Reporting US and Iraq officials, the WSJ confirms that this news about sanctions waiver came as Washington and Baghdad have been working to de-escalate the tension between one another, after last month’s crisis relating to the US assassination of Qasem Soleimani, the IRGC general from Iran.

The WSJ reported that there were differences among officials in Trump’s administration regarding the waiver.

“We want to maintain maximum pressure on Iran,” the WSJ reported a US official as stating. “But it should not be at the expense of the economic stability of its neighbors,” he added.

Washington Post and Middle East Monitor have contributed to the story.

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The bipartisan US move initiated by Congress last week threatened sanctions against companies working on completing Nord Stream 2, Europe’s biggest energy infrastructure project, which the US and some European countries fear could give Russia some control over the continent’s energy supplies and boost revenues for an increasingly belligerent Kremlin, The Wall Street Journal wrote.

The move prompted Swiss pipe-laying company Allseas Group S.A. to stop work on the $10 billion pipelines, just weeks from completion. The pipe would double direct gas shipments to Germany by Russian’s state-owned gas giant PAO Gazprom.

Despite the announcement of the stoppage, Russian energy minister Alexander Novak told a state-owned press agency on Thursday that only 160km, or the underwater part of the Nord Stream 2 pipeline, remained to be completed, work that would be finished within months by using Russian ships. Russian state media reported that Gazprom’s pipe-laying vessel Akademik Cherskiy, currently in the far east, would be brought to the Baltic to complete the pipeline.

The US’s move sparked outrage in Germany, prompting senior officials and politicians to call for a coordinated approach to protect the strategic interests of European Union members against future US sanctions.

“Europe needs new instruments to be able to defend itself from US licentious extraterritorial sanctions,” wrote Niels Annen, Germany’s deputy foreign minister, in a tweet last week.

The dispute adds to strain in the Western alliance since the Trump administration adopted a series of foreign-policy moves, including troop withdrawals, trade tariffs and the withdrawal from certain international agreements, without consulting with allies.

Some German officials say that fortifying Europe’s defenses against US sanctions could require closer cooperation with Russia and China at a time when President Trump is pressuring EU allies to side with Washington in its trade, technology and geopolitical disputes with Beijing.

Others questioned Washington’s motivations, saying that the sanctions were driven by the desire to increase exports of American liquefied natural gas or LNG.

Miguel Berger, the German Foreign Office’s director-general in charge of economic affairs, wrote in a tweet last week that the sanctions were an “attempt to use coercive measures for selling LNG to Europe.”

The extraterritorial reach of US economic sanctions has been a recurring irritant for Europe. Washington has imposed fines worth tens of billion dollars on European firms, especially banks, for past sanctions breaches, and European officials have worked on ways to protect the continent’s companies.

A senior German government official said, in response to the pipeline sanctions, that Germany would make a renewed European push to build a firewall against US sanctions when it takes over the EU’s rotating presidency next year.

One goal would be to create a separate financial infrastructure that would allow European companies to escape the scope of US sanctions. The banks involved would have to be based in jurisdictions out of the US’s reach, such as China or possibly Russia, the official said.

“Washington is treating the EU as an adversary. It is dealing the same way with Mexico, Canada, and with allies in Asia. This policy will provoke counter-reactions across the world,” this official said.

Some European officials, besides Germany, have even toyed with the idea of adopting sanctions of their own against the US, for instance, to deter policies they think endanger the environment.

“What if the EU Parliament would sanction the Keystone pipeline on environmental grounds,” a senior German diplomat asked, speaking to The Wall Street Journal this week, in reference to the oil pipeline connecting Canada and the US that has been opposed by environmentalists in both countries.

Building a shield against US sanctions is difficult because of the size of the US economy, the role of the dollar in international transactions, and the fact that the US has control over much of the world’s financial plumbing.

The EU has failed to protect its companies that do business in Iran since the US reintroduced sanctions against the country last year after Washington exited the 2015 nuclear deal. US officials have urged Europe to tighten its own sanctions on Iran instead of trying to work around US measures.

In January, the British, French, and German governments created a company to carry out a complicated barter-like scheme with an Iranian counterpart out of America’s reach. So far, it has not completed a single transaction.

Richard Nephew, a senior fellow at the Brookings Institution, said the rising frictions between the US and its traditional allies would encourage the development of similar arrangements.

Russia and China have banks and other companies that do no business in the US and are thus immune from US sanctions. Some of those firms, like China’s Bank of Kunlun, were the main conduit for China’s Iran sales under the previous pre-nuclear-deal set of Iran sanctions.

Yet for Western firms to start using such institutions would carry reputational and compliance risks. Even Chinese firms have grown more cautious about bucking US sanctions. Bank of Kunlun, whose China National Petroleum Corp. parent is listed on the New York Stock Exchange, has repeatedly frozen business with Iranian firms over the last year. China’s purchase of Iranian oil plummeted after US sanctions waivers were removed.

Peter Beyer, German Chancellor Angela Merkel’s trans-Atlantic affairs coordinator, told German radio on Wednesday that finishing the pipeline would now be more expensive, but that it would be completed in the second half of 2020.

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The waiver will allow Iraq to continue buying gas and electricity from Iran.

The administration of US President Donald Trump said in March it was extending a 90-day waiver for the second time to let Iraq continue energy imports from Iran.

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The market widely expected Washington to extend the waivers for five of the countries. However, the administration says that any country still importing oil from Iran will be subject to US sanctions beginning on May 2.

“Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil,” Trump said in a tweet on 22nd of April after he ordered a tightening of sanctions on Iran’s oil exports.

To shed more light on the issue we reached out to Dr. Albert Bininachvili, a professor of political science at the Columbia University for an interview.

Here is the first part of the interview:

Answering our question on the possibility of the driving of Iran’s oil export to zero and the Saudi Arabia and the UAE’s capabilities to make up for any shortfalls in oil supply, he said,“The US decision to strictly re-impose secondary sanctions on Iran by denying waiver extensions to eight countries that had been buying Iranian crude makes the future of Iran’s oil exports (which amounted to up to 2.4m bpd before sanctions were imposed) the biggest supply risk to the global energy markets, especially against the backdrop of political turbulence and output losses in Libya and Venezuela. The ability of other oil producers to bridge this impending supply shortfall is about to be tested.

Most energy experts believe the Trump administration’s decision can only work with the backing and cooperation of Saudi Arabia, the United Arab Emirates and other Persian Gulf producers to avoid an undersupplied oil market and spiking crude prices.

However, the circumstances are different than the lead-up to Washington renewing sanctions on Iran in November 2018 when the two leading Gulf producers and other crude suppliers, including Russia, turned up their oil taps only to find themselves outwitted by learning that the Trump administration had granted waivers — significant reduction exceptions (SREs) — to Tehran’s top crude buyers.

Riyadh and Abu Dhabi are making it clear that cooperation in replacing Iranian oil exports will now be on their terms.

Saudi Oil Minister Khalid al-Falih struck a cautious tone in comments regarding the end of the waivers, saying: “In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil-consuming nations to ensure a well-balanced and stable oil market.” Riyadh evidently is not interested in another oil price crash.

Falih later stressed that, because the oil market is “well-supplied,” Riyadh didn’t perceive urgency in boosting production in May, when SREs to eight nations expire. “We will be responsive and we think there will be an uptick in real demand but certainly we are not going to be pre-emptive and increase production,” he said.

UAE Oil Minister Suhail al-Mazrouei made a similar point earlier in April at a conference in Abu Dhabi, saying “I think we have learned the lesson… We will not jump the gun, pre-produce the volumes that are not required yet.”

The two Gulf oil powerhouses seem politically committed to doing their part to undermine Iran’s economy and ideally marginalize its influence in the greater Middle East. But Riyadh and Abu Dhabi know the oil market is tighter and more vulnerable than six months ago, the result of slowing global demand, rising crude inventories, less Venezuelan and Libyan oil available due to internal strife in these countries.

Given that Saudi Arabia and the United Arab Emirates are being tasked with replacing Iranian oil and preventing a major oil market disruption, Riyadh and Abu Dhabi tend nevertheless to avoid reckless and hasty steps on moving precipitously while they assess market conditions, determine their best course of action and protect their financial self-interests.

Energy executives familiar with Saudi decision-making process are certain that Riyadh would only respond after it thoroughly assessed the impact on the oil market from the expiration of sanctions. In other words, they may let the oil market continue to tighten before they add supply.

Saudi Arabia and the United Arab Emirates have been instrumental in the OPEC+ alliance that has withdrawn as much as 1.2 million barrels per day (bpd) of crude from the market over the last year, a major contributor to a tightening of global oil supply. Saudi Arabia has assumed the lion’s share of the cuts agreed to by the alliance, pumping well below its assigned quota of 10.31 million bpd at 9.79 million bpd in March.

Technically, Saudi Arabia and the United Arab Emirates could collectively boost oil output by as much as 1.5 million bpd reasonably quickly. As the biggest OPEC producer Saudi Arabia produced 9.82 million barrels a day in March and can pump an additional 1 million barrels a day within a short period.

The UAE can increase output to 3.5 million barrels a day from a current level of 3.045 million.

That volume would handily accommodate the loss of Iran’s remaining 1 million bpd of exports, although the United States is unlikely to see Iranian crude sales drop to its “zero” target goal.

Interestingly, to cover the first 1million bpd of the lost Iran’s share, Saudi Arabia and UAE do not need to transcend their respective OPEC allocated quotas as both countries are still underperforming. Saudi Arabia can lift output and still abide by the deal because it is currently pumping about 500,000 bpd below its quota.

UAE also stays 400.000 bpd below.

They are unlikely to increase output over the existing quota before the OPEC+ summit in June, where new ceilings may most probably be reserved for the spare capacity holders.

However, the two Gulf producers would be unable to maintain that higher output indefinitely and what is particularly important, it would greatly diminish global spare production capacity, a critical factor should unexpected crises arise.

OPEC and allied suppliers including Russia agreed to limit their production until the end of June to buttress crude prices and avert a glut. They are due to meet in June to decide whether to extend the cuts.

Russia’s crude and condensate output increasing slightly in 2019 to 558 million tons, or 11.21 million barrels a day.

That, on the surface, would suggest that the impact on oil prices from the expiration of Iran sanctions waivers could be limited. Saudi Arabia could replace lost Iranian supply barrel-for-barrel, at least in short term perspective. However, while Riyadh could ramp up production, it would also need to do so at a cost to its spare capacity. Buyers won’t have trouble finding enough supply, but the loss of a big chunk of spare capacity has historically been a driver of higher prices and higher volatility.

If the United States succeeds in reducing Iran’s crude exports close to zero, in line with its stated policy, Saudi Arabia would have to raise its production to unprecedented levels to cover the loss.

And it would leave the global market tighter than at any time since the oil shocks of 1973/74 and 1979/80, with resulting upward pressure on prices.

The question is where exactly will the replacement barrels come from?

The estimates of the International Energy Agency show that OPEC members held 3.4 million bpd of spare capacity, while their non-OPEC allies had no more than 330,000 bpd.

Saudi Arabia accounted for almost two-thirds of the reported OPEC spare capacity (2.02 million bpd), with smaller volumes held by Iraq (330,000 bpd), United Arab Emirates (330,000 bpd) and Kuwait (220,000 bpd).

Russia accounted for most of the non-OPEC spare capacity (roughly 250,000 bpd) with little or no available spare capacity in the other non-OPEC allies.

But using the IEA’s figures, it is clear Saudi Arabia would need to increase production and exports by at least 1 million bpd to cover the total loss of Iranian barrels.

The Saudis claim that their spare production capacity is between 1.5 million bpd and 2 million bpd. The EIA defines spare capacity as the volume of oil production that can be brought online within 30 days and sustained for at least 90 days.

The problem with this estimate is that it has never been tested. According to the US Energy Information Administration, the kingdom has never produced more than 10.42 million bpd on an annual basis (2016) or 10.63 million bpd in a single month (July 2016) in the last 20 years.

Although, in theory, it may seem there is sufficient spare capacity in Saudi Arabia and other countries, to compensate for the loss of Iranian export, but it would leave the global market with less than 1 million bpd of capacity left to meet all other contingencies.

In practice, the market could become much tighter, with sanctions essentially using up all the spare capacity worldwide and eliminating this vitally important “shock-absorber”.

Maximum production would require opening the chokes on existing wells and bringing previously shut-in wells back into service. Boosting production this way might risk a decline in oilfield pressure that could result in long-term damage to the reservoirs.

And it is not clear whether the midstream infrastructure, i.e. pipelines, processing plants and export terminals have enough capacity to handle 12 million bpd because such high flow rates have never been tested.

The Saudis and their OPEC allies seem aware that using their spare capacity is a now a double-edged sword: it may cool down prices, but the impact could be limited by the risk-premium as the market worries about what’s left.

Spare capacity is a fluid concept. For some, it means extra output that can flow at the flick of a switch. Realistically, most industry executives define it as production that can be brought on stream in 30 days, and then sustained for a at least three months. Beyond that, some of the spare capacity is simply oil on the ground that can be pumped by drilling new wells, requiring more time.

Over the years, Saudi Arabia has been traditionally secretive about how much of its spare capacity falls in each bucket. But Ali Al-Naimi, who was oil minister for nearly 25 years until 2016, offered a glimpse in 2012.

“I believe we can easily get up to 11.4, 11.8, almost immediately in a few day,” Al-Naimi told CNN in 2012. “All we need is to turn valves,” he added. The other 700,000 barrels a day to reach about 12.5 million requires three months of work, however. “And the 90 days is for one thing: to mobilize additional drilling,” he said.

There’s one more complication: of the 12.5 million barrels a day, only 12 million is controlled directly by state-owned company Saudi Arabian Oil Co, or Aramco. The other 500,000 barrels a day lies in the so-called Neutral Zone shared with Kuwait. But the region hasn’t produced a single barrel for nearly two years due to a dispute between Kuwait and Riyadh.

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Speaking to Foreign Policy, Iraq’s new electricity minister, Luay al-Khatteeb, talked about the country’s plans to rebuild the shattered power sector, and US pressure over continued energy ties with Iran.

“To rebuild the Iraqi power sector…We need at least 100 substations across the country and interconnections with neighboring countries. This is something we signed with Saudi Arabia, Kuwait, Jordan, with Iran, soon with Turkey and Syria, it’s basically to make Iraq an electricity hub,” he said.

“At the moment, about 4 gigawatts [roughly one-third of Iraqi electricity] comes directly and indirectly from Iran, either by providing the electricity directly or through natural gas supplies that provide the feedstock for power generation,” he noted.

“This is something that in terms of price and volumes and delivery—there is no alternative. We have explored other options in neighboring countries. There is no alternative that competes on volume or price or speed of delivery to make up for that,” the Iraqi minister added.

He went on to underscore that Iraq has strategic relations with all its six neighbors, and “this must not be compromised at the expense of one relationship.”

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An informed source told Iraqi satellite TV network Alsumaria that during the meeting between Pompeo and Iraqi President Barham Salih, the two sides stressed an extension to Iraq’s waiver exempting it from sanctions to buy energy from Iran.

On April 22, US President Donald Trump announced that he would not renew waivers that allow eight countries, including Iraq, to buy Iranian oil without facing Washington’s sanctions, in a bid to bring the Islamic Republic’s oil exports to zero.

The Iraqi source went on to add that during the Tuesday meeting, it was also stressed against any measure that would escalate tension with Iran.

Iran supplies Iraq, as one of the Islamic Republic’s major and most important energy clients, with electricity and gas for its power plants.

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In this round of talks, the experts will discuss and exchange views on issues such as unilateral US sanctions, US refusal to extend sanctions waivers on Iranian oil, US refusal to extend sanctions waivers on nuclear-related cooperation, and economic cooperation using INSTEX trade mechanism.

The Instrument in Support of Trade Exchanges (INSTEX) is a special-purpose vehicle (SPV) established in January 2019 by France, Germany and the United Kingdom to facilitate non-dollar trade with Iran.

In a joint statement yesterday, Britian, Germany and France and EU foreign policy chief Federica Mogherini said that the US decision not to extend sanctions exemptions on Iranian oil and nuclear cooperation was regrettable.

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The CBI authority further said that the new mechanism aims to organize the transactions in the foreign exchange market between the exchange shops. He further explained about the mechanism, saying that the licensed exchange shops are linked to each other and their transactions are supervised by the CBI itself every day.

The CBI aims to explore the real volume of demand and supply in the foreign currency market through this new mechanism, the official noted, adding that the CBI will take action to sell or buy foreign currencies if required.

The CBI had announced the launch of an organized foreign exchange market almost two months ago and it was supposed to be inaugurated at the end of the first Iranian month of Farvardin (April 20).

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To know more about the issue we reached out to Dr. Osman Faruk Logoglu, a senior member of Turkey’s Republican People’s Party (CHP). Following is the full text of our interview with him:

Are the US moves to slap unilateral sanctions against Iran and not extending waivers for Iran’s oil importers in compliance with international law and regulations?

The US sanctions against Iranian oil exports are in flagrant violation of international law and regulations as they transgress the sovereign right of nations to trade freely.  The sanctions are illegal also because they have been imposed unilaterally without a mandate from the UN Security Council or by any other authorized body.  The US is certainly entitled not to import Iranian oil or goods itself but has no right to prevent others from engaging in what is legal and proper.

The US is making efforts to drive the export of Iranian oil to zero. Is it possible? If no, why?

The US effort to drive Iranian oil exports to zero is not possible.  There will certainly be buyers of Iranian oil who will not comply with US sanctions.  China has already declared that its trade with Iran is legal and normal.  Turkey has also taken a stance against the US move. Foreign Minister Çavuşoğlu stated that the US decision will not serve regional peace and stability, yet harm the Iranian people and added that Turkey rejects unilateral sanctions and impositions on how to conduct relations with neighbors.  Iran’s exports might be curtailed for some time to come in the near future, but over time the volume of its exports could/should rise.  We should expect adverse reactions to the US decision to grow in time and this could also help Iran to sell more of its oil.

The US is forcing Turkey to stop buying oil from Iran and replace Saudi and Emeriti oil instead of Iranian oil. What are the advantages of Iranian oil for Turkey?

Iran is our neighbor.  We have a broad range of economic relations. Oil is one major element in the nexus of our ties with Iran.  The physical proximity is also an important asset as far as Iranian oil is concerned.   Given the state of our problematic relations with both Saudi Arabia and the UAE, there is no incentive for Turkey to buy oil from them.

Considering the rivalry between Saudi Arabia and UAE from one side with Turkey and their differences, Can’t US request threaten Turkey’s energy security and maybe consequently it national security due to the fact the UAE is one of the supporters of the PKK terrorist separatist group?

Even if Turkey reduces its Iranian oil imports and starts to look for other sources, the alternative for Turkey will be neither Saudi Arabia nor the UAE.  Current conditions will not allow Turkey to turn in that direction.  In any case, the US is not in a position to ask Turkey where it is to buy its oil from.

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US President Donald Trump has decided not to renew waivers that allow eight countries to buy Iranian oil without facing Washington’s sanctions, in a move aimed at bringing Iran’s oil exports to zero.

The Iranian MP stressed that the Islamic Republic would definitely continue to sell its oil, adding that this would require bypassing the US sanctions.

“There are numerous ways to sell oil, and just as we managed to bypass sanctions in the past, we can do the same in the current situation and export our oil as much as desired,” he added.

He said the Iranian Ministry of Petroleum has thought of many alternatives to sell oil, adding “even if our oil clients stop buying our oil, we have many other clients, especially in the region, who are after Iran’s oil.”

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