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Need to revive Iran-India energy ties

Shebonti Ray Dadwal is Consultant at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • September 30, 2014

    With the recent report1 of two American companies – Chevron and ExxonMobil – dropping out of the race for the long-struggling TAPI gas pipeline project, on the grounds that Ashkabad had refused to give them equity stakes in the fields supplying the gas in exchange for funds for constructing the pipeline, has put the project in further doubt. Even though two other firms – France’s Total and Malaysia’s Petronas – have offered to step in without demanding any stakes in Turkmenistan’s gas fields, at best, the project will be delayed for several months.

    Interestingly, an earlier report had also said that Pakistan was now mulling over an alternative proposal whereby it would buy liquefied gas (LNG) from Iran, in lieu of natural gas through the suffering IPI pipeline project. Although Iran has been aspiring to build a liquefaction facility since the 1970s, it has not been successful and has had to cancel or delay LNG projects because of the US-EU sanctions regime that has made it impossible to obtain financing and to acquire the requisite technology for the same. As a result, Iran is now looking at the possibility of exporting natural gas to Oman, which has two liquefaction facilities, from where the Iranian gas could be converted to LNG and then exported to Pakistan. The report said that Pakistani officials were planning to hold negotiations with Iranian counterparts at an upcoming meeting.

    The fact that Oman and Iran have reportedly finalised a “heads of agreement” whereby Iran will export 20 million cubic meters per day (mcmd) of gas to Oman through a pipeline over 25 years from 2015, does make the Pakistani proposal viable. Significantly, at the time the agreement was being negotiated a year ago, Oman had stated that approximately 50 per cent of the gas could be allotted for export to other markets including Japan, South Korea and India.

    Of all the proposals that have been making the rounds over the last few decades, the latter appears to be the most feasible as it would resolve India’s security concerns associated with the IPI and TAPI projects, and would avoid the unstable and insecure route transiting Afghanistan and Pakistan. However, the success of the under-sea pipeline from Oman would be contingent upon a pipeline between Iran and Oman being constructed. Although an Iran-Oman gas agreement has been doing the rounds since 2007 and a MoU was signed in 2013, as of now, only a “heads of agreement” has been signed between these countries, which is essentially a checklist of issues that the parties have decided must be resolved. Nonetheless, the fact that Oman has taken this preliminary step is significant given the pressure that it has been subjected to by the US to purchase gas from other suppliers, like Qatar.

    In fact, several countries and companies, including European ones, are eagerly waiting for signs that the sanctions imposed on Iran will be lifted so that they can access not only the country’s vast energy resources, but also enter its lucrative market. In particular, European companies, which had exited from Iran four years ago, when the sanctions were tightened, are at the forefront leaving their American counterparts behind. Many are already holding exploratory talks with Iran. Within weeks of the Joint Plan of Action (JPA) being announced in November 2013, Iranian Oil Minister Bijan Namdar Zanganeh met with the chief executives of some European oil companies. With the US and EU imposing sanctions on Russia for its Ukraine operation, although as of now these do not include the energy sector, concerns are increasing that Russia may retaliate by cutting off supplies to Europe, lending weight to Europe’s search for a non-Russian supply alternative. Although the JPA set a July 20, 2014 deadline for a final settlement on Iran’s nuclear programme, the deadline was pushed to November 24, 2014. While the negotiations are inching along with both sides taking hard positions, Tehran seems optimistic that by November a decision to lift the sanctions will be taken.2

    If indeed Iran and the Western countries do come to an understanding or even possibly an agreement on the former’s nuclear programme resulting in the sanctions being lifted, it will lead to a rush for a share of the lucrative Iranian energy pie similar to Myanmar’s opening up last year. India cannot afford to be left behind.

    India earned Tehran’s wrath when it voted against Iran in the IAEA in 2005 and although it continued to buy Iranian crude despite the sanctions, it reduced its off-take drastically, relegating Iran to seventh position as an oil import source, down from second position. Moreover, India has all but opted out of the IPI gas project – although officially it remains on the table – and has instead showed more enthusiasm for the rival TAPI project.

    None of this could have gone down well with Tehran and may reflect on energy ties once Iran returns to the international community’s fold. No doubt, India can, and has been finding alternative sources for its oil imports, both in West Asia and other regions. However, with the potential growth in its demand for gas seen to increase over the next few years, Iran is an ideal source. Not only does it have huge natural gas reserves, which have remained unexploited, unlike its rivals in the region such as Qatar and Oman, its geographical location is well suited for exporting gas to India, either through pipeline or as LNG – as and when Iran gains access to the technology.

    On the other hand, Iran has recently put its Farzad-B gas block on its auction list, citing delays in development by the Indian firm. The block, which holds an estimated 21.68 tcf of in place reserves, of which 12.8 trillion cubic feet (tcf) can be recovered, was acquired by OVL in 2008, but left undeveloped due to fear of sanctions. Earlier too, in February 2012, Tehran issued an ultimatum to OVL, but had not carried out the threat of cancelling the allocation. The general belief is that the recent auction notice is to put pressure on India to develop the field. With reports of India negotiating with other gas producers, including the US and Russia for LNG as well as pipeline, Iran too is keen to tie up sensing the potentially huge Indian market. However, if OVL continues to show tardiness, it may lose the block, given that several suitors are waiting in the wings to enter Iran’s energy sector. Moreover, once the sanctions are lifted, Iran may prefer to send its gas to the more lucrative European market.

    India has recently been trying to revive its energy links with Iran and has even increased its oil imports. It has also recently agreed in principle to pledge $100 million for upgrading Iran’s Chabahar port, and is believed to have revived interest in piping gas from Iran, although not necessarily through the IPI project. Whatever the outcome of the nuclear negotiations between Iran and the western interlocutors, India needs to keep its long-term energy security interests in mind and engage with Iran before it becomes too late.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India