Tag Archives | oil and gas

What’s driving India’s Iran crude oil rush?

Summary: The interim nuclear deal last year loosened the noose around Iran’s exports but concerns over a volatile Iraq are now spurring purchases back to pre-2013 levels

Reports earlier this month indicated that in comparison to last year, India took 46 percent more oil from Iran between the months of January and July. So far this year, India has received about 270,600 barrels per day (bpd) with the month of July registering an average of 210,300 bpd.

Today India is Iran’s second best customer of its crude oil after China. India was briefly #1 in 2012 after sanctions levied by the United States and the EU saw competitors China, Japan and South Korea race to cut back more ‘significantly’ than it. Despite the waiver from Washington, India drastically curbed imports the following year, cutting back even further than the targeted 15 percent reduction mark. This saw Iran plummet from second largest supplier of crude to seventh place.

A quick glance at where imports stood since 2011 shows that we are currently inching toward pre-2013 levels that existed before the ‘American squeeze’.

Source: Reuters (Thomson Reuters Oil Analytics)

Source: Reuters (Thomson Reuters Oil Analytics)

How did this come about?

1. Relief from Interim Nuclear Deal

The first reason of course being the breakthrough interim deal struck between Iran and the P5+1 (US, UK, Russia, France, China plus Germany) nations in November 2013 as they began trudging down the long road of negotiating a nuclear agreement. The interim agreement kicked into force in January and allows Iran to keep its oil export levels to 1 million bpd (less than half of pre-2012 levels). Today the country maintains levels at approximately 1.1 million bpd, a little more than the cap, but American officials aren’t exactly complaining.

Indian players, private refiner Essar Oil Ltd and state-owned Mangalore Refinery and Petrochemical Ltd (MRPL), are the only two regular importers of Iranian crude (other irregular importers include Indian Oil Corp, Hindustan Petroleum Corp and HPCL-Mittal Energy Ltd). Essar Oil, the biggest Indian buyer of Iranian crude, more than doubled shipments from January. They rose from 54, 200 bpd in December to 141,900 bpd in January and crossed 231,000 bpd by end of March this year. A wary MRPL, however, plans to keep its annual purchases from Iran around last year’s levels of about 80,000 bpd in spite of the interim relief. Because it fears that’s exactly what the relief is – “interim.”

The Iranian nuclear negotiations have not had a very smooth ride since January. The talks failed to meet the initial July deadline but with neither party (read US and Iran) willing to give up just yet, the negotiations have now been extended till November.

Despite this narrow window of opportunity and high degree of uncertainty, the mood on Iranian crude imports remains positive.

“This year, we plan to restart Iran oil purchases. We are already talking to the re-insurers for this, and we are getting positive responses so far.”

— S. Venkataramana, MD, Chennai Petroleum Corp. (MRL) to Bloomberg News

After a two-year gap, Chennai Petroleum Corp. (MRL) , a unit of India’s largest refiner Indian Oil Corp (IOCL), plans to resume crude imports from Iran (Naftiran Inter Trade Co., the Swiss-based subsidiary of National Iranian Oil Co., also holds a 15.4 percent stake). This change of heart has primarily come about because the European Union eased its sanctions on insuring cargoes after the interim deal and insurers are now returning to the market, albeit cautiously.

2. Urgent Need for Diversification: The Iraq Crisis

A second and increasingly concerning reason is the instability in parts of the Middle East, in particular Iraq. The country overtook Iran in 2012 to become India’s second largest supplier of crude oil. The Islamic State (IS) may not yet have taken southern Iraq where the Basra oilfields are located, but the instability spreading through the country has New Delhi already mulling over contingency plans.

In June, the government instructed public sector oil companies to draw up long and medium term plans with emphasis on diversifying India’s oil import basket. India ideally wants to reduce its dependence on a volatile Iraq and, at the same time, not increase its dependence on Saudi Arabia. Given these circumstances, both the government and refiners believe that Iran offers an immediate, proximal solution with lower transportation costs than say Latin America or Africa.

It is a tight window of opportunity till November after which the outcome of the Iran-P5+1 nuclear negotiations will decide if this upward trend for Iranian crude continues.

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The global problem confronting India

Ankit Agrawal

The most important global problem confronting India is “Energy Security”. The dimensions of the problem are multi-axial. To put it succinctly, India needs access to hydrocarbon fuels like coal, oil and gas and it needs to be able to use these fuels (and others like uranium) to generate power and energy to meet the exploding demand of a fast-growing economy. These fuels may be domestically produced or imported.

As of today, not only do we not have access to enough energy domestically, it costs a lot to meet the shortfall through imports. The domestic production of coal is not sufficient to meet the demand for electricity. More than 70 percent of oil and gas requirement is met through imports, nuclear plants don’t have access to enough uranium to run at full capacity and the hydropower potential remains under-exploited. The imported supply and its price tag are vulnerable to currency fluctuations, geopolitical events and equations and hostile military action from enemy countries.

To make sure that energy security is never a problem, we first need to devise and implement sensible domestic policies to resolve issues within the ambit of the state’s influence and authority. Focusing solely on the territory covered by the question, there are elements of the larger problem which can only be solved in co-operation with or influence over other countries:

One,  Assured long-term supplies of oil and gas (in which we are deficient) from friendly countries, which can reach us through sea-routes safe to navigate and pipelines not vulnerable to terrorist attacks.

Two, Assured supplies of uranium to feed and expand our nuclear power generation capacity.

Three, Access to latest technologies from advanced countries to make our nuclear plants more efficient and fail-safe, exploit domestic reserves of oil and gas found in challenging geologies and improve productivity and efficiency in the mining of coal. To give an example, hydraulic fracturing has been hailed as the technique heralding an oil and gas revolution in the U.S. due to which its output is expected to exceed Saudi Arabia’s by 2020, according to an IEA report. US oil and gas majors have gained substantial expertise with the technology which could benefit India. India is believed to have shale reserves in Cambay, KG on-land, Cauvery on-land, Assam-Arakan and Indo-Gangetic basins.

China is an upper riparian state controlling some major rivers flowing into India. It has built huge dams on many of those and diverted waters to other regions of the country, thus reducing the flow to India. This not only deprives India of water resources, it also reduces the hydropower potential of the country.

How Does It Affect The Foreign Policy?

Meeting these needs and solving these problems requires long-term strategic thinking from a foreign policy perspective. We need to develop and maintain good relations with countries exporting these products and technologies. This requires a fine balancing act when faced with competing demands from two countries, both of which may be crucial to us. For example, while we import large quantities of oil from Iran, the U.S. has been demanding that we stop doing so or face retaliatory sanctions in other arenas which could affect our global competence in trade, services and agriculture, and deprive us from gaining access to advanced technology. It also confronts us with moral dilemmas. India has opted to do business with the military government in Myanmar after decades of support to democratic forces led by Aung San Suu Kyi. This has been done keeping in mind India’s need to access Myanmar’s rich gas reserves, build a gas pipeline from it through Bangladesh and the need to prevent China from gaining a monopoly in the region. The decision erodes India’s global credentials as a champion of democracy and may reduce its heft on international forums, making the job of diplomats tougher.

How Does India’s Policy Affect World Efforts To Solve The Problem?

Being a major consumer, India’s bid to lock up energy supplies crowds out smaller countries from the market, thus putting their energy security in jeopardy. Insufficient supplies drive up prices, making energy unaffordable to poorer nations. India’s recent involvement in the South China Sea by way of carrying out exploration activities in disputed territory has muddied geopolitical waters. It has complicated resolution of the dispute over resource ownership by boosting the confidence of smaller countries in the region which are wary of confronting China on their own.

India is expected to enjoy a demographic dividend over the next 30-40 years with the relatively low average age of its population making the workforce more productive. A McKinsey report estimates that by 2030, 590 million people in India would be residing in cities, 91 million urban households will be middle class compared to 22 million today and GDP would have increased five-fold. It is logical to assume that energy demand will thus increase manifold in the next 20 years alone. To meet this demand, the basic elements of our energy security strategy need to be in place by the end of this decade.

What If India Can’t Solve The Problem In Time?

Economic growth rates will plunge, productivity will take a hit and unemployment will soar. As a consequence, a massive swell of unemployed and dissatisfied youth will rise in revolt, causing social and political unrest and chaos. The democratic fabric of the country will be threatened. Food security of the country will be threatened if the agriculture sector doesn’t get enough power, resulting in soaring inflation. Low growth, rampant unemployment and high inflation is a perfect recipe for a full-fledged civil war.

Failure to achieve diversification of energy supplies across countries and sources such as hydrocarbon, nuclear, solar and wind, will make India beholden to other nations. This will reduce our autonomy and manoeuvrability over other issues of national interest, force us to compromise against our will and principles and yield to nefarious interests. We will be taken for granted in a global power configuration driven by real politik, leaving us unable to defend our national interests. In absence of robust economic growth, our military will find it difficult to keep pace with rival powers. Regional rival China will lose no opportunity to compound our woes. It might engage in military adventure in Arunachal Pradesh and Sikkim and collude with Pakistan to facilitate its grabbing of Kashmir. Neighbours like Bangladesh and Sri Lanka may start ignoring us and join hands with Pakistan and China.

Ankit Agrawal is an Equity Research Analyst based in Delhi                                                                   

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