ENERGY INTERNATIONAL RISK ASSESSMENT (EIRA)
AN INDEPENDENT MONTHLY REVIEW
November 2016
VOLUME 4
ISSUE 11
 
Iran and India probe ground for a long-term tango

The blatantly tough, ultimatum-style huge pressure exerted by Iran on India in the case of untapping Farzad B gas field seems to have paid off. Indian energy major, Oil and Natural Gas Corporation (ONGC) pledged to offer an acceptable financial investment model for the development of the field in order not to alienate the Iranians who looked like losing patience and temper with its peers.

In October, the powerful Iranian oil minister, Bijan Namdar Zanganeh, disclosed “displeasure” at the ONGC’s proposal and made a clear warning that unless there is soon a “reasonable” financial investment model, Tehran will make “another decision” apparently meaning that Persians would go shopping for partners elsewhere.

The story is not as old as the ivory-white marble mausoleum Taj Majal in Agra or the Holy Shrine of Masuma-e-Qom, sister of Imam Reza, the Eighth Imam of the Shia Isna Asheris (Twelver Shias) in the Iranian city of Qom. But it has a rather long record of mishaps.

A consortium of OVL (ONGC Videsh Ltd.), Oil India Ltd. and Indian Oil Corp. is credited with the finding in 2008. The Farzad B gas field located in the Persian Block of North Pars field is believed to contain in-place gas reserves of 21.7 trillion cubic feet, of which 12.5 Tcf is recoverable. It makes it a true bonanza for all with legitimately granted access. Originally, it looked like the OVL had the full right to claim such an access. It was close to landing with the lucrative deal when in 2010 submitted a revised master development plan (MDP) for producing 60% of the field's in-place gas reserves. But then geopolitics has brutally messed up with economics.

The plan ran astray due to the US and international sanctions introduced against Iran for its controversial nuclear program with an allegedly hidden goal of acquiring an A-bomb. OVL chose not to violate the sanction regime for fear of reprisals. The US has set limits to investment of foreign companies into Iran’s energy sector, putting a cap of $20 million per year, which made no business sense at all.

The wind changed direction with the defrosting of trade and economic ties between Iran and the outside world. It occurred in January this year as it had been stipulated in the phased-out de-sanctioning process and procedures signed and sealed in 2015 by Iran and P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States) and joined by the European Union.

In April this year, Narendra Modi’s government raised a credit line to Iran to $450 million to prop up exports of good and services. In particular, it was a self-serving move to ensure the 2015 deal signed bySteel Authority of India Ltd. (a state-run entity) and private firm Jindal Steel and Power Ltd. is completed. The contract stipulates the supply of 250,000 tons of steel rails worth $255 million to Iran.

The actual “thaw” became perfectly visible in the second half of this year with India capitalizing on its geographical proximity and absence of unresolved thorny issues in bilateral relations. With no more restrictions of financial transactions, India has repaid Iran its outstanding debt totalling $6 billion, which originated from the unpaid imports of Iranian oil (India is Iran’s second most important purchaser of its oil after China). An Indian bank has recently opened a branch in Iran. Air India announced the comeback ofdirect flights to Tehran from Delhi, something that last happened back in 1994.

Yet, it pales in comparison with the expected energy deal on Farzad B gas field that is now scheduled for signing next year. Either it would be a “definitive agreement by February 2017”, as envisioned by India’s oil ministry (reported by The Times of India), or at least by March 2017, as claimed by sources quoted by The National Interest. In any way, the project is really big. The field has the potential to produce three billion cubic feet per day, and it would make a hefty contribution to the energy balance of both countries.

Moreover, the development of Farzad B gas field is intrinsically linked with another mega-project: the upgrade of the port of Chabahar, Iran’s only deep-water port on the Indian Ocean, turning it into a multi-faceted trade hub. India has made a commitment to invest $500 million into the construction. Interestingly, the next phases of the port’s upgrade might include building a liquefied natural gas (LNG) plant in Chabahar, which would open new vistas in the Iranian ‘pivot’ to other fast developing economies in Asia. Iran’s has never hidden its ambitions to match the LNG exports success story of Qatar, and, in theory, it has all the prerequisites.

To be noted: if the LNG plant in Chabahar is put on stream it would accelerate Iran’s competitive drive to carve the still most profitable markets in Eastern Asia (Japan, china, South Korea, etc.) and secure a sizable market share for its LNG exports. Once again, it would not provide relief to consumers in the EU since the European Commission keeps pressuring the prices downward, scaring away the traditional LNG producers like Qatar.

Besides, the Chabahar port would make a huge difference for Iran. It could be complemented with an industrial zone focused on export-oriented sectors, for instance, on petrochemicals. Tehran leadership has long proclaimed the goal of diversifying the economy and placing emphasis on high-added value products. Apart from the enhanced export potential, Chabahar would serve as a gateway for trade routes within what is now often termed as Greater Eurasia.

Prime Minister Modi reacted to the opening of new delivery routes for Indian products in 2014 when the cargo was shipped through onshore infrastructure to Russia via Iran in a telling comment. Basically, he committed India to creating “vast network of physical and digital connectivity that extends from Eurasia’s northern corner to Asia’s southern shore.” Alex Vatanka, author for The National Interest, was correct to conclude that it makes Iran “India’s inevitable land bridge to markets in the north and west directions.”

Iran must know it is worth its salt (its oil and gas too). The case of Farzad B gas field looks exemplary. Government decision-makers in Tehran seem to be certain that India would concede in the long run having few options in diversifying it’s energy purveyors, and would invariably seek lucrative deals with the de-sanctioned Iran.

This ‘school of thought’ was revealed in an article published in April in the Iran Daily: “With Iran emerging as India's principal gateway to Central Asia, Russia and Europe, the Modi government hopes to give the partnership a push with the high-level visits. Connectivity projects within Iran and linking the region, besides demand for energy, are driving India's policy towards Iran, sources pointed out.”

The unnamed ‘sources’ might be right in assuming that the natural complementarity of energy providers and energy consumers will serve as the driving force behind the gradual rapprochement of the two major and fast driving economies in Asia. For the record: this year, India has outpaced China with economic growth expected to hover around 7.5% (compared to around 6.7%) while Iran's forecasted 2016 GDP growth rate is believed to reach 5-6%.

Once again Alex Vatanka makes a sensible observation: “Tehran and Delhi have long eyed each other as befitting strategic partners that together can link up the subcontinent and west Asia in ways unseen before.” It should be added that while Pakistan remains a close ally of China, and this alliance is viewed with suspicion in New Delhi, the bettering or relations between India and Iran seems to be devoid of any hidden stumbling blocks and past grievances.

This time geopolitics is part of the solution and not part of the problem. The emerging India-Iran tandem ready to tango must be watched closely for new surprising and, hopefully, positive happenings on all terrains, from trade, energy, trans-border infrastructure and investment opportunities to high diplomacy.

 

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Oil
India
Iran
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