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Press Release [FREE Access]
Petro Intelligence » Fracas Over Farzad: Need To Sideline The Hotheads

By R. Sasankan

Hassan RouhaniOil is hugely combustible and issues surrounding it can explode very quickly into a fireball of acrimony and resentment that could become difficult to douse.

The stand-off between India and Iran on a couple of burning questions threatens to wreck a close relationship if the hotheads on either side are not pulled aside by cooler minds.

India’s finance minister Arun Jaitley appeared to be doing just that when he said:”India has a very stable relationship with Iran. India is Iran’s second biggest oil buyer after China and was among a few which had continued to import crude despite western sanctions against Tehran…There were several pending issues with Iran particularly relating to the oil payment. Most of them have been resolved…It’s very strategic for us, because the Chabahar port is not only going to service Iran, but also going to service Afghanistan.”

It is not the first time that Jaitley – who was speaking after a meeting with his counterpart during his recent visit to the US to attend the meeting of the International Monetary Fund and the World Bank — has had to interpose himself in a simmering dispute and attempt to play a peace maker.

Indo-Iranian relations have been badly frayed over the past few months.

There have been no unpleasant exchanges between ministers of the two sides. But the rancour between the two countries appeared to escalate after a couple of state-owned oil companies in India threatened to drastically reduce the quantum of crude oil they import from Iran – and the Iranian side responded with contempt to that threat.

Arun JaitleyThe provocation for the threat by the Indian PSUs was the reluctance of Iran to award them the contract for developing the Farzad B field which the Indian PSUs had discovered after making considerable investment in the project. The Indian PSUs had altered their development proposal for the field at least thrice in a deliberate bid to wrest the contract. The contract for Farzad B field has not yet been awarded to anybody. But Iran drew the Indian’s ire after it entered into a sort of memorandum of understanding with Russia’s Gazprom for the Farzad field. True, there is a world of difference between an MoU and an actual award. But it was enough to enrage the Indian companies.

It is difficult to say who provoked whom. According to well-informed oil industry circles, Iran seems to regret the unpleasant development in its relations with India which, so far, has been limited to exchanges between the PSUs of the two countries.

Iran also has reason to feel miffed after India struck deals to import oil from the US to meet its energy needs. Iran has a volatile relationship with the US and does not like the idea of India cosying up to Washington. The friction between the two sides escalated after three Indian PSUs and private player Reliance Industries contracted US oil cargoes for a total of 7-8 million barrels of oil with more contracts believed to be in the pipeline. The Trump administration is also keen to supply US LNG to India.

Moreover, Saudi Arabia, Iran’s Islamic rival, has finally set up an office in New Delhi and is actively considering major investment in India’s refining sector. Both these developments have clearly upset the Iranian leadership.

Arun Jaitley would have been responding to Iranian leadership concerns when he spoke about the “stable relationship” between the two countries. Both sides seem keen to repair the damage to their decades-old relations. However, the situation calls for initiatives at the highest political level.

India should realise that US crude is no substitute for supplies from the Middle East. US crude is sweet, and even the refineries in the US need to import heavier and more sour crudes because they are designed to only absorb a certain amount of light crudes. So the US will keep importing Canadian, South American and Middle Eastern crudes. The US imported about 7.85 million barrels a day of crude oil in 2016 and exported 520,000 barrels a day of crude oil.

If one takes the IEA’s estimate as the basis, total crude oil exports from the US would be about 100 million tons annually at the most over the coming 20 years or so.

India imports over 200 million tons of crude annually. There is both a limit on how much of the sweet American crude India can absorb and its likely share in overall American crude exports. Experts do not see India being able to access more than 15-20 million tonnes of the American export annually.

The inescapable truth is that India’s dependence on the Middle East for crude oil supplies will continue. However, the swift moving developments in the international petroleum scene are working in India’s favour if its negotiators properly and honestly exploit the emerging benefits.

While the US supplies provide India with a bargaining leverage, India must also continue to work with the Middle East, Russia and South America diplomatically and strategically.

So, where does Iran fit in? Russia got its foot into India’s door with the acquisition of the 20 million tonne per annum Essar refinery and has already signalled its intention to double its capacity.

Saudi Aramco is the next in line. Iran cannot afford to be left too far behind. Iran refused to sell its 18 per cent stake in Chennai Petroleum Corporation Ltd (CPCL) which is an IOC subsidiary. In fact, IOC’s plan to merge CPCL with it was blocked by NIOC, which is already weighing the option of investing in the 15 million tonne per annum refinery that CPCL plans to establish in the same state. But the latest developments over Farzad will certainly weaken Iran’s ability to set conditionalities for its investment.

Iran ought to be an ideal partner for India. However, there are geopolitical hurdles which can be countered only with deliberate political initiatives. Experts admit that the current standoff goes beyond a few commercial issues. Saudi Aramco’s entry is expected to alert the Iranian leadership to re-work its strategy for India.

Iran, which has huge gas reserves, cannot afford to forego the Indian market. India should also not allow its tried and tested relations with Iran to be undermined by a bunch of egoistic executives of its oil PSUs. Diplomacy has a great role to play and the task should be assigned to seasoned diplomats. In the changing scenario, there is always the possibility that Iran could reconsider its stand on the Farzad B field.



To download the latest issue 'Volume 30 Issue 24 - March 25, 2024', click here
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