Modi’s Iranian trump card under threat

Prime Minister Narendra Modi has been criticised for his frequent visits abroad. What is often overlooked is that it is during these trips that he has secured hydrocarbon assets in resource-rich countries that are diplomatic outcastes for the Western world. His strategy has been largely successful as is evident from – the acquisition of natural gas fields in Russia, and the favourable renegotiations on a long-term LNG (liquefied natural gas) supply contract from Qatar.

The result of acquisitions in Russia have had a profound impact on the numbers. Since 2014-15, production of crude oil & natural gas by Indian companies from overseas assets has doubled. Today, nearly a third of oil and natural gas produced by Indian companies comes from overseas assets as compared to 13.7% four years ago.

If it wasn’t for the United States’ refusal to waive off sanctions, which will be levied by the Trump administration on energy exports from Iran, Modi's trifecta would be complete. India would continue to have the west Asian country for energy security and as a safe haven from crude oil shocks. But not under Trump's watch.

After the first India-US Ministerial 2+2 Dialogue last week, U.S.’ Secretary of State Mike Pompeo made it clear that the Trump administration expects every country to completely halt crude oil imports from Iran, even if it is after November 4 when the trade sanctions for the petroleum sector kick in.

“We will consider waivers where appropriate but that it is our expectation that the purchases of Iranian crude oil will go to zero from every country or sanctions will be imposed. So we’ll work with the Indians, we committed that we will do that,” Pompeo said at a media briefing soon after meeting his Indian counterpart Sushma Swaraj, Minister of external affairs.

Over the last decade in particular, India, which imports 83% of its crude oil needs, has carefully nurtured an increasingly beneficial relationship with Iran. Despite U.S. sanctions on Iran, which were in place till 2015, India continued to buy crude oil from the West Asian country. In return, India was offered discounts and almost free shipping.

The lifting of the U.S. sanctions on Iran in 2016 put this mutually beneficial relationship on the fast track. India ramped up its crude oil imports from Iran. According to data presented in the Lok Sabha, India imported 5.67 million tonnes of crude oil from Iran during April-June 2018. In comparison, India imported 5.22 million tonne of crude from Saudi Arabia, during the same period.

The imports were even higher in July but started to drop in August. According to Reuters, after peaking at nearly 769,000 barrels a day was being imported by India in July but that came down 32% to 523,000 barrels a day in August. The newswire also found that imports in August were nearly 56% more than the same month last year.

It is perhaps this trend that prompted Pompeo to say that the US understands for some countries it takes time to completely unwind crude oil imports from Iran, but they will work with these countries to find a solution.

Meanwhile, when it comes to exporting crude to India, it is not just discounts that Iran has been offering. Since 2010, India has nurtured a relation with Iran that could see it get a natural gas field in the West Asian region. The gas field is more than twice the size of any discovered natural gas fields in India.

India has had its eyes on the Farzad B field, which has in-place reserves of up to 21.68 trillion cubic feet (Tcf), of which 12.8 Tcf of gas and 212 million barrels of condensate may be recoverable, for sometime now.

It was in 2016, during PM Modi’s visit to Iran that some headway was made in the acquisition of the Farzad B field. India agreed to allow rupee-denominated investments in Iran and $500 million investment in the Chabahar port. Military and strategic benefits aside, the deal was crucial in giving India’s public sector companies like ONGC Videsh the edge to acquire the Farzad B field.

That $500 million investment and the acquisition of the field could be under doubt if India doesn’t navigate the current situation with the sanctions with delicate diplomacy. Even while the India-US Ministerial 2+2 Dialogue was taking place, Iran’s Minister for Roads and Urban Development, Abbas Akhoundi met with his Indian counterpart Nitin Gadkari, Minister for Road Transport & Highways and Shipping.

According to media reports, Akhoundi said Iran is ready to handover the Chabahar port to the India within a month. But even he admitted that the US sanctions will affect trade with India. He, however, urged both countries to find a solution and carry on the progress in building the relation.

Whether the U.S. is able to provide hydrocarbon energy sources to India is doubtful, but it is certainly waiting for the opportunity to supply more crude oil to India, one of the biggest importers in the world.

“From whence they [India] purchase the other crude oil, we’re happy to see if it’s American products that are able to deliver for them. I think that’d be a great outcome,” said Pompeo.

To be sure, even though the U.S. is trying to become the second largest crude oil supplier to India, it was only in 2017 that the first shipment of U.S. crude oil was imported by India.

Although, Pompeo was confident. “We want the trade balance, the trade deficit that the United States has in its trade with India, to be rectified. They have made some progress on that, and we thank them for that. They’re going to buy more energy products from the United States. They’re going to purchase more aircraft from the United States,” he said.

For India, while the shipping costs are going to be much higher, clever calibration could make sure things don’t spiral out of control. It could buy U.S. crude oil using the WTI (West Texas Intermediate) price which at $67.89 per barrel was around $9 per barrel cheaper than Brent prices.

It is a headache that Prime Minister Modi could have done without given that the country is heading for general elections in 2019 and several state elections in the interim. But the disruptive force of President Trump is hard to avoid.