clearly going to be looking for ways to move that money, 

some portion of that money, out of their territory into the international financial system. 

The CHAIRMAN. Mr. Harrell, I am going to interrupt and ask 

with the remaining seconds of my time a question about Libya. We 

talk a lot about what is going on in Syria, Iraq, Iran and Libya, 

as we all remember, was a very difficult place and is still a very 

difficult place with the level of violence and civil unrest. 

Mr. Webster, in terms of how Libya represents a potential source 

of revenue for ISIS, how does that factor into the discussion today? 

Mr. WEBSTER. Thank you for your question, Chairman Murkowski. 

I think it is actually quite important. Realize that Libyan production before the civil war was 1.6 million barrels a day which, of 

course, dwarfs the 30,000 or 40,000 barrels a day that ISIS is controlling now. Right now because of a variety of issues within the 

country, it’s about 300,000 or 400,000 barrels a day. But obviously 

there is still an immense amount of upside in terms of production 

out of Libya. 

Additionally Libyan production, as I think you said in your opening comments, is light, sweet oil which was actually, a shortage of 

that was actually one of the drivers for driving up prices in 2008. 

My understanding is ISIS has got a foot hold in Sirte and is seeking to control some of those terminals and some of those other access ways for oil. So it is a big concern in terms of both the amount 

of oil and then what ISIS could potentially do with that, particularly as that could then be pushed into and allow them to create 

additional energy attacks in Algeria, Egypt and other places from 

within Libya. 

The CHAIRMAN. Thank you. 

Senator Cantwell. 

Senator CANTWELL. Thank you, Madam Chair. 

Continuing with vulnerabilities, well actually I have two questions, one to you, Mr. Webster, which is about the transportation 

and infrastructure and SPR that we need to worry about, and there 

are other things, like the Strait of Hormuz, which approximately 

19 percent of all oil travels through. So that, I would assume, 

would represent an opportunity for someone and a concern. When 

you look at the transportation infrastructure overall vulnerabilities, 

targets that we need to harden, how important is it that we keep 

the Strategic Petroleum Reserve modernized? 

And Mr. Harrell, back to a very specific regional question. I 

think mentioning that the refining capacity in the ISIS region had 

been taken out is the hardest to rebuild. But the actual oil produc-
76 

tion, I mean, you can bomb that, but it is not difficult to still continue to get the oil. So this point about following the money and 

what kind of impact could it have to get the Assad regime off of 

the oil from an economic perspective. 

So, Mr. Webster? 

Mr. WEBSTER. Thank you, Ranking Member Cantwell. 

The importance of transport and the importance of being able to 

get oil and refined products to people is obviously very critical, and 

that’s actually particularly critical for the Strategic Petroleum Reserve. We’ve got just under 700 million barrels that are residing 

there currently. 

And while it would appear that right now there’s really no use 

for it at all in that we’ve got plenty of supply here in the United 

States, it’s incredibly important to be able to hold onto that and 

also to be able to access that. And because of a variety of changes 

in terms of logistics in the region as well as the changing in terms 

of the types of crude that we’re importing and the types of crude 

that we’re making within the United States, that ability to tap 

that, both in terms of its volume, but also in terms of the timing, 

is incredibly important even though right now it appears that 

there’s really not much use for it. 

Senator CANTWELL. Okay. 

But in general making sure that we are protecting these—if you 

were looking at terrorism overall, protecting these transportation 

sectors of the major supply is something we should be concerned 

about? 

Mr. WEBSTER. Absolutely agree with that, yes. 

Senator CANTWELL. Okay. 

Mr. Harrell. 

Mr. HARRELL. Thank you very much, Senator. 

Absolutely agree. I think if you look at the external buyers of 

ISIS oil, the Assad regime and natural gas, the Assad regime is 

front and center of that. 

As you said, Senator, in your opening remarks, I think it would 

be incredibly useful for Russia which has basically played a destructive role in Syria to date, to use the leverage it has over the 

Assad regime to try to get them to cut out buying oil and gas from 

their own enemy, ISIS, because that indeed the largest external 

purchaser of ISIS-produced hydrocarbons. 

Senator CANTWELL. What about the impact of bombing the actual 

wells? How is it for them to recover and they have had these modular systems. So what are we doing here and why is this important 

to then focus on the money aspect? 

Mr. HARRELL. Thank you very much. 

So as you noted last year when the military began bombing these 

modular refineries in Syria, ISIS basically adapted and they 

moved, or really the people refining the oil moved, to what Dr. 

Crane described as these tea kettle refineries where the oil is just, 

sort of, boiled in open pots and refined in a very crude way. 

From a military perspective those are easy to repair as are the 

well heads. I think from a military perspective keeping up the pressure on those targets, so you know, they know that if it’s going to 

take them a week or two to repair it it’s going to be hit again right 
77 

away rather than getting a couple of months of production out of 

that before it’s hit again. 

Keeping up the tempo, the operational tempo, of the military targets is important as is the steps that the military has begun to 

take on the distribution networks, trucks and things like that. 

But to your point, we very much need to focus on what happens 

with the money after ISIS earns it from the oil revenue. I think 

from a military front there are things that can be done in terms 

of targeting cash houses and raids on high value targets. Military 

will say the attack, the raid on Abu Sayyaf, who is an ISIS financier, the financial manager, earlier in the year was a very important step. I think things like that can happen. 

And then again, keeping up the pressure on money exchange 

houses and sort of, informal oil wallahs that might help ISIS move 

its cash out of its territory into the rest of the world. 

Senator CANTWELL. So you are saying we need to be as adaptive 

to move and as they try to come up with new techniques we need 

to be adaptive to move fast as well. 

Mr. HARRELL. Absolutely. 

Senator CANTWELL. Thank you. 

Thank you, Madam Chair. 

The CHAIRMAN. Senator Daines. 

Senator DAINES. Thank you, Chair Murkowski, Ranking Member 

Cantwell, for having this hearing on this very, very important 

issue. 

Our national security, protecting our families from terrible acts 

of terrorism, I can tell you, is on the minds of Montanans every day 

as I travel around the state. It is telling to us today how important, 

I believe, energy independence, American energy independence and 

security, is to our safety, to our prosperity as well as the entire 

world. 

So count me in. I think many here on the dais believe we should 

remove the ban on U.S. oil exports and move forward here in continuing the U.S. in leadership in the way of production. The irony, 

to think that the President just moved forward with removing the 

ban on Iranian oil exports and we are the only nation in the world 

that still has a ban on its exports, I think cannot be overstated. I 

hope we will soon remove that ban. It is good for the American people, it is good for our economy, and I think it is good for the world. 

As we look at what is going on right now with ISIS and as the 

testimony heard today that one of their leading sources of revenue 

certainly is from oil production, it seems like it is pretty clear there 

are two parts of our strategy. One would be to increase U.S. oil production which hopefully we will be working to address that through 

removing the oil export ban. The second is destroying ISIS oil production and revenues, that two prong attack. 

In the last couple of months we unfortunately have seen the second largest terror attack in Europe since 9/11. We have seen the 

largest, most lethal, terror attack on our soils since 9/11. And interestingly enough it seems like suddenly the tempo on attacks on the 

oil assets of ISIS have increased. 

My question is for Mr. Harrell. I have heard the Administration 

say the intelligence has changed and so forth, but I am not convinced. Mr. Harrell, you said one of the most effective ways of 
78 

fighting ISIS is to launch attacks on its oil infrastructure; however, 

CIA Director Morell said on Charlie Rose here a couple weeks ago 

that one of the reasons the U.S. was not doing this was because 

of environmental concerns coming from the Administration. Do you 

think that made sense? 

Mr. HARRELL. Thank you, Senator, for the question. 

Clearly the Administration has had a number of concerns over 

the last year as it has thought about the operational tempo of attacks including the need to gather intelligence and the need to 

gather knowledge about what collateral costs might be whether to 

civilians or future Syrian production. 

Certainly in my view right now, given the threat we are facing 

from ISIS, the attacks we and our allies have faced over the last 

month, while it is important to consider collateral costs, the nearterm benefit of taking out revenues needs to weigh very heavily on 

that scale. 

And so I do think it’s important that we assess and maintain, 

you know, well although assessing the costs we maintain a very robust operational tempo and focus on taking out the oil infrastructure, obviously while minimizing to the extent we can those kinds 

of collateral costs. 

Senator DAINES. Wouldn’t it make sense, there have been the 

words used by the Administration it is trying to contain ISIS. I 

think many of us believe that it is about destroying ISIS. And back 

to your testimony saying that their leading sources of revenues are 

from oil, if we cut off their revenues that would be a very, very important part of destroying their capabilities to launch their terror 

attacks around the world. 

Mr. HARRELL. I very much agree with that. I think it is clear 

that ISIS is not a threat we should contain. ISIS is a threat we 

need to destroy. I very much agree with you, Senator. 

Senator DAINES. Thank you. Thank you. 

Mr. Webster, let me get your thoughts on that as well. We have 

heard these comments that perhaps the limited attacks in Iraq and 

Syria have been related to environmental concerns of the Administration. Now suddenly after these two large attacks, one in Paris, 

one in San Bernardino, suddenly the strategy changed. Any insights there? 

Mr. WEBSTER. Senator, it’s a little outside of my expertise in that 

I’m just a global oil markets guy, but I would agree with Peter that 

it does seem when you are looking at this in terms of, you know, 

the cost, as it were, in terms of collateral damage against what 

ISIS brings, particularly as I am looking at around the world and 

looking at increased risks to the global supply system over the next 

several years. And so anything that could be done that can actually 

roll that back and put that into a better posture would be a positive thing for the oil market. 

Senator DAINES. Yes, and this gets back to the point we do not 

want politicians running this war; we want the U.S. military to run 

it. If we intend to destroy ISIS, let’s destroy ISIS. 

Mr. Webster, a question for you is how do you think removing 

the ban on crude oil exports will help reduce the world’s risk to terrorism? 
79 

Mr. WEBSTER. So by removing the export ban on the U.S. what 

it does is it allows the U.S. producers to ensure that they don’t get 

such a big discount compared to global prices. So that maximizes 

their price or as I would call it, essentially removes what has in 

the past been what I had termed a policy discount. 

Now at this particular time because of high refining runs in the 

United States and because of the low price and because we have 

lower production, you probably actually wouldn’t see a whole lot of 

barrels leave the country if you actually allowed crude oil exports 

today. However it’s important still to change this policy because by 

changing this policy it actually supports U.S. production growth in 

the future rather than doing it when it suddenly becomes an emergency, sort of, nature. 

So it’s an important policy for us because it allows us to increase 

U.S. production. And by increasing U.S. production, as we all 

know, the U.S. production is, what I would argue, a much safer 

place for production to come from rather than other countries. And 

so that increases overall energy security, not just in the United 

States, but actually on a global basis. And it must be remembered 

that oil markets is a global market. 

Senator DAINES. Thank you. 

The CHAIRMAN. Thank you, Senator Daines. 

Senator Heinrich. 

Senator HEINRICH. I want to thank Senator Daines for his questions. I think they get to the heart of a number of these issues. But 

I would certainly encourage him, rather than listening to the 

former Director of the CIA on Charlie Rose, to talk to our current 

Director of the CIA and also the folks at DOD who have been doing 

this targeting. 

The intel has changed. The Abu Sayyaf raid was a major coup 

and has, I think, made our efforts much more successful. But one 

of the things in talking to DOD folks I think is very important is 

how you make this targeting more successful while also mitigating 

and minimizing the fodder for ISIS to run this highly effective, inspirational, social media campaign which has been an enormous 

problem for us. Obviously what happened in California was not directed. It was inspired, and we need to keep that in mind. 

Mr. Harrell, in the past you have said that the targeting has had 

limited impact on combating ISIS’ ability to generate funds and 

that their oil revenues are largely unchanged. Has the recent shift 

in terms of the oil tanker trucks, has that moved the needle substantially in your opinion and to what proportion in terms of their 

overall revenues? 

Mr. HARRELL. Thank you very much, Senator, for the question. 

I should begin by saying facts on the ground, you know, on a 

short turn, a turnaround time frame are hard to gather from that 

part of the world. It certainly does appear, though, with that caveat 

that the military campaign, the escalated military campaign, is 

having an impact. 

It is clear that it is serving as both, obviously taking trucks out 

has an immediate impact. The results are serving as a deterrent 

to people who previously thought they could make some quick 

bucks loading oil and selling it, maybe thinking they need a new 

line of work. 
80 

So I do think it is clear that the impact on the trucks is having 

an impact, the attacks on the trucks are having an impact. I also 

think the larger scale strikes in the oil and gas separation plants, 

these are larger pieces. 

Senator HEINRICH. Right. 

Mr. HARRELL. The infrastructure. I think that is definitely having an impact. So I think what we are seeing is a useful and very 

welcome operational tempo that I hope is maintained going forward. 

Senator HEINRICH. I would agree with that estimate. 

Do you have opinions on whether it makes sense, in addition to 

targeting the sort of large, industrial scale infrastructure like the 

separation plants? Does it make sense to try and target these very 

small, sort of, teapot refinery operations? 

Mr. HARRELL. I think that is an excellent question. 

I think that I would note two kinds of cautions about whether 

it makes sense to attack the teapot refineries. 

First is by all assessments they are not actually directly run by 

ISIS. ISIS runs well heads directly. It runs the large PC infrastructure. These are run by, you know, entrepreneurs who have the unfortunate reality of living under ISIS control. I don’t, in any way, 

want to defend what they’re doing refining the oil but they’re not, 

sort of, ISIS employees, so to speak. 

They’re also really are very simple kinds of things that are easily 

repaired. So I think that, you know, if there was a way to do it 

while minimizing civilian casualties and at a tempo that you can 

actually take them out of commission, maybe. But I think hitting 

those two criteria actually in practice is going to be somewhat challenging. 

Senator HEINRICH. Yes, I think that is exactly the challenge that 

our targeting folks at DOD find themselves wrestling with each 

and every day. 

Dr. Crane, I want to ask you something that is related to this 

although it does not directly touch on the oil financing piece. I 

want to understand how substantial is the economic impact of the 

Iraqi Government continuing to pay the salaries of Iraqi employees 

who live in ISIS-controlled territory? How big a problem is that because obviously those salaries that get taxed by ISIL as well and 

much of that money is, sort of, trapping up that economy in that 

contested area? 

Dr. CRANE. Excellent question. 

Fortunately the Iraqi Government has stopped paying to Mosul. 

However my understanding is that some of the Anbar communities 

continue to be paid. I couldn’t think of a better policy decision. And 

I think the first decision on stopping payment in July and Mosul 

was probably the single biggest impact on ISIL finances that has 

taken place so far. 

Senator HEINRICH. So diplomatically we should be pursuing—— 

Dr. CRANE. Absolutely. 

Senator HEINRICH. A complete cessation of financing those salaries throughout, not only in Mosul, but in Anbar and any ISIL-held 

territory within Iraq. 

Dr. CRANE. Although hopefully Ramadi will and Fallujah later 

will soon not be under ISIL control. 
81 

Senator HEINRICH. I couldn’t agree more. 

Thank you. 

The CHAIRMAN. Thank you, Senator Heinrich. 

Senator Cassidy. 

Senator CASSIDY. Thank you all. This is a very stimulating discussion. 

First, Madam Chair, I would like to submit for the record an editorial we just published yesterday as regards the nexus, if you will, 

between exporting U.S. oil and actually reducing global CO2 equivalent emissions and reducing funding for terrorism. 

The CHAIRMAN. We will include that as part of the record. 

[The information referred to follows:] 
82 

912612016 Obama's cHmate hypocney J TheHiU 

Decemb(:r09,2015, !tOO am 

Obama's climate hypocrisy Sy Siln. Sin Cas$1dy iR·La.). M.D. 

As the Paris cijmale talks continue, President Obama has repeatedly made clear his belieftha! no cha~enge poses a greater threat lo future 

generations than cflmate-change. The president and his administration have attempted to tower greenhouse gas (GHG) emissions by limiting 

domestic oil and gas protfuctlon on federal lands, continuing the 40-year~o!d cmde oil export ban (presumably to decrease oil consumption 

worldwide) and imposing regulations on the U.S. oil and gas exploration industry, designed fo restrict U.S. -oil production, This, while the 

president's Iran agreement allows tran to increase their oil production by 2 million barrels per day by 2021 and gives them access to new 

global rnarl\ets. If Obama wants to lower GHG emissions and simultaneously address 1hat wh.ich most Amerfcans think is the greatest threatterrorism ~ he should allow Americans to explore for and export oil. 

UnliKe !ran. the U.S. has a long~standing commitment to conservation. America leads the world in both emissions reductions and production of 

oil and natura! gas due!o industry investment and advanced technology. While pushing the Iran deal, Obama failed to mention that Iran does 

not share our commitment to reducing emissions from oil production. The International Council on Clean Transportation and t-tte Carnegie 

Endowment for lntemational Peace determined that Iran emits almost three times the GHG per barre! during production. of crude oil than that of 

U.S. producers in tile Gulf of Mexico. Major oil rigs In the Gulf of Mexico emit 0.031 and 0.034 metric tons of C02 equivalents, a measurement 

of greenhouse gas emissions, per barrel while Iranian oil fields emit 0.070 to 0,099 metric tons of C02 equivalents per barreL !f this seems 

small, understand that if !ran Increases o:! production by 2 mlUion barrels per day due to a vacuum the V.S. leaves 1n tile market, they Will emit 

100,000 metric tons more of C02 equivalents per day. Jn a real s;;ons~, either !he U.S. or ln:~n Will supply ol! to the i'lternatlona1 oil m<'!rket If it is 

the U.S., less GHG is emttted. if !ran, mora GHG is emitted. 

Despite this, less than one month after the presldent gave tran access to-export o.H, M !ssued a threat to veto legislation that would al!ow US. 

oil exports, Both Repubficans and Democrats support Hfting the current crude o~ export ban, Put !n place in 1975, it's an outdated policy that 

denies American companies access tc the global ol! market. It also denies jobs and economic growth to Americans and the American 

economy 

According to the Aspen Institute, lf the :::rude oil export ban was lifted, domestic crude oil productton could increase by 3.25 n;iilion barrels per 

d~y by 2025. GOP would increase by $165 bimon in peak. e}(p!oration and development years (2019-2021 ), continuing at S141 bi!Eon per year 

in 2025. As 20 percent of GOP is typically paid in taxes to the federal government, this is $33 blHion per year towards domestic needs, such 

as paying down debt and financing defense and security. Related to this. a total of 630,000 jobs would be added at the peak in 2019. 

Americans' household income would increase by $2,000 to $3.000 in 2025. Conversely, the Iranian Central Bank predicted that increasing 

lranlan oil production and lifting the sanctions could mean their growth tate will tncrease to 5 percent This ls the same economy that finances 

terrorism throughout the Middle East and continuously undermines the slability of its regional neighbors, Including Israel, Egypt and Saudi 

Arabia. Whichever country ftlls'the international need for oil wi!! advam::e their county's goals. It should be the U.S. 

Despite the lower GHG emissions -and the economic and security benefits of increased domestic energy production, the Obarrta 

administration has slowed energy productiOn on federal lands and closOO off areas of exploration and development of off.c:ohore oil. The Obama 

administration's draft five--year plan for 2017~2022 lists 14 !ease sales. the towest number in the 42~year history of the planning process. 

Curremtly, the administration's five-year offshore oil and gas leasing plan, which took effect on August 27, 2012, removed 1.42 billlon acres ol' 

the 1.65 bimon acres of available OCS lands--87 percent-and blocked any new oij and gas exploration off the AtlantiC coast 

Bottom ~ne, if Amerfcan oil is exported, the demand for Iranian oil will decrease. This will result in tons less GHG emissions. more income for 

American workers, an increase in the U.S, GOP and a focus on American priorlt\es. lf American aU is not exported, these benefits will be seen 

by !ran. 

http:lf!hehrJLcomfblogslcongr.ess~bloglenerm.H.mvironrnentf282531·obama--shou1d-suPJX>ft-exporting·oil 1/2 
83 

9/2612016 Obama's climate hypocrisy 1 TheHil! 

If Obama really befieves that no challenge poses a greater threat to future generations than climate change, and if he is willing to acknowledge 

that most Americans feel that terrorism poses at least an equally serious threat, he should support exploring for and exporting American oil. 

Cassidy is Louisiana's junior .senator, serving since 2015. He sits on ihe Appropriations; the Energy and Natura{ Resources: the Health, 

Education, Labor and Pensiom; and the Veterans' Affairs comml1tees. 

The Hill1625 K Street, NW:Sulte 900 Washington DC 20006! 202-628-85{)0 tel j202-628-S50S fax 

Ttls contents o.fthls slts are ©2016 Capito! Hllt Publishing Corp .. a sub.sicliat)' of News Communica~ons. Jne. 

hltp:lfthi:.lhll!.comiblogslcongre?s~blogl'energy·env1roomantl262531~obama~shouki·support-exporllng-:Oil 
84 

Senator CASSIDY. In the article we point out, for example, and I 

suspect Dr. Vakhshouri could testify to this, that the Iranian oil 

fields emit about three times the CO2 equivalence as U.S. Gulf of 

Mexico equivalence. And if they bring up their—we put $2 million 

if Iran brings up their daily output by two million more barrels a 

day and they will emit 100,000 more, 100,000 more, metric tons of 

CO2 equivalence per day, 36.5 million metric tons of CO2 equivalence per year than the U.S. does from our Gulf of Mexico. So if 

one of the concerns of our colleagues on the other side is CO2 emissions it actually lowers global CO2 emissions by exporting U.S. oil. 

Let me credit my colleagues in the back, Ms. Genevieve Gorman 

and Mr. Jack Crampton, for their help in researching this editorial. 

That said, Mr. Crane, in your testimony you state that one thing 

we could do to help shut down is although ISIS is awash in cash 

they do do business with large enterprises and at some point may 

attempt to move that cash into banks, if they have not already 

done so. You say Treasury could go after these entities as a way 

to increase transaction cost. Why aren’t we already? [Laughter.] 

I am sitting here thinking we should have done this a year ago. 

Have we attempted and been unsuccessful or has it been a pathway which we have not pursued? 

Dr. CRANE. My understanding is that they don’t use banks much. 

The question really is there are a number, as you know, heavy 

trucks, Class A vehicles, are expensive costs, over $100,000 a year. 

Some of them are operated by fleet operators. 

What I think would be useful is make sure that we have intelligence about which companies, some of which are located in surrounding countries or in Syria, are operating those vehicles and 

you can then go after those. A lot of the trucks are operated by 

owner operators that are sanctioned—— 

Senator CASSIDY. But you mentioned specifically some large companies that they must deal with. 

Dr. CRANE. Right. 

Senator CASSIDY. I am sensing that you have a sense of which 

large companies those are. Have we gone after those large companies? 

Dr. CRANE. There are some in the KRI, in Kurdish Regional Government area, that have been accused of doing this. I do not know 

if we have actionable intelligence. 

Senator CASSIDY. Gotcha. 

Mr. Webster, you emphasize that the U.S. shale production has 

contributed not only to U.S. but also global national security. It 

would do more so if we allowed oil exports. 

I am struck that we just assume that that fracking industry can 

rise and fall effortlessly, but from the field I am hearing that because prices have remained low so long that now that production 

capacity is not only being idled but the workers dispersed, that we 

cannot necessarily ramp up within a week this fracking capacity 

but rather be reassembled over a period of time. And the longer we 

go with it being disassembled and dispersed, the longer it would 

take to do so. Is that a correct assessment? 

Mr. WEBSTER. Thank you, Senator, for that question. 

Actually that is correct. The longer that the fields that you, kind 

of, move out and lay off the crudes, of course the longer it takes 
85 

to reassemble them, both in terms of the kit that is required but 

also in terms of the personnel. So while you can bring production 

back up when there are market signals, the longer that they are 

not, you know, kind of, at the high level of investment, the longer 

it does take. 

Senator CASSIDY. So the more we dilly dally the more we run a 

risk of not being able to reassemble quickly thereby hurting both 

national and global security? 

Mr. WEBSTER. The longer that the price is low and that you are 

not moving, absolutely. 

Senator CASSIDY. Yes, gotcha. 

Dr. Vakhshouri, I apologize if I am not getting your name correctly. The Carnegie Institute for International Peace does point 

out that Iranian oil production emits three times the CO2 equivalence as U.S. oil production but you mention that they would like 

to move to refinery capacity. Have the Iranians ever shown in the 

refinery business any particular concern for CO2 emissions? 

Dr. VAKHSHOURI. Well of course, I mean, I think, Senator, first 

thanks for your question. I can’t compare the efficiency and the 

emissions and the facilities in Iran and the United States but yes, 

there are going to be, of course, more emissions, producing more 

emission than those in the United States. 

But I would like to mention something and that is about Iran’s 

export or Iran’s crude oil. That is a different type of crude oil in 

Iran and different markets and different types of refineries that are 

refining Iran’s condensate. 

Senator CASSIDY. Dr. Vakhshouri, I am sorry I am out of time 

and I have one more statement to make. So can I ask you to hold 

that and submit that answer for the record? I apologize. 

Dr. VAKHSHOURI. Sure, just one more point. The additional refinery capacity would be for Iran’s condensate. 

Senator CASSIDY. Yes. 

Dr. VAKHSHOURI. And condensate refiner would not be as—— 

Senator CASSIDY. Emittive. 

Dr. VAKHSHOURI. Yes. 

Senator CASSIDY. Let me just finish by saying this, Madam 

Chair. 

We heard from Secretary, from Ms. Yellen, the other day that a 

decrease in U.S. oil production is now a drag on the economy. We 

hear from the Aspen Institute that if we allow export of oil it creates 630,000 jobs per year and increases GDP by $141 billion. We 

hear from Mr. Webster that by exporting oil we will increase both 

national and global security. But if we do not tend to it we will lose 

that opportunity both on an economic, a national security and I 

might add, environmental basis. There is such a strong case for allowing U.S. export of oil. I cannot imagine why the Administration 

does not. 

I yield back. Thank you. 

The CHAIRMAN. Well said, Senator Cassidy. 

Senator Hirono. 

Senator HIRONO. Thank you, Madam Chair. 

I was curious as to, one of the things we understand is that ISIL 

derives a lot of its revenues from taxation. And Dr. Crane, you 

mentioned that Iraq stopping its payments to persons who live in 
86 

ISIL-controlled territory was a really good thing. But what happens 

to those people? What income do they rely upon to live their lives? 

Is there any concern that stopping these, what amounts to massive 

amounts of payments, what happens to these people and where 

they might turn? 

Dr. CRANE. Very good question and that is why the Iraqi Government has been so hesitant to turn on and turn off those payments. 

What we’re seeing though is that mass—people who leave ISILcontrol territory, as you know, the Turkmens, the Yazidis, Iraqi 

Christians, Iraqi Sunnis, have all been persecuted and attacked by 

ISIL. And so ISIL is trying to keep people there. But what is happening is we’re seeing people leave once they, if you’re an Iraqi 

teacher or civil servant or doctor and you leave Mosul and get into, 

go to Baghdad or Kurdish regional government-controlled territory 

then your salary will be restored. It’s not clear how much of their 

salaries they even got to keep. You know, ISIL is not a charitable 

institution. 

Senator HIRONO. Yes, so it just leads to further instability in 

Syria and other areas. 

Mr. Harrell, right now the position the Under Secretary of Terrorism and Financial Crimes in the Department, our Treasury Department, is vacant. You had talked about targeting cash houses, 

exchange houses, going after some of the financial institutions that 

support ISIL, so this position is vacant and this is a person who 

leads the effort of our country to counter terrorist financing. So 

how important is it for us to fill this position at this point? 

Mr. HARRELL. Thank you very much, Senator, for that question. 

I worked closely with the Administration’s nominee for that position, Adam Szubin, when I was working at the State Department. 

He is certainly an incredibly effective individual at combating the 

financing of terrorism, and I think it would be very valuable for the 

Treasury Department to have him confirmed. 

He is obviously working diligently every day, but as you know, 

Senator, there’s a difference between working in an acting capacity 

over there and actually being confirmed and in full authority. And 

so I certainly think when you’re looking at what Treasury can do 

to combat the financing of ISIL, having their entire team in place. 

Senator HIRONO. Yes. 

Mr. HARRELL. Including the Under Secretary, would be valuable. 

Senator HIRONO. So does anyone on the panel disagree that we 

should go ahead with this confirmation at this point? Nobody disagrees? Thank you. 

Another question for you, Mr. Harrell. You noted in your testimony that there is a flow of oil-related equipment that supports 

ISIL’s revenue stream from oil and that we should target this flow 

of oil-related equipment. Do you have any thoughts on how the 

U.S. could best do that? 

Mr. HARRELL. Thank you. 

Senator HIRONO. For example, do we know who is supplying all 

this oil-related equipment and what we can do to stop them from 

continuing to sell this equipment to ISIL? 

Mr. HARRELL. Thank you, Senator. 

So I think the answer to the second question is the information 

is obviously imperfect. And gathering additional information so 
87 

that the Treasury Department can sanction these supply networks 

is valuable. 

I also think, short of sanctions, there are a couple of steps that 

can be taken. For example, reaching out to businesses, both the 

governments in the region and also to traders in the region to 

make them aware of this problem and of the potential sanction consequences if they do sell equipment to ISIL. 

You know the regions are awash in that some people are going 

to be selling deliberately, some people are just going to be selling 

to any buyer who comes across their door and making sure that, 

you know, the businessmen who are selling this stuff are taking 

steps. 

Will that be a complete solution? No. Would it be helpful? Yes. 

I also think it would be valuable instead of having the sanctions 

focused on sales to ISIS which can be hard to show. You have to 

really document this is ISIS. Sales across the borders into ISIScontrolled territory and prohibiting it at a territorial level would be 

an easier enforcement issue. 

Senator HIRONO. I am running out of time. 

But what countries are the most likely suppliers of this type of 

equipment that the U.S. could engage in discussions with to have 

them cease selling these items? 

Mr. HARRELL. Iraq and Turkey. I mean both those countries are 

awash in oil equipment, and I’d recommend engagement there. 

Senator HIRONO. Thank you. 

The CHAIRMAN. Senator Gardner. 

Senator GARDNER. Thank you, Madam Chair. 

It is good to see the other Senator Murkowski on this side of the 

dais, so welcome to the Committee, Senator Murkowski. And thank 

you, Chairman Murkowski, for this hearing today and Ranking 

Member Cantwell as well. To the witnesses, thank you for your 

time today. 

The first question, I will direct to Mr. Webster. Earlier this week 

we heard testimony from Amos Hochstein, who is the nominee to 

be the Assistant Secretary for Energy at the Department of State, 

talking about the impact of the sanctions we had in place against 

Iran and how those sanctions had cost the Iranian regime $150 billion because of lost oil revenues. How long will it take for Iran to 

recoup $150 billion in lost Iran revenues once sanctions are lifted? 

Mr. WEBSTER. Senator, I generally look at volumes and not dollars, so I would say probably Ms. Vakhshouri would probably be a 

bit better equipped to answer that particular question. 

Senator GARDNER. Dr. Vakhshouri, would you take a crack at 

that? 

Dr. VAKHSHOURI. Senator, the volume of their export has 

dropped severely on the numbers because some of their assets— 

they don’t, at this current moment, they don’t have access to their 

funds outside of, they’re outside of Iran, but on the numbers I cannot give a statement. 

But on the portions, their export and their revenue dropped significantly, even in their budget, because prior to 2011 Iran’s oil export income was 80 percent of its export revenue and 60 percent 

of its government revenue. But even the share of the budget, oil 

revenue in their budget, dropped from 70 percent to 33 percent. 
88 

Senator GARDNER. But it is pretty safe to say that a $150 billion 

loss in revenue will be recouped by additional sales once the sanctions are lifted, correct? They will be making money. 

Dr. VAKHSHOURI. Well, they make money, of course—— 

Senator GARDNER. Correct. Will some of that money be used for 

funding of terrorism? 

Dr. VAKHSHOURI. Well Senator, I mean, I’m not an expert in terrorism, but I look into the industry and I think that after 2012 

sanctions the influence of the groups that in the U.S. we consider 

as supporters for terrorism increased in Iran because they think we 

had better access to the network to help the economy. 

Senator GARDNER. Mr. Harrell, Dr. Crane, would any of you like 

to add to that, the increase in sales from Iranian oil that will be 

allowed once the sanctions are lifted that money will go toward 

state sponsored terrorism, correct? At least some of that money? 

Dr. CRANE. Some of the money will go to the Syrian regime. 

Senator GARDNER. Which is killing its own people. 

Dr. CRANE. Right. I think the bigger issue, but I can’t imagine that they’re going to, at current oil prices, they’ll recoup $150 billion any time in the next few decades. 

Senator GARDNER. Okay. But if they are making money some of 

that will go to state-sponsored terrorism. 

Mr. Harrell, would you like to comment on that? 

Mr. HARRELL. Thank you, Senator. 

I should begin by saying I know that low oil prices have been 

hard for some of the energy producing parts of the country, but it’s 

been very good for national security in the sense of depriving revenues to countries like Iran, like Russia, that depend on oil revenues for—— 

Senator GARDNER. Let me jump in right there. For the U.S. to 

change its export policy, that would actually improve U.S. national 

security? 

Mr. HARRELL. I’d have to defer to some of the other experts on 

the panel for the domestic ramifications of that. 

Senator GARDNER. But I think you just said that depriving Iran 

the revenue has helped our national security, correct? 

Mr. HARRELL. But, clearly, yes. 

Senator GARDNER. Their displacing their exports by U.S. exports 

would also help our national security, correct? 

Mr. HARRELL. Clearly low oil prices help our national security. 

I think there are strong national security arguments for allowing 

U.S. exports as part of a balanced package that also addresses a 

variety of environmental issues. Again, I’m not the expert on the 

domestic side of this, so can’t comment—— 

Senator GARDNER. Mr. Webster, let me jump to you. Does allowing export of oil from the United States improve our national security? 

Mr. WEBSTER. Absolutely, Senator. 

Senator GARDNER. Thank you. 

I want to just talk about some of the visits that we have had over 

the past year with leaders from Japan, leaders in Korea, all talking 

about U.S. exports. However, they have also said in various countries, we have heard of teams that have been traveling from Japan, 

for instance, to Iran to talk about additional energy opportunities 
89 

there. Do you anticipate some of our closest allies entering into export agreements with Iran? 

Mr. WEBSTER. But right now, thank you, Senator, for that question. 

I know that Iran right now is trying to get its terms together so 

that it can entice some of these companies to come back. I think 

it might take a bit of time to do that. But I do think Iran does represent a lot of opportunities for these companies and countries outside of the United States, and I have no question that there will 

be absolute interest by those. 

Senator GARDNER. Thank you. 

I want to ask one final question. Several of us have requested 

that the President increase the deployment and embedding of joint 

terminal attack controllers, JTACs, to help find and identify targets on the ground. Would that be useful in targeting oil production, oil development, oil transportation in Syria by ISIS? I would 

love to hear anybody’s response who is willing to answer the question. 

Dr. Crane, we will start with you. 

Dr. CRANE. This is kind of personal. I was in Iraq for three 

months in 2003 and five people that I knew were killed. And so 

every time, my daughter works with Navy Seals, so every time we 

deploy U.S. troops I recognize there is cost with that as well. It 

would probably improve targeting. 

Senator GARDNER. Mr. Harrell. 

Mr. HARRELL. I’d just echo Dr. Crane’s comment. These are obviously complex decisions but clearly gathering more intelligence 

helps improve targeting. 

Senator GARDNER. Anybody else care to answer? Very good. 

Thank you, Madam Chair, my time has expired. 

The CHAIRMAN. Thank you, Senator Gardner. 

Senator Barrasso. 

Senator BARRASSO. Thank you very much, Madam Chairman. 

Mr. Harrell, I found your testimony fascinating, and I read every 

word of it. Now in your testimony you state, ‘‘we have to acknowledge that U.S. and coalition efforts to date have, at most, limited 

success in actually reducing ISIS oil revenues.’’ You went on to explain the current estimates of a million dollars to a million and a 

half dollars a day are largely unchanged from an estimated million 

a day that the Treasury Under Secretary estimated ISIS earned 

from the oil trade about a year ago in November 2014. Finally you 

say one of the lessons of the last year is that limited strikes on 

ISIS oil infrastructure are not strategically effective. 

You served in the Obama Administration between 2009–2014, 

and you worked on President Obama’s 2008 campaign. Can you 

give us any insight into why the President has decided not to 

change his strategy against ISIS in light of these and other failures? 

Mr. HARRELL. Thank you, Senator, for the question. 

I should begin by saying I do actually think that the significantly 

increased operational tempo and range of targets that we’ve seen 

DOD begin striking over the last three or four weeks is a very important step. It appears to be having an impact although the, you 

know, results are early and it’s hard to gather information from the 
90 

ground. But I think that that is a very important step. And I certainly hope that we see continued escalation of the targeting of this 

oil infrastructure. 

Senator BARRASSO. So for the first year or so we don’t have what 

we have now seen in the last three or four weeks. So you actually 

commended the recent air strikes in your testimony on the oil 

tanker trucks that distribute oil that is produced in the ISIS-controlled territory. You commend the military’s recent decision to 

strike, as you said, larger pieces of ISIS oil infrastructure that are 

more difficult to repair or replace because you went through a lot 

about how easy it was to repair a number of the things that we 

were shooting at before. You state more needs to be done. You explain that strikes on oil infrastructure need to be comprehensive 

not limited, and you say that the U.S. military should target ISIS’ 

oil infrastructure to the maximum extent possible and there should 

be no part of ISIS oil enterprise where people feel safe to work. 

As a former official in the Obama Administration do you believe 

the Administration, today, is prepared to actually take those additional steps that you have outlined? 

Mr. HARRELL. I certainly think that what I have, what we have, 

seen all of us have seen over the last month is a very welcome increase in operational tempo. 

I would say, obviously, it does take time to develop targeting 

packages. I do think that the raid on Abu Sayyaf, the ISIS oil minister, essentially, in May provided a variety of important information that’s been useful for targeting. It no doubt took time to decode, translate all that information and use it. And certainly where 

we are today is a welcome tempo, and I hope it continues. 

Senator BARRASSO. Along those lines you had mentioned that 

government officials have concerns about avoiding permanent damage, you said, to Syrian oil infrastructure given that oil will be a 

key piece of rebuilding of post conflict Syria. I wonder to what extent officials within the Obama Administration continue to have 

these concerns. 

Mr. HARRELL. Senator, thank you very much. 

I obviously can’t speak to the current thinking of the Obama Administration. I do think that while there are legitimate concerns, 

you always want to weigh collateral costs. Where we are today, in 

my view, the threat we’re facing is such the weight of destroying 

the infrastructure needs to weigh very heavily on the scales. 

Senator BARRASSO. So you would agree that it is more important 

to first defeat ISIS and then worry about the details of rebuilding 

Syria. 

Mr. HARRELL. I think clearly ISIS is the most serious terrorist 

threat we face today, and we need to take all practical steps to defeat them. 

Senator BARRASSO. You also talk a bit about beyond oil, the natural gas business in Syria, explaining that over the last year ISIS 

captured important Syrian natural gas fields. You say, multiple 

sources indicate that ISIS sells natural gas to the Assad regime 

largely to fuel electricity production. Finally you say that you have 

heard from U.S. Government sources that the natural gas trade between ISIS and the Assad regime is at this point significantly larg-
91 

er than the oil trade between them. Do you know how much ISIS 

earns from producing and selling their natural gas? 

Mr. HARRELL. I unfortunately don’t have a good estimate or 

break down for that specific number. The information, I think, I 

and probably other experts have gotten on that front has been anecdotal. I don’t know if my colleague, Dr. Crane, would like to comment on that. 

Senator BARRASSO. Dr. Crane, would you like to weigh in? 

Dr. CRANE. Yeah. It’s a complicated question because what has 

happened is that they ship the natural gas to a generator and then 

ISIL is paid in the form of electricity, so a dollar amount is not 

very useful but it does help ISIL to have access to electric power. 

Senator BARRASSO. I guess then my final question, Madam 

Chairman, is to Mr. Harrell, as well as Dr. Crane if he wants to 

jump in. Do you believe it is easier or more difficult to cutoff this, 

in terms of natural gas verses oil? Do you have any thoughts on 

it because obviously the revenue is different but still there is a 

price being paid? 

Dr. CRANE. On natural gas, as you well know, it would be the 

generating plant that it goes to. It would be difficult to target the 

pipeline, per se, because it’s hard to hit. 

Whether the United States Government would want to target an 

electric power plant in Syria is above my pay grade, but it’s a pretty serious question. It does have a lot of implications for the horrible situation in Syria. 

And as we mention on the oil side, I think we will decrease revenues but it’s not going to go away. There’s, you know, you can haul 

it in pickup trucks, fix terminals and things like that. It’s helpful 

but it’s, it doesn’t make it disappear. 

Senator BARRASSO. Thank you. 

Thank you, Madam Chairman. 

The CHAIRMAN. Thank you, Senator Barrasso. 

Senator Capito. 

Senator CAPITO. Thank you, Madam Chairman and thank you 

all. This has been very interesting discussion. 

I want to pivot a little bit to Saudi Arabia. Saudi Arabia has continued to ramp up their production even as the price of oil has gone 

down, and I think they are experiencing a bit of a fiscal crisis over 

their lack of revenues. 

I have a report here. I think the data is from the IMF and it says 

that in order for Saudi Arabia to balance their budget in 2015 the 

price of oil would have to be $106. It is obviously much, much less 

than that. Of course they have a lot of reserves, and they are, I 

am sure, drawing on them as we speak. 

I would like to ask in light of that and if we do and I do support 

oil exports from this country and oil glut, do you anticipate that 

this will bring about in a country such as Saudi Arabia an instability that could make those countries even more vulnerable to ISIS 

or somebody or a terrorist group to be able to come in, and I do 

not want to say take over, but become a part of that? Is that a fear 

or is that something that is possible? Dr. Crane, do you have an 

opinion on that? 

Dr. CRANE. Saudi Arabia has very substantial reserves as you 

know and they can run a deficit for a very long period of time. 
92 

I think more importantly when I’ve worked both in Iraq and I’ve 

worked quite a bit in Qatar as well, there’s a tremendous amount 

of waste in government expenditures there that we’re all aware of 

in terms of almost free electricity, very low prices for gasoline or 

whatever. And when we’ve seen, when the Iraqis finally did raise 

gasoline prices up from a nickel a gallon up to something sensible, 

there wasn’t a peep from the population. 

So I think what we’ve seen in even regimes that are autocratic 

like in Saudi Arabia that when governments make these cuts in 

very wasteful subsidies and there’s a lot of wasteful investment as 

you know, in Saudi Arabia. They’ve been able to weather the 

storm. 

Senator CAPITO. And should be able to for quite some time. 

Mr. Webster, we have talked a lot about who is using the revenues and how the revenues are used. Can we boil it down simplistically to say this percent of the oil that is captured by ISIS is used 

internally? Is it 50 percent? Is it 70 percent? And what percent is 

sold externally? Do you have an idea of those numbers? 

Mr. WEBSTER. Thank you for your question, Senator. 

I’m not sure I’m going to be able to answer it. Our assessment 

is close to a couple of my colleagues here from the IHS country risk 

which is about 45 percent of their revenues come from oil but in 

terms of its distribution rather if it’s within the ISIS territory or 

if it is exported or put out elsewhere I’m afraid I don’t have that. 

Senator CAPITO. Does anybody have an opinion or an approximation? What I am trying to get at is if 50 percent of the oil revenues—we have talked about how to stem the tide here and a lot 

of it is the financial sanctions, but you say they do not go through 

the banks. They are not using a formalized financial system, but 

if they are selling this to countries there is some way, to track the 

old movie line, to follow the money. 

That is the question I am trying to get to is where do we look 

for this money where we can find a formalized financial system 

that we can then impose as a global community, I would think, financial sanctions. 

Dr. CRANE. Unfortunately what we’ve had is that the single largest set of buyers for the oil have been these small teapot refineries. 

And then once it goes into gasoline and diesel—— 

Senator CAPITO. Can’t trace it. 

Dr. CRANE. It goes everywhere, and it’s gone all over the place. 

The largest single sales have been to the Syrian Government, these 

20,000 odd barrels per day. We don’t have a lot of influence with 

that government. 

Senator CAPITO. Right. 

Dr. CRANE. But that’s the sad truth. 

I do think, however, targeting, you know, classic vehicles, heavy 

trucks are expensive. And so when one targets those then the people who own those think two, three, four times before they engage 

in hauling this stuff around and it doesn’t move by itself. 

Senator CAPITO. Alright. Thank you. 

The CHAIRMAN. Senator Hoeven. 

Senator HOEVEN. Thank you, Madam Chairman. 

I would like to thank both you and the Ranking Member for 

holding this hearing. 
93 

I believe that lifting the oil export ban is important for our country and will help with national security through energy security by 

helping to grow our oil and gas industry, our energy industry in 

this country. We create a stronger economy, we create more jobs, 

but we also produce more energy here at home and are able to supply our allies with oil and gas as well. So I would like each of you 

to react. Do you agree with that generally and if not, why not? 

We will start with Dr. Crane. 

Dr. CRANE. Yes, as an economist putting strictures on markets 

is have efficiency costs. 

Senator HOEVEN. Mr. Harrell. 

Mr. HARRELL. Thank you very much. 

I certainly think from a national security perspective there’s 

strong arguments for allowing U.S. oil exports. I can’t speak to domestic side of that equation. 

Dr. VAKHSHOURI. I think it’s important for the global energy security particularly in considering the investment in non-OPEC oil 

is reducing and the share of the OPEC oil export is going to increase from 50 percent today to 75 percent in the next decade. So 

it is important to have, especially the Middle East tackling with all 

these terrorist attacks and threats, it’s important to have the alternative resources out, especially from the U.S. 

Senator HOEVEN. Mr. Webster. 

Mr. WEBSTER. Thanks for your question, Senator. 

As you are probably aware, IHS has put out a couple of studies 

on the crude export issue. Our findings is that this is a clear win 

for the U.S. economy and also for energy security. It’s difficult to 

find a case where it’s, this is not a positive. 

Senator HOEVEN. Thank you. 

Dr. Vakhshouri, when the United States put the restrictions in 

place, the sanctions in place on Iran at that time, I believe, Iran 

was exporting about two and a half million barrels a day. After 

those sanctions had gone into place, I believe, their exports declined to just barely over one million barrels a day. 

With the President’s plan to lift sanctions, can you tell us what 

you anticipate in terms of exports, growing volume of exports, for 

Iran and kind of a timeline as you see them grow? 

Dr. VAKHSHOURI. Thank you very much for your question, Senator. 

On the immediate rebound of Iran and crude oil, depending on 

the timeline of the sanction roll back, Iran can add about 400,000 

to 500,000 barrels per day by mid next year and about 150,000 to 

200,000 barrels per day of condensate. 

Iran’s midterm plans for increasing its crude oil and condensate 

is to ramp up its crude oil capacity of pre 2012 of four million barrels per day to about 5.7 million barrels per day which out of this 

5.7 million barrels per day, one million of it would be condensate. 

So on the crude oil side, really the capacity of Iran’s production 

by the end of 2020 would be about 4.7 million barrels per day. And 

they have already done the investment, so they will be able to 

reach to this production capacity by 2020. Seven hundred thousands barrels per day of it would be new oil, from new fields and 

the rest would be the natural oil, old fields. 
94 

Senator HOEVEN. So you are saying they already have the capital 

to make the investment to achieve that growth and by 2020 they 

would export the equivalent of four million barrels a day? 

Dr. VAKHSHOURI. Produce. 

Senator HOEVEN. Produce. How much of that would they export? 

Dr. VAKHSHOURI. So the export, Iran’s main plan is to regain its 

prior, pre-2012 sanctions level of 2.5, so and then their OPEC position. So that would be their main priority. 

Out of this 5.7, one million of it would condensate that their refinery capacity for condensate will increase to one million barrels 

per day by 2020. So no more than Iran’s total overall export is not 

going to increase in the best scenario more than 500, if everything 

goes well. 

On the investment side it’s expected that Iran’s total upstream and downstream in petrochemical energy needs about $200 billion 

to $250 billion of investment. But for increasing its, to reaching its 

medium term crude oil and natural gas production by 2020 they 

only need about $50 billion investment—— 

Senator HOEVEN. Do you anticipate them going back to the 

roughly two and a half million barrels a day of export by the 2020 

timeline? 

Dr. VAKHSHOURI. My anticipation, Iran’s oil minister’s anticipation is sometime by the end of 2016 but our anticipation is that by 

that, it takes some time, so maximum production increased from 

Iran would be about 500,000 barrels of crude oil and about 200 condensate. It would take another year for Iran to build that capacity 

because they have to shut down some of the fields. And to regain 

that back, that production capacity, also considering that Iran’s oil 

fields are mature, it’s going to take some time. 

Senator HOEVEN. Okay. 

Why do you think Saudi Arabia is pushing volumes so aggressively in terms of oil production and export? Why is Saudi Arabia 

doing that? 

Dr. VAKHSHOURI. Well I think for different reasons. 

First and foremost is that Saudi, by reducing their prices the demand, hopefully, would raise and the United States demand, gasoline market, would be also important for Saudis. But we see that 

how the transportation system were moved from the fossil fuels to 

other renewable sources of energy, also the expansion of U.S. crude 

oil production and generally non OPEC production. 

On the other side I don’t see why Saudis, they don’t see any reason to give back the market access to Iran, the market to Iran. So 

Saudi and Kuwait already are substituting Iranian oil production 

drop of sanctions, since 2012 sanctions, and I don’t see any reason 

for Saudis politically and also market wise to lose this market access. 

And something that is important is that how OPEC is functional 

in the next year, in the next decade or next few years. Just the way 

that we see that Iraq is signing the contracts and its upstream energy industry and Iranian oil, new oil investment regulations, 

would allow the companies to increase more production because the 

prices are so low they have to increase their production to make 

their money back. So it’s going to be very tough to keep that balance between the OPEC members. 
95 

Senator HOEVEN. Madam Chair, I have one more question. Do 

you want me to wait or can I ask it? I see I am over my time, so 

I will defer to—— 

The CHAIRMAN. Let’s go to Senator Lee. 

Senator HOEVEN. Alright. 

The CHAIRMAN. You will have an opportunity for a second round. 

Senator HOEVEN. Very good. Thank you. 

Senator LEE. Thank you, Madam Chair, thanks to all of you for 

being here today. 

Mr. Harrell, I would like to start with you, if that is alright. In 

your testimony you point out that the U.S. and our coalition allies 

have had some limited success in reducing the oil revenues that 

ISIS has been able to get which remain at about $1 million to $1.5 

million per day, as I understand it. Can you tell me why is it that 

current policies have failed to affect what we regard as ISIS’ second 

largest source of revenue? 

Mr. HARRELL. Thank you very much, Senator, for the question. 

I should begin by saying I do think that the, sort of, recently increased tempo of military strikes over the last month or so is having an impact and is an important move in strategic direction of 

how to attack this. 

I think that the fundamental challenge the U.S. faces there is because this oil is largely produced in, you know, small kinds of wells 

and then distributed pretty widely and largely consumed in ISIS’ 

own territory or sold to the Assad regime. It is really a military decision, a military set of tools, that is first and most important. 

Sanctions can be an important supporting set of tools, but it is a 

military set of tools that has got to be front and center here. 

And I think that, you know, it probably took the Administration 

some time to decipher the intelligence to figure out that the, where 

the assets to strike are, about what kinds of assets are available 

to strike those targets to get to where we are today where there’s 

an increased military tempo. 

I do hope that the increased military tempo we are seeing will 

be contained and indeed escalated going forward because I do think 

that’s front and center, the best way to target this source of revenue. 

Senator LEE. So increased military involvement certainly would 

help when we are targeting, when we are going after, ISIS targets. 

What about the policing against ISIS’ black market activities as 

conducted by neighboring Arab states? Do you think that is likely 

to help also with regard to our efforts to hinder ISIS oil production? 

Mr. HARRELL. I absolutely think that is also a very useful step. 

Saying that most of the oil is consumed in ISIS territory or sold 

to Assad doesn’t mean all of it. There is clearly some smuggling 

happening. And I think that getting the adjacent states to actually 

seize and destroy the vehicles that are being used for smuggling 

the oil that’s coming out, not just turn it back so it can try to cross 

again, but actually take these, take this equipment out of commission would be a very important step. 

I also think intelligence gaps are definitely real. I’ve worked on 

this from a government side. I understand how hard it is to get intelligence. But, you know, taking sanctions against the guys while 
96 

ultimately buying it in Turkey, in KRG, where you can identify 

who those people are, is also a useful step to take. 

Senator LEE. Which of the Arab states in the region do you think 

are best positioned to help us with these efforts, help contribute to 

the increased military action against ISIS? 

Mr. HARRELL. Well in terms of the oil smuggling out of ISIS territory, so shutting that down, I think it’s pretty clear most of it has 

been, well most of it is in the Assad regime which isn’t going to 

help us. But after that it’s pretty clear most of it has been going 

into Turkey and into the Kurdish autonomous region of Iraq. 

I do think the KRG, the regional government there, has been escalating its tempo to crack down on that, as have the Turks, but 

I do think more can be done there in terms of stopping the smuggling. 

Senator LEE. Most of the oil sold by ISIS has been intra-territorial within ISIS-held territory. What do you think the likelihood 

is that this will expand, that they will increase their production of 

oil and that we will see a corresponding increase in the amount of 

oil that they are exporting? And who, if anyone, do you see as the 

most likely buyers in their exports? 

Mr. HARRELL. Well, Senator, thank you very much for the question. 

I certainly hope we will not see an increase in production, because I hope we keep the military pressure on them. I think that’s 

a very valuable step to take. 

Clearly absent effective pressure, including the military pressure 

on the production, we would see an increase. I mean, they know 

this is a major source of revenue for them. It is something that 

they are interested in maintaining. You see that they repair facilities when they can very quickly after strikes. It’s important to 

them, so clearly we’ve got to keep up the pressure or it will increase. I mean, the smuggling routes into Turkey and into KRG 

and elsewhere, these are long standing smuggling routes that have 

existed for years and years and years. 

Senator LEE. Long before ISIS. 

Mr. HARRELL. Yes, long before ISIS. I mean that’s where things 

flow out. 

Senator LEE. So that’s where we would most likely to see the 

most action there? 

Mr. HARRELL. Yes. 

Senator LEE. I see my time has expired. Thank you, Madam 

Chair. 

The CHAIRMAN. Thank you, Senator Lee. 

I have another set of questions here, but I will defer my time and 

go back to you Senator Hoeven. 

Senator HOEVEN. Thank you, Madam Chairman. I appreciate 

that. 

I just wanted to finish up for a minute with Dr. Vakhshouri 

about how dependent Iran’s economy is on oil. In other words, if 

they could not export oil, just how much difficulty would that create for them? What percent of their economy is oil and what would 

the ramifications be on the regime and on their economy in general 

if they were not able to export oil? 

Dr. VAKHSHOURI. Thank you for your question, Senator. 
97 

Well as I mentioned earlier, Iran’s dependency on oil export revenue decreased significantly since 2012. One issue was because of 

simply the restrictions on their oil export and that their oil export 

almost dropped to half. The other one was the very low crude oil 

prices. 

So already Iran, compared to other producers of OPEC and 

among the Persian Gulf producers, Iran has the less dependency on 

oil export. And I mentioned that the share of oil export revenue in 

Iran’s domestic budget dropped from 70 percent in 2011 to 33 percent in 2015. 

And what Iran is thinking now is just instead of exporting crude 

oil or natural gas, of course, export of natural gas is important for 

Iran because it creates long-term energy ties with its, with the receiving countries but to produce more processed products like refined petroleum products, refined products that come from their 

condensate, lighter and middle distillates. And also using their natural gas in their petrochemical factories, they’re going to increase 

their petrochemical facilities and production capacity almost three 

times by 2025 and also export of electricity. 

And it would, of course, generate more income, more jobs for the 

government and also it’s harder to put a ban on export of electricity 

at some point than export of crude oil or natural gas. It’s harder 

for governments that are receiving electricity politically to be convinced to stop importing electricity. 

Senator HOEVEN. But all of that economic activity you describe 

is dependent on oil and gas. 

Dr. VAKHSHOURI. I mean Iran has lots of mining industry and 

lots of other sources of income like taxing, taxations which have 

been increased in the recent years to substitute some of their oil 

revenue. But of course, it comes from oil and gas. But they’re going 

to process it inside and then—— 

Senator HOEVEN. I understand. 

Dr. VAKHSHOURI. Yes. 

Senator HOEVEN. Thank you. And thank you, Madam Chairman. 

The CHAIRMAN. Senator Cantwell. 

Senator CANTWELL. Thank you, Madam Chair. 

I would like to keep with the subject but ask the question a little 

differently and with respect to lifting the sanctions with Iran. I 

would like to know how lifting sanctions affects its energy sector, 

how it affects the conservative Iranian Revolutionary Guard Corporation (IRGC) and how diversifying businesses might be impacted? So either Mr. Harrell or Dr. Crane, what impacts would 

this opening up have on diversifying power and influence, at least 

in the energy sector? 

Dr. CRANE. As you know, Iran is a, you know, 80 million population. That’s a pretty wide—it has a bunch more diverse economy 

than a country like Qatar. And what we’ve seen happen over the 

course of the sanctions is that the foundation is called Bazaaris 

which are owned by the Iranian Revolution or controlled by the 

Iranian Revolutionary Guards, have kind of, crept into the economy 

and established monopolies and siphoned off, use those profits to 

fund their own activities. 
98 

And Iran has a long history of being very competitive and capitalistic. I mean, it’s had markets. The Bazaaris are focused on 

Bazaaris. 

And I think in the internal, you know, the internal political dynamic in Iran who we have seen individuals who are much more 

interested in integrating with the rest of the world economy are 

seeing the relaxation of sanctions as weakening those groups that 

have been opposed to, you know, have been using the sanctions to 

strengthen our own position. And these groups are the people who 

are financing terrorists and engaged in other activities abroad. 

Senator CANTWELL. Mr. Harrell. 

Mr. HARRELL. Thank you very much for the question, Senator. 

I just largely echo Dr. Crane’s remarks and view of how the 

IRGC did increase its influence during the sanctions era. 

I think that the fact the IRGC maintained, remained sanctioned, 

even after the nuclear deal and the fact that, I think, there’s commitment both here in Washington and in Europe to really keep up 

the pressure on the IRGC to make sure the companies going into 

Iran do not do business with the IRGC has some potential to help 

some of the non-IRGC actors in Iran, you know, compete more effectively against the IRGC in these economic areas where the IRGC 

is active. 

Senator CANTWELL. In energy? 

Mr. HARRELL. Yeah. 

Senator CANTWELL. Wouldn’t that be a good thing if we had 

somebody competing with them? 

Mr. HARRELL. I certainly think we want to see more competition 

emerge to the IRGC. I mean, the sanctions were very effective, I 

think, at getting us to where we are today with the nuclear agreement. But you know, we did see the IRGC expand its role in a diminishing pie in Iran during the sanctions era. And I think it 

would be good to see some of that get unwound and see the IRGC, 

obviously, lose its influence within Iran. 

Senator CANTWELL. Thank you. Thank you, Madam Chair. 

The CHAIRMAN. Thank you, Senator Cantwell. 

Mr. Webster, I want to wrap up my questions with one directed 

to you. In your testimony you talked about the issue of spare capacity that is out there and recognizing that this cushion that has 

been available historically through OPEC countries, we have seen 

a decline in that spare capacity and as we continue to see production up at higher levels that that spare capacity or that cushion is 

lessened. 

Your comment about the risk premium or the fear premium, well 

obviously there is a lot of risk going on whether we are talking 

about Iraq, Iran, Syria, Saudi Arabia or anywhere in the region. 

We have had some discussion in this Committee about what we 

really know about the spare capacity. We do a lot of guessing, I 

think, particularly when it comes to nation countries like Saudi 

Arabia. 

How confident are we that we really have an understanding as 

to what that cushion is, how reliable that is and what does that 

do to this risk premium or this fear premium that factors into what 

is going on with not only accessibility of supply but the pricing? 

Mr. WEBSTER. Thank you for your question, Senator Murkowski. 
99 

This is a very big issue, and I know you have discussions in 

terms of figuring out how much spare capacity actually is. We in 

the analytical community, we don’t have guesses, we call them 

analysis. But it’s right up there which is the question is it’s a big 

question for markets. 

When you got to this in 2008 there’s always that assessment of, 

you know, Saudi Arabia has historically claimed it as 12.5 or 12 

without the partition neutral zone but in reality you have to make 

an assumption on how much actually is there and realize that usually the last million barrels a day or so is quite heavy, so it’s actually oil that is actually not terribly useful for oil markets. So it’s 

both an uncertainty on how much there actually is and how sustainable that is and what type of oil it is. 

This shift from Saudi Arabia and spare capacity to more control 

within the United States system both in terms of shale oil and also 

in terms of stocks, is incredibly important because it is much more 

easy for someone like me to calculate just how much we have there. 

This fear premium, this is my concern, is that in the coming 

years, right now we have a lot of geopolitical risk out there, but 

the market isn’t really paying attention to that right now because 

we are producing more oil than we are consuming around the 

world right now. And so you could actually handle an outage right 

now without a whole lot of difficulty. 

But this is going to shift in the future and part of it is because 

of OPEC and Saudi Arabia’s policy where they’re actually increasing their production. And whatever your assumption is in terms of 

their total productive capacity, there’s no question it is shrinking. 

The CHAIRMAN. Senator Cantwell mentioned this in her first 

round of questioning which related to some of the choke points of 

transportation issues that we face. You have the Strait of Hormuz 

that is sitting out there, really, with a great deal of exposure and 

vulnerability when it comes to moving this resource. 

When we are talking about this risk premium, how do you factor 

in the geographic reality of being able to safely and freely move 

these oil exports? 

Mr. WEBSTER. Thanks for your question, Senator. 

The Strait of Hormuz is, as I would say, probably the most critical choke point for global oil markets. So as Ranking Member 

Cantwell mentioned in her opening statement, there’s about 94 

million barrels of supply or demand every day. About 17 million of 

that actually flows through the Strait of Hormuz and that, while 

you have other places like the Strait of Malacca and other places 

where you could, you know, arguably go around it, you can’t really 

easily go around the Strait of Hormuz. You need to go through it. 

When you get into an environment where it is either a tight market or some sort of concern that something might happen in terms 

of harassment operations or some effort to try to choke off supply 

from the Strait of Hormuz, the availability of supply from other 

parts of the world that is not bottled up within the Gulf is incredibly important for not just U.S. energy security, but also global energy security. 

The CHAIRMAN. Well it just seems to me that as we are talking 

about the very direct connect between oil and funding or financing 

of terrorism around the world that we can be focusing today on di-
100 

rect hits to small trucks or how we are moving vehicles that are 

transporting oil on the ground. But that is just what we are focusing on right here, right now. 

The reality is that this is a global trade in oil that allows for a 

funding of terrorism that goes on around the world, and where we 

have these points of vulnerability as we are moving these resources 

I think we need to be paying attention and understanding, again, 

the implications of these restrictions. 

We have talked a little bit on the dais here today about the important role the United States can play in allowing us a greater 

level of energy security when we have access to increased supply 

that we control, that we are producing, that we are putting out on 

the market, that we are not only using for ourselves, but really 

using to help our friends and allies in other parts of the world. 

I mentioned my concern about Libya recognizing that Libya’s 

supply of oil out into the market if something happens, if there is 

continued unrest and violence there, the United States would have 

an opportunity to perhaps supply to some of those countries that 

Libya has been providing oil to. 

I think that as we talk about the issue of this 40-year-old export 

ban and, as was pointed out by Senator Daines, recognizing that 

we are the only country that produces oil that has in place a ban 

on export, I think it is important that we put into context what it 

means, not only to our security as a nation, but to the security of 

nations around the world when we can help influence, not only the 

supply, but how you can more safely move the necessary resource. 

I see that Senator Warren has arrived. We have just concluded 

our final remarks, but we will give you the courtesy of your five 

minutes. 

Senator WARREN. I very much appreciate that, Madam Chair. 

I apologize for my absence. We had a bill signing for the new 

education bill. I appreciate the chance to be here. 

You know, one way to weaken ISIS is to cutoff access to its 

source of funding. My understanding is that ISIS funds its operations in part through the sale of the oil that it seizes, that it extracts, that it refines in the territories that it controls. And some 

of that money ends up moving through the banking system including through the more than 100 branches of Iraqi and Syrian national banks that are located in territory controlled or contested by 

ISIS. 

Mr. Harrell, can you explain how ISIS and the people who purchase oil from ISIS rely on the international banking system to 

move their money? 

Mr. HARRELL. Thank you, Senator, very much for the question. 

I should begin by saying, in my assessment most of the oil trade 

begins very much as a cash-based trade. It’s ISIS selling oil at the 

well heads taking literal cash, you know, U.S. dollars, Iraqis’ 

DNRs, things like that which they then stockpile. I think they actually do keep much of that money in cash. Over time it is a cashbased economy there and heavily cash dependent. 

But clearly as the volumes of cash buildup ISIS is and will be 

looking for ways to move that out whether it’s just for, sort of, 

management purposes, whether it’s to move money to affiliates. 

And I think it’s very important to continue to deny them access to 
101 

the formal financial system. I think one of the important steps on 

that front that the U.S. Treasury Department has taken is the U.S. 

Treasury Department has gotten the Iraqi Central Bank to shut 

down the access of the Iraqi bank branches inside ISIS territory in 

Iraq. So they should now be shut off from the formal financial system. 

But we are seeing various informal exchange houses, you know, 

money wallahs, things like that, looking at ways to move money in 

and out of ISIS territory. So I don’t think it would go direct from 

ISIS to the formal financial system very much because the banks 

are shut down. But I do think they’re looking, you know, and they 

have ways with some of the informal money exchange houses to, 

you know, first move it out and then try to move it on. And that’s 

certainly something that is critically important to address. 

Senator WARREN. Well, I think you put it in a very important 

way but make it clear that cash is critical to their operations. Obviously we want to use any tool that we can to try to disrupt the flow 

of cash and certainly through the banking system but also any 

other tool we can to disrupt the flow of cash. 

That is part of the reason why President Obama nominated 

Adam Szubin to serve as Treasury Under Secretary for Terrorism 

and Financial Crimes back in April. The Under Secretary is responsible for combating terrorist financing and he is the U.S. Government’s chief enforcer of our financial sanctions against countries 

like Iran, Syria and Sudan. 

It is an absolutely critical position and one that plays a key role 

in disrupting ISIS finances, and I think you have partly identified 

what we have already done there. 

Mr. Harrell, can you explain some of the tools that the Office of 

Terrorism and Financial Crimes has to disrupt the flow of money 

to ISIS? 

Mr. HARRELL. Yes. 

I think there are a number of tools that the Treasury Department, under the Office of Terrorism and Financial Crimes leadership, has including sanctioning money houses and banks that may 

deal with ISIS, with ISIS cash, including putting out short of sanctions, putting out advisories to the financial sector about what 

typologies to look for, what risks to look for so there’s greater information there including engaging with Iraq, with Turkey, with other 

governments in the region, including their regulators to make sure 

that those regulators are taking the steps to keep that money out 

of their jurisdiction. 

Senator WARREN. Thank you. 

Despite the importance of attacking the financial foundation of 

ISIS, the Republican leadership has been holding up Adam 

Szubin’s nomination for nearly eight months. Mr. Szubin is impeccably qualified for this position, even Republicans do not contest 

that. He has worked at the Treasury Department for over a decade 

under both Democratic and Republican Administrations. 

Mr. Harrell, let’s be really brief because the Chair has already 

given us extra time here. Do you think Senate confirmation of Mr. 

Szubin will aid in our fight against ISIS? 

Mr. HARRELL. I absolutely think it would aid in our fight against 

ISIS. 
102 

I’ve had the privilege of working with Adam Szubin for a number 

of years when I was at the State Department and traveling with 

him. He would be, once confirmed, an enormously effective leader, 

leading those operations over at the Treasury Department. As we 

all know being confirmed in the job is different from serving there 

in an acting capacity. 

Senator WARREN. Well, thank you very much. 

If we are serious about taking down ISIS we need to aggressively 

target its use of the international financial system to sell oil and 

to move money around. Congress does not look very serious about 

this threat when it definitely delays the confirmation of our top 

counter-terrorism financing official for months for no legitimate 

reason. 

It is long past time to confirm Adam Szubin to be Under Secretary for Terrorism and Financial Crimes. 

Thank you, Madam Chair. 

The CHAIRMAN. Thank you, Senator Warren. 

With that, ladies and gentlemen, thank you for the time that you 

have given us and all the good and helpful information you have 

shared. We appreciate it. 

Thank you. 

We stand adjourned. 

[Whereupon, at 12:11 p.m. the hearing was adjourned.] 
(103) 

APPENDIX MATERIAL SUBMITTED 
104 

The Role of Oil in ISIL Finances 

Addendum 

Keith Crane 

RAND Office of External Affairs 

CT-448/1 

January 2016 

Testimony 

Document submitted on January 6, 2016 as an addendum to testimony presented before the Senate Energy and Natural Resources 

Committee on December 10, 2015 

This product is part of the RAND Corporation testimony series. RAND testimonies record testimony presented by RAND associates 

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its research clients and sponsors. RAN 0® is a registered trademark. 
105 

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106 

Keith Crane 1 

The RAND Corporation 

The Role of Oil in ISIL Finances2 

Before the Committee on Energy and Natural Resources 

United States Senate 

January 6, 2016 

The subsequent questions and answers found in this document were received from the 

Committee for additional information following the hearing on December 10, 2015 and were 

submitted for the record. 

Question from Senator Ron Wyden 

Question: Mr. Crane, does ISIL seem to have the technical capability needed to sustain their 

current level of oil production indefinitely? Absent an increase in attacks from the US and our 

allies, is ISIL capable of maintaining their existing oil infrastructure? 

ISIL has not been able to maintain past levels of oil output in Syria. Production in fields currently 

controlled by ISIL ran 300,000 barrels per day prior to the Syrian civil war. Before the recent 

attacks on trucks and oil production infrastructure, production levels from these fields were 

running 30,000 to 40,000 barrels per day. However, production will not completely cease. ISIL 

has been able to pressure or induce individuals with oil industry expertise to work in these fields. 

Absent attacks from the United States and our allies, production could very well rise. 

Question from Senator AI Franken 

Question: In the Senate we talk a great deal about the importance of "energy independence". 

While technological advances such as hydraulic fracturing and horizontal drilling have certainly 

increased our oil production, the U.S. still imports a tremendous amount of crude oil-more than 

7 million barrels every day. The number-one source of these imports is from OPEC countriesmany of whom don't have the same geopolitical interests as the United States. Many Senators 

1 The opinions and conclusions expressed in this testimony are the author's alone and should not be 

interpreted as representing those of RAND or any of the sponsors of its research. This product is part of the 

RAND Corporation testimony series. RAND testimonies record testimony presented by RAND associates to 

federal, state, or local legislative committees; government-appointed commissions and panels; and private 

review and oversight bodies. The RAND Corporation is a nonprofit research organization providing objective 

analysis and effective solutions that address the challenges facing the public and private sectors around the 

world. RAND's publications do not necessarily reftect the opinions of its research clients and sponsors. 

2 This testimony is available for free download at http://www.rand.org/pubs/testimonies/CT448z1.html.. 
107 

have been pushing for the U.S. to lift the ban on crude oil exports. If we start exporting some of 

our oil, will the U.S. have to make up the difference by importing more oil from OPEC countries? 

First, I would like to trace through the likely effects of repealing the export ban on U.S. production 

and the distribution of U.S. produced oil. I will then address your question more directly. 

What happens if the oil export ban is repealed? A substantial amount of increased production 

in the United States comes from fields in North Dakota. Currently, some of this oil is refined in 

the Midwest, but production out of the Bakken now exceeds Midwestern refineries' demand for 

this oil. Some is transported to the Gulf. This oil is transported by pipeline, barge and rail. Some 

of this oil goes west by rail to the Pacific Coast and is barged to California refineries, and some is 

transported by rail to East Coast refineries, which are designed for lighter, sweeter crude oils like 

those from the Bakken. It goes by rail because there are no pipelines to the east or west coasts. 

Railroads charge from $5 to $10 per barrel more to transport this oil than pipelines do for 

comparable distances. Producers have to discount their oil to cover the costs of transporting it, 

so as to make it competitive with imported oil delivered by tanker. 

If the export embargo were to be repealed, much of the oil currently going to the east or west 

coasts by rail, might go to the Gulf Coast where it would be exported to foreign markets. It would 

be exported because transportation costs are lower to the Gulf than to the two coasts: there are 

pipeline connections to the Gulf Coast, oil can be barged down the Mississippi, and distances by 

rail are less, all leading to lower transportation costs. Because of lower transportation costs, 

producers have to provide less of a discount to get their oil to market. The reduction in the 

discount due to the repeal of the export embargo would increase the profitability of Bakken oil, 

leading to higher production of oil than would otherwise be the case. How much more would be 

produced, especially at current prices, is a matter of debate, but some more oil would be 

produced. In the context of the global market, this increased production would exert some 

downward pressure on global oil prices, but in light of the size of the likely increase in volumes, it 

probably would not have a major impact on world market prices. 

Repealing the export embargo is also like to increase refining efficiency. Because oil cannot be 

exported, light, sweet oil from Eagle Ford and other Texas fields is sold to refineries along the 

Gulf. Most of these refineries have been optimized to use heavy crudes, primarily from 

Venezuela and Mexico. To induce these refineries to purchase light crude from fields in Texas 

and elsewhere, the light crude has been sold at a discount to world market prices for similar 

crudes, like Brent. If this crude could be exported, it would not have to be sold at a discount. 

Gulf refiners would then choose to import heavy, sour crudes, for which they are optimized. The 

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global refining industry would enjoy efficiency gains as lighter and heavier crudes would be sold 

to refiners that are optimized to run on those types of crude. 

If we start exporting some of our oil, will the U.S. have to make up the difference by 

importing more oil from OPEC countries? The net amount of crude oil consumed in the 

United States is driven by US. demand, not US. production. US. refiners already import more 

oil than necessary to satisfy US. demand. They refine these additional imports and export 

refined products. US. exports of refined oil products and natural gas liquids ran 3.82 million 

barrels per day in 2014, more than half the number of barrels per day of crude oil imported, which 

was 7. 34 million barrels per day. 

Assuming that US. demand does not change, repealing the export ban could result in increased 

exports of crude oil (we currently export to Canada), but a decline in exports of refined oil 

products, or no change in exports of refined oil products, which would imply more imports. 

In 2014, Canada was our most important supplierofoil, accounting for 39 percent of total US. 

imports of crude oil. Mexico is also an important supplier. However, OPEC provided 41 percent 

of gross imports; Saudi Arabia and Venezuela were our most important suppliers from OPEC. If 

demand for imported oil were to rise because of increased exports of US. crude oil, some of the 

increased demand would likely come from OPEC, especially supplies to US. East Coast 

refineries. Imports from Venezuela, an OPEC member, likely would also rise, as would imports 

from Canada, not an OPEC member, as both those countries produce heavier oils, and these oils 

would substitute for some lighter oils from Texas that are currently being refined in Gulf Coast 

refineries. 

How much oil we produce, export, or import is not a fundamental determinant of the health of the 

US. economy. Many countries with healthy economies, for example, Germany and South Korea, 

import all their oil. Other healthy economies, like Norway and up until recently Canada are 

important exporters. The key to US. energy security does not lie with production. Rather, it 

relies on well-functioning international oil markets and a resilient domestic economy that can 

quickly and efficiently respond to the ups and downs of world market oil prices. 

Finally, it is true that some OPEC members do not have the same geopolitical interests as the 

United States. However, the export ban likely has not affected their policies. The oil exports ban 

has been in place since 1975. Over the past 40 years the political interests of the United States 

and these OPEC members have not converged. In the case of Venezuela, they have diverged. 

OPEC members must sell their oil to generate funds for their governments. Regardless of US. 

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actions, they will find buyers. With the export ban, they likely receive a marginally higher price 

than they would if the ban were to be lifted, but the quantities now banned from export are likely 

not enough to have a large effect on exporters' overall revenues. 

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U.S. Senate Committee on Energy and Natural Resources 

December 10,2015 Hearing: Terrorism and Global Oil Markets 

Questions for the Record Submitted to Mr. Peter Harrell 

Questions from Senator Ron Wyden 

Question 1: Mr. Harrell, as you and Mr. Webster have testified, ISIL makes a 

substantial amount of money from illicit oil sales; likely over a million dollars a 

day. While military action is being taken to cripple their ability to produce oil, you say 

that ISIL has been able to rebuild what's been destroyed. You also make a 

recommendation that "(t)he U.S. needs a robust campaign to sanction ISIL procurement 

networks and reach out to businesses in Iraq, Turkey, and elsewhere in the region to 

ensure that they are taking appropriate steps to avoid selling oil equipment to ISIL-linked 

buyers." What exactly would the components of that campaign be? How would U.S. 

financial and trade agencies work to stop the sale of oil equipment to ISIL networks? 

Answer: Senator Wyden, thank you very much for your question and for the opportunity 

to testify to the committee. 

With respect to military action against ISIS oil targets, it is important to remember that 

many of ISIS's facilities are relatively simple, low-tech facilities, for example 

"refineries" that are jerry-rigged out oflarge metal barrels and other readily-available 

equipment. These kinds offacilities can be repaired or replaced relatively easily after a 

military strike. Several additional military steps can help increase the pressure on ISIS oil 

revenues, including continuing to strike the tanker trucks that transport oil in ISIS 

territory, which are more valuable and harder to replace. 

On your question regarding sanctions, the U.S. and our allies should sanction any 

individual or company that sells oil-related equipment, including oil producing and 

refining equipment and tanker trucks, into ISIS-controlled territory. Most existing 

sanctions target the sale of equipment to ISIS, but in Iraq and Syria, countries awash in 

such equipment, it can be difficult to prove that a sale is to ISIS, rather than to some nonISIS businessman living in ISIS-territory. Sanctions on the sale of such equipment to ISIS 

controlled territory would be easier to implement and enforce. In addition, the heightened 

scrutiny that sanctions officials, banks, and companies are already putting on transactions 

in southern Turkey and other area adjacent to ISIS territory is valuable to prevent trade 

with ISIS. 

Finally, it is important that we not forget the necessity of keeping up economic and 

financial pressure on the Asad regime. The sad reality is that until there is a change in the 

Syrian government, the chaos and violence that allowed ISIS to grow in Syria will 

remain. We should work to tighten the pressure on Asad, including by putting pressure on 

the military supply lines that Iran and Russia use to support Asad. 
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U.S. Senate Committee on Energy and Natural Resources 

December 10, 2015 Hearing: Terrorism and Global Oil Markets 

Questions for the Record Submitted to Mr. Peter Harrell 

Question 2: Mr. Harrell, you testified that the ISIL oil trade is largely cash based, 

without significant linkages to banks or other financial institutions. Furthermore, you 

stated that the Treasury and State Departments have cracked down on money changers 

and exchange houses that help ISIL move cash into and out of its territory. But ISIL's 

reach is expanding, and it seems likely some of this money is financing affiliates around 

the globe. What do you see as the weaknesses in US efforts to restrict the flow ofiSIL 

funds? What else should the US be doing keep ISIL's cash out of the hands of potential 

terrorists in the United States and Europe? 

Answer: Senator Wyden, as you say in your question, one of the real challenges we face 

in countering ISIS's finances is that although much ofiSIS's money is in cash and in 

ISIS-controlled territory, ISIS-linked and ISIS-inspired attacks in Paris, Orlando, San 

Bernardino, and other cities are low-cost affairs and ISIS's ability to move even small 

amounts of money can support devastating terrorism against the United States and our 

allies. For example, the ISIS terrorists involved in the 2015 Paris attacks, which were 

estimated to cost just over $30,000, used pre-paid debit cards to help cover their 

expenses. It is critical the European Union continue to enhance both its internal 

information sharing regarding terrorist financing and also joint U.S.-E.U. terrorist finance 

sharing mechanisms. I also recommend that the U.S. develop a model, similar to one 

launched by the U.K government and major U.K. banks in 2015, in which certain 

designated officials at major U.S. banks would receive security clearances so to enable 

better two-way information sharing on ISIS and other terror finance threats between the 

U.S. Treasury Department and the private sector. 

In addition to combatting financing of these lone-wolf and small-group attacks, the U.S. 

government needs to continue working with U.S. and international information 

technology companies to crack down on ISIS's ability to spread propaganda and recruit 

sympathizers online. The U.S. must always remain committed to our First Amendment 

principles, but we also need to develop practical ways to counter ISIS's online 

recruitment efforts. 

Question from Senator Debbie Stabenow 

Question: Mr. Harrell- You offer a number of options that the U.S. and our allies could 

take to disrupt the oil revenue ISIS is receiving. From escalating military strikes on oil 

infrastructure and tanker trucks, to pressuring governments in neighboring countries to 

crack down on oil smuggling. 

Some in Congress are using the troubling rise ofiSIS to justify lifting the ban on U.S. 

crude exports and increasing domestic oil production. However, other polices that 

enhance energy security receive scant attention. For example, policies Congress enacted 

that spurred the development of highly fuel efficient and electric vehicles have reduced 

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U.S. Senate Committee on Energy and Natural Resources 

December 10,2015 Hearing: Terrorism and Global Oil Markets 

Questions for the Record Submitted to Mr. Peter Harrell 

oil consumption. Another example is the Department of Defense's work to utilize nextgeneration biofuels. Our military leaders have made clear that diversifying our fuel mix 

with domestically produced advanced biofuels is a national security imperative. 

Do you have any thoughts on whether lifting the ban on oil exports would have any 

impact on reducing the oil revenue that ISIS is receiving? 

Answer: Senator Stabenow, thank you very much for the question and for the 

opportunity to testify to your committee. Since I had the opportunity to testify in person 

to your committee, Congress enacted legislation ending the ban on exporting U.S. oil to 

international markets. There were of a number of justifications for the decision to lift the 

ban, including enabling the United States to become a reliable, stable source of energy for 

U.S. allies and potentially reducing the role of certain foreign governments in 

international oil markets. With respect to ISIS, however, ISIS-produced oil is largely 

consumed in local markets in Iraq and Syria and, to some extent, in adjacent countries. 

As a result, I do not expect that the decision to end the ban on U.S. oil exports will have a 

large-scale impact on ISIS's oil-related revenues. 

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U.S. Senate Committee on Energy and Natural Resources 

December 10,2015 Hearing: Terrorism and Global Oil Markets 

Questions for the Record Submitted to Mr. Jamie Webster 

Question from Senator AI Franken 

Question: I understand that you authored a report in 2014, titled "U.S. Crude Oil Export 

Decision: Assessing the Impact of the Export Ban and Free Trade on the U.S. Economy." 

In this report you argue for the benefits of exporting oil, which is also the subject that you 

focused on at the hearing. However, I'm concerned that your research findings were 

funded by a consortium of petroleum producers. As we all well know, these companies 

have been lobbying Congress for some time now to lift the ban on oil exports. Do you 

believe that receiving funding from the oil industry for your research poses a potential 

conflict of interest? 

No. Our analysis is objective and independent. As with all IRS research, the 

findings and conclusions are solely our own. The ban on exporting crude oil was 

an antique. It was put in place to support a system of price controls that Presidents 

Carter and Reagan abolished three and a half decades ago. The lifting of the ban 

was strongly advocated by America's most important allies, the European Union 

and Japan for reasons of energy security. It was anomalous to maintain this ban 

when, for four decades, the U.S. government has been calling for open trade in 

other commodities, and indeed has recently criticized China for exactly this kind 

of ban on rare earths. We made clear the funding for reasons of transparency. 

We generally favor free trade- a flow of exports and imports guided by economic 

principles- whether it is in commercial airliners, agricultural products, films, or 

medical devices. 

Question from Senator Debbie Stabenow 

Question: Mr. Webster- There is no denying that global oil markets are critical to the 

security and economies of the U.S. and countries throughout the world. And I share the 

concerns about the threat posed by ISIS. 

Over the last year, proponents of lifting the U.S. crude export ban like yourself cite 

ongoing international conflicts- including the troubling rise of ISIS to justify lifting the 

export ban. 

As you are aware, negotiations are ongoing about lifting the ban in exchange for 

extending incentives for renewable energies and advanced manufacturing, and other 

policy priorities. However, I am not aware of any consideration of repealing even a single 

permanent tax incentive the oil industry receives as part of an agreement. 

In your testimony, you state that "market incentives alone will help push U.S. oil 

producers to produce more as prices rise," but current crude export policy can "limit the 

full upside of this production increase." If that is the case, is it necessary for Congress to 

continue offering tax breaks for this mature industry, particularly when some of these 
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U.S. Senate Committee on Energy and Natural Resources 

December 10,2015 Hearing: Terrorism and Global Oil Markets 

Questions for the Record Submitted to Mr. Jamie Webster 

incentives have been on the books since 1916 and maintaining them in this difficult 

budgetary environment costs the government tens of billions of dollars? 

I am not sure which tax provisions you are addressing. The often-cited Domestic 

Manufacturer's Deduction is available to all qualifying taxpayers, including the 

automobile industry. As I understand it, this deduction is generally 9 percent, but 

has been limited to 6 percent for the oil and gas industry. Universal application 

also applies to the foreign tax credit. 

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