tehranbureau An independent source of news on Iran and the Iranian diaspora

Iran-India Oil Trade in Jeopardy

by THOMAS STROUSE in Washington, D.C.

25 Jan 2011 20:17Comments
india+iran+oil.jpgDispute over payments may foretell further retreat from relationship.

[ business ] The month-long payment dispute over Iran's oil sales to India demonstrates how difficult it has become for foreign firms and institutions to do business with Iran, regardless of the legitimacy of the transaction. Although sanctions do not directly target Iran's oil sales, U.S. restrictions on Tehran's financial dealings are indirectly making it more difficult for Asian and European companies to purchase oil from Iran.

The payment dispute began when India's central bank, the Reserve Bank of India, announced in late December that Indian companies could no longer use the Asian Clearing Union (ACU) to make oil and gas purchases from Iran. The ACU mechanism, set up in 1974, acts as a clearinghouse for bilateral trade between its nine member states. The transactions handled by the ACU are settled by the central banks of the respective countries, making it difficult to identify the individual companies involved. The United States has been pressuring India to close down this trade mechanism with Iran because it has provided Tehran with the ability to bypass restrictions on its financial dealings.

Until December, the ACU was the major channel through which Iran and India completed oil sales. According to the latest ACU newsletter, Iran routed more than $13 billion overseas through the mechanism in 2010 and nearly $9 billion in 2009. Iran and India routed more than 75 percent of the ACU's total U.S. dollar transactions in 2010.

Resolving the Payment Dispute

Without the long-established ACU mechanism as a trade outlet, officials in Tehran and New Delhi have been working vigorously to find a viable, long-term solution for the past month. However, it has thus far been no easy task to find a bank that will settle transactions for Iran's oil sales, with financial restrictions making it difficult for purchasers of Iranian oil to secure letters of credit and make payments to Iran.

In early January, Iran proposed using the European-Iranian Trade Bank (EIH), based in Germany, to handle payment transactions. Under this scenario, the Indian companies importing Iranian crude oil would open individual accounts with the State Bank of India (SBI) and SBI would in turn open an account with EIH in order to make payments to Iran. EIH was blacklisted by the U.S. Treasury Department in September, putting any bank that does business with the German entity at risk of a U.S. investigation. After India decided to forgo this risk, Iranian officials suggested using two banks based in the UAE, but both banks reportedly refused to facilitate payments to Iran.

SBI, India's largest bank, has taken the position that it is up to Iran to help find a bank that is willing to handle its business transactions. The bank is reportedly willing to facilitate payments, but it is not willing to do business with any bank on the U.S. sanctions list. "The Iranians have to line up a bank," an SBI executive, Pratip Chaudhuri, told the press on January 10. Indian refiners "are not able to pay for oil, not because we are afraid of the sanctions or something, but because they are not able to designate a suitable bank which would receive the payment on their behalf."

Iranian officials have said little about the dispute, other than linking the move to U.S. pressure on India, with a particular emphasis on President Barack Obama's trip there in November. The official IRNA news agency concluded in one report on the matter that "India's continued economic growth rate of eight percent is in limbo as the government of Manmohan Singh has bowed to U.S. pressures."

Indian officials have been publicly optimistic that a solution will be found in the coming days, with high-level delegations visiting Tehran as well as holding talks with European banks about the possibility of routing payments to Iran. Without a relatively quick solution, the row could put in jeopardy an oil trade worth an estimated $13 billion per year, not only making it difficult for Iran to sell its oil, but also for Indian refiners to find short-term replacements for Iranian crude. During the first week of January, India's major importers of Iranian crude began searching for alternative sources of supply in case the issue is not resolved in a timely fashion.

India's Oil Imports from Iran

Moving around 400,000 barrels per day (b/d), Iran is India's second largest supplier of crude oil. In 2010, India imported around 3 million b/d in total, with Iran's share representing approximately 13 percent.

While the Iranian supply is important for India's energy needs, India's growing market is even more important to Iran, representing around 17 percent of Iran's total oil exports. For the past several years, India has been one of the three largest purchasers of Iranian oil, along with China and Japan. These three markets account for more than half of Iran's total oil exports. According to calculations based on government data, China imported an average of around 463,000 b/d from Iran in 2009, India imported 426,000 b/d, and Japan imported 421,000 b/d.

The two largest Indian importers of Iranian crude are Mangalore Refinery and Petrochemicals Ltd (MRPL) and Essar Oil, importing nearly 300,000 b/d combined.

MRPL, a subsidiary of India's state-run Oil and Natural Gas Corp. (ONGC), currently purchases around 150,000 b/d from Iran. MRPL, which runs a 236,000 b/d refinery in southern India, depends on Iran for more than 60 percent of its total crude oil requirements. The company imports smaller amounts from Saudi Aramco and the Abu Dhabi National Oil Company (ADNOC). MRPL supplies the majority of its refined products to Indian companies that then market the product domestically. An estimated 40 percent of the company's refined product output is exported.

Privately owned Essar Oil, the second largest Indian importer of Iranian crude, currently purchases around 125,000 b/d from Iran, representing nearly 50 percent of the company's total imports. Essar, which operates the 280,000 b/d Vadinar refinery on India's western coast, signed its first term contract for Iranian crude imports in April 2008.

Replacing Iranian Crude

In early January, the uncertainty over supplies in the short term led MRPL to issue rare spot tender contracts for crude imports for February and March. This was an attempt to guarantee that its refining operations will not be held up if there continues to be no agreement on a mechanism to pay Iran for its crude. MRPL's imports from Iran account for a much larger percentage of its total crude oil requirements than the other Indian companies importing from Iran.

The majority of India's term contracts for Iranian crude imports are up for renewal before their term ends on March 31. In early April, Indian companies typically announce their contracts for the rest of the fiscal year, which begins on April 1. It remains unclear if the companies will maintain their current level of imports or if they are in the process of searching for alternative supply sources in an attempt to diversify and reduce their dependence on Iran. This will also depend on what kind of short- and long-term solutions Tehran and New Delhi are able to reach over the payment dispute.

In April 2010, India's privately owned Reliance Industries decided not to renew its term contract for the purchase of Iranian crude, reportedly because of pricing issues. In 2009, Reliance imported more than 100,000 b/d from Iran, which represented around 10 percent of the company's total imports. To make up for the substantial shortfall that resulted from dropping the contract, Reliance increased its oil imports from Venezuela from 59,000 b/d in 2009 to 182,000 b/d in 2010.

Upon renewing its term contract with Iran last April, Essar announced that it would be looking to reduce its dependency on Iranian crude oil in the future, hoping to make up for any reduction in Iranian imports with increased domestic production from India's Mangala oil field. Essar's Vadinar refinery began receiving Mangala crude through a new pipeline system last June. Essar has since been replacing some of its imports from South America with domestic production from Mangala, with expectations that it will continue to do so throughout the next couple of years.

India's rapidly rising demand for energy has led to a high level of dependence on Iran as a crude oil supplier. Considering the increasingly intense international pressure on Tehran and its own difficult approach to negotiations on energy issues, it has been suggested by some Indian analysts that Iran is not the most reliable partner in New Delhi's search for energy security.

The Impact of Sanctions on Investment in Iran

In addition to having an impact on oil sales, sanctions have also played a significant role in hindering Indian investment in Iran. A number of Indian companies have expressed interest in investing in Iran's oil and gas sector over the past several years, but the decision to move forward with the investment deals has often been plagued by the threat of U.S. sanctions.

In 2007, India's Essar negotiated a deal with Iran to build a 300,000 b/d refinery in Bandar Abbas worth up to $10 billion. The new refinery, which the Iranian government viewed as symbolic of its close ties to India, was expected to take three to four years to build and would have helped meet Iran's domestic gasoline and diesel requirements. However, by late 2007, the deal had fallen apart after it provoked controversy in the United States. At the time, Essar was in the process of acquiring a large steel company in Minnesota. After Minnesota Governor Tim Pawlenty threatened to block the sale because of the company's involvement in Iran, Essar promptly withdrew from the Bandar Abbas project and moved forward with the acquisition of Minnesota Steel.

There are also a number of ongoing challenges facing Indian investment in Iran's gas sector that will likely play out during the course of this year. In December 2007, India's ONGC and Hinduja Group signed a deal to purchase a 40 percent stake, worth an estimated $7.5 billion, in phase 12 of Iran's South Pars gas field. More than three years later, the consortium is finding it difficult to secure funding for the project. With banks unwilling to finance the investment, the deal is effectively delayed. In November, Iran's state-run Petropars issued an ultimatum to the Indian companies that they have until the end of January to financially commit to the project or the negotiations will be permanently abandoned. "We are still negotiating with Petropars. We have to spend money on the project without violating U.S. sanctions, which isn't easy," a senior ONGC official told the press on January 12.

Similar to European firms, Indian companies are seen to be dragging their feet on Iranian investment projects, hoping that Iran's status within the international community will improve at some point, thus opening the door for increased investment. In the absence of foreign investors, it is likely that Iran will continue struggling to develop critical elements of its oil and gas sector, with the giant South Pars gas field just one example.

India's Balancing Act with Iran

In addition to instituting stringent restrictions on Iran's financial dealings, the United States, during both the Bush and Obama administrations, has engaged in a campaign to pressure Indian and other foreign companies not to invest in Iran's oil and gas industry. One major tool in this effort is contrasting the benefits of doing business in the United States with the risks of doing so in Iran. A number of Indian companies, including Essar and Reliance, have begun adjusting their relations with Iran in recent years, particularly with an eye toward their U.S. interests and opportunities. Although Iran holds significant opportunities for Indian companies, the risks involved have mounted over the past couple years, as sanctions and other financial restrictions have tightened.

For Indian companies to invest in Iran, they first need to avoid being caught in the web of financial restrictions set up by the United States, but they must also conform to Indian government policy on such consequential investment decisions. As India positions itself as a major global player -- and a responsible nuclear power -- New Delhi may be more willing to sacrifice some aspects of its relationship with Tehran. With India beginning its two-year stint as a non-permanent member of the U.N. Security Council at the start of 2011, and with aspirations to hold a permanent seat, New Delhi likely perceives that it now has more responsibilities to maintain, particularly in its dealings with Iran.

Thomas Strouse, an analyst at Foreign Reports, covers the oil industry for Tehran Bureau.

Copyright © 2011 Tehran Bureau

SHAREtwitterfacebookSTUMBLEUPONbalatarin reddit digg del.icio.us
blog comments powered by Disqus

In order to foster a civil and literate discussion that respects all participants, FRONTLINE has the following guidelines for commentary. By submitting comments here, you are consenting to these rules:

Readers' comments that include profanity, obscenity, personal attacks, harassment, or are defamatory, sexist, racist, violate a third party's right to privacy, or are otherwise inappropriate, will be removed. Entries that are unsigned or are "signed" by someone other than the actual author will be removed. We reserve the right to not post comments that are more than 400 words. We will take steps to block users who repeatedly violate our commenting rules, terms of use, or privacy policies. You are fully responsible for your comments.