[Senate Hearing 114-526]
[From the U.S. Government Publishing Office]
S. Hrg. 114-526
TERRORISM AND THE GLOBAL OIL MARKETS
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HEARING
BEFORE THE
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 10, 2015
__________
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
LISA MURKOWSKI, Alaska, Chairman
JOHN BARRASSO, Wyoming MARIA CANTWELL, Washington
JAMES E. RISCH, Idaho RON WYDEN, Oregon
MIKE LEE, Utah BERNARD SANDERS, Vermont
JEFF FLAKE, Arizona DEBBIE STABENOW, Michigan
STEVE DAINES, Montana AL FRANKEN, Minnesota
BILL CASSIDY, Louisiana JOE MANCHIN III, West Virginia
CORY GARDNER, Colorado MARTIN HEINRICH, New Mexico
ROB PORTMAN, Ohio MAZIE K. HIRONO, Hawaii
JOHN HOEVEN, North Dakota ANGUS S. KING, JR., Maine
LAMAR ALEXANDER, Tennessee ELIZABETH WARREN, Massachusetts
SHELLEY MOORE CAPITO, West Virginia
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
C O N T E N T S
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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
TERRORISM AND THE GLOBAL OIL MARKETS
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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?
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.
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 available. 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 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 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 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:]
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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.
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:]
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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 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:]
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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 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:]
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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 imposed 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 production, 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 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 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 near-term 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?
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.
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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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 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 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
ISIL-control 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 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 ISIS-controlled 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.
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 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 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 larger 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.
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.
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.
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.
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 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.
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.
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.
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 direct 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 cash-based 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 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.
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.]
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