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Tag Archives | oil

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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How India made its mark in Sudan and South Sudan

The breakout of ethnic violence in South Sudan over the past month has seen hundreds of civilians killed. Yesterday, two Indian soldiers serving in in the country as part of the United Nation’s peacekeeping force died after their base was ambushed by rebels. New Delhi has close relations with Juba, and much before its independence, had impeccable and historic relations with Khartoum. Sudan was India’s first oil and gas homerun abroad.

In the mid-1990s, India seriously started mooting investing in the energy sector abroad as its newly liberalised economy and its new designers realised that for successful and uninterrupted economic growth for a country of this size, it was vital to organise uninterrupted supply of fuel.

Prior to this India, which has always been a net importer of crude, had invested in Russia which provided more than favourable conditions.  Now, things were changing and decision making on the issue at the Prime Minister’s Office was changing. One of the earliest signs of India’s intensions for overseas investments in oil and gas came with the then much publicised idea of the Central Asia Gas Pipeline Project (CAGPP), an idea first put forward by the company Bridas from Argentina. Indian diplomats at the time in Baku, the capital of Azerbaijan, had started pressurising the Indian government to seriously look into the prospects of bringing natural gas from central Asia into India, but avoiding Afghanistan and Pakistan. Alternates included building pipelines through parts of China.

As politics over the central Asian pipeline continues even today, in 2013, India’s plans to invest in energy assets abroad took it elsewhere. Africa is a continent rich in natural resources and while not much of Western interest prevailed there in the 1990s, due to various reasons, the developing world started to look at the continent as a viable and comparatively economical region to invest in.

However, there was considerable dissent within the multi-layered political circles on Delhi whether India should invest in assets such as these abroad or not, specifically in Africa. Such an investment was unprecedented in a post-90s India and possibility of this happening, while challenging, was eventually unavoidable.

When BJP’s Atal Bihari Vajpayee became Prime Minister in 1998, Indian oil and gas sector started to work towards applying (previously failed) pressure on the Prime Minister’s Office to start investing in energy assets abroad. During lobbying for this, many involved from the industry realised that some of Prime Minister Vajpayee’s Cabinet ministers were dead against investing in a project in Sudan. ONGC Videsh (OVL) had already managed to win the country’s first big foreign energy project in Russia’s Sakhalin-1 field in 2001. However, Sudan was a different, challenging, risky and unconventional bid.

One of the main reasons why powerful people such as Arun Shourie and the late Pramod Mahajan were advising Vajpayee against this “adventure” was the fact the stake India was looking to buy also involved China. This was looked upon as against India’s national interest within the cabinet and the trust factor with Beijing was not the strongest, making it a risky venture.

Ram Naik, who was the Oil Minister at the time, was spearheading these acquisitions knowing that Vajpayee was interested in this direction. Bureaucrats, oilmen and others including ministers had managed to correctly guide Naik in accepting that these bids are necessities and not luxuries. The dissent, nonetheless, continued within the cabinet. It is known that Mahajan had said: “hum gareeb desh hain. Sudan mein itna paisa lagane ki kya zaroorat hai? (we are a poor country, why do we need to put so much money in Sudan?). Arun Shourie reportedly added weight to Mahajan’s views.

However, Vajpayee and now L K Advani, who had gotten involved, were not convinced by Mahajan’s apprehensions. A meeting was organised where bureaucrats and oil industry leaders were called in to offer further convince the cabinet. By this time, the people gunning for the Sudan deal had managed to get some newspapers to back the bid, with articles favouring the deal. However, not many made it into print since time was limited. Multiple copies were printed of these few articles which were then taken into the meeting and presented as though many articles backing the bid had been published across the spectrum of the print media.

The oil industry also highlighted the fact that India had invested over $1 billion in the Sakhalin-1 project in Russia successfully. This was presented as another feather in the cap of Oil Minister Ram Naik’s accomplishments. After listening to all the details including both Mahajan and Shourie making their concerns known assertively, Vajpayee decided to overrule all opposing viewpoints after L K Advani convinced him that the deal should go ahead along with risk insurance, which was organised by a British bank. He (Vajpayee) gave ONGC Videsh a historic unconditional nod for the deal.

India went ahead and bought 25% stake in the Greater Nile Petroleum Operating Company (GNPOC) from Canadian major Talisman Energy for a staggering sum of $750 million in 2003. The China National Petroleum Company (CNPC) owns 40 per cent in GNPOC, Petronas of Malaysia has 30 per cent and the Sudanese national oil company 5 per cent.

This successful deal, passed thanks to political foresight and smart and intense lobbying by both diplomats and oil industry leaders, opened in a way many doors for other Indian businesses to grow in Africa. Even after the carving out of South Sudan from Sudan, New Delhi has managed to keep close relations with both Juba and Khartoum, even though the near war conditions between the two states do keep India’s Foreign Ministry on its toes. Last year, India had invited high level delegations from both countries to try and ease the tensions.

A lot of the troubles between Sudan and South Sudan have occurred due to the new international border separating them. Most of the rich oil and gas regions are around the border and the basins in the region are now shared by both countries. For many months Sudan had blocked routes for South Sudan, a land-locked country, to export its oil as the pipeline required for this runs via Sudan. Juba, as a response, asked India to come and build a new pipeline via Kenya, hence bypassing its problem in dealing with Khartoum and restoring its crucial funds received from oil and gas. However, India till now has not accepted due to concerns on both political (angering Khartoum which could have then got closer to China) and economic (cost of the project and the transit fees due to Kenya would have been too high).

Both Sudan and South Sudan are great examples of governance with vision, which managed to get both in the bigger business of owning energy assets abroad and getting a good foot hold in Africa, a continent on the cusp of an economic boom.

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Growing relations between India and Canada

Olivia Gagné

The Canadian Prime Minister Stephen Harper landed in India for his longest trip in a foreign country since his election victory of 2006. This reflects the growing interest Canada has been showing towards India over the last few years, keeping in mind its objective to diversify it’s trading partners and thus secure its future prosperity.

The current bilateral relations have great potential to be strengthened in many areas. A Comprehensive Economic Partnership Agreement (CEPA) is likely to be concluded next year between India and Canada, which would help reach the annual common fixed target of $15 billion in bilateral trade from the current $5 billion.

Canadian businesses clearly size the growing Indian market as a not-to-be-missed opportunity. In turn, India considers all that Canada has to offer with respect to the several challenges it is increasingly facing. Canada is an emerging energy superpower and could start exporting oil and liquefied natural gas to an energy-deprived India as soon as the required infrastructures to do so are installed. 99 percent of the Canadian hydrocarbons are sold to the United States of America, at a ridiculously cheap price. Canada has an obvious economic advantage selling it at higher prices, closer to the international ones and India is willing to pay this price to get Canada as a reliable supplier. Nuclear energy is also on the cards as both the countries signed a civil nuclear agreement two years ago.

Apart from the Indian conquest for energy security, the education of the current and future generations of Indians is a major challenge that could find part of the solution in better cooperation with the Canadians. Last year, 13000 Indian students went to Canada for education. Canada is seriously interested in welcoming more in the coming years for their intellectual capabilities. The Canadian post-secondary education is one of the best in the world as showed in a recent OECD report. The Canadian expertise could greatly benefit the Indian authorities on planning and managing public education. Canada also has extraordinary know-how in the environment protection field from which India has a lot to learn. In sum, the Canadian private sector is looking avidly at all the infrastructure needs in India and could help in achieving the considerable government spending of this sector.

The Canada-India relationship can also be strengthened if both countries engage together in other parts of the world for joint cooperation. For example, the aid sector in Africa offers many opportunities for this. Canada seriously needs to improve its image in this region as it failed to gain a seat in the United Nations Security Council (UNSC) in 2010 partly because it lost credit with the continent over the last few years. India is similarly seeking the African support for its bid for a UNSC permanent seat, and is obviously interested in accessing the resources of the area. The share of Canada’s development experience in Africa could help make India’s “new role” as a global donor much more effective. Together they could even plan triangular cooperation projects, which are an innovative approach to development, seen as highly effective and which would benefit each of the three committed parties.

The previous items of the bilateral possibilities might be part of the agenda on the prime minister Stephen Harper’s second official visit to India from November 3rd to 9th.

Olivia Gagné is a graduate student at the Université Laval and currently doing an internship at The Takshashila Institution.

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