by R. Sasankan
Diplomats
and gamblers have one thing in common: they learn the art of bluff and
bluster. Their success in ensuring positive outcomes depends very
critically on their being able to size up the opponent and knowing
exactly how far they can go with the bluster and how long they can
continue bamboozle him with the bluff. Often, you can completely misread
the situation and end up with egg on your face.
India’s negotiators in oil and gas contracts have often engaged with
their suppliers from a position of relative weakness. But as the global
crude oil business has gone through a roller coaster over the past
decade, there has been a change in circumstances and negotiating
positions, largely arising from the fact that India has emerged as one
of the largest energy-consuming nations in the world. India’s
negotiators – timorous in making demands in the past – have been
emboldened to adopt hard line negotiating positions without clearly
thinking through the consequences of such brinkmanship.
Not long ago, India’s state-owned oil companies had held out the threat
that they would drastically cut crude imports from Iran in protest
against Tehran’s reluctance to award them the contract for developing
the Farzad-B gas field which they had discovered. Of course, they didn’t
come straight out and say it. The threat was planted through an
international news agency without any official going on record. Iran’s
reaction was immediate and brusque. Iran’s state-owned oil companies not
only scoffed at the Indian threat but they went a step further and cut
the freight discount they used to give to Indian PSU importers. The
message was absolutely clear: Iran would not be bullied with such
threats.
The upshot of this tense, cut and thrust exchange was that the Indian
oil companies cut back crude imports from Iran in FY 2017-18 but not
drastically as had been originally planned. The rocky trade relations
were, however, restored to normal during President Hassan Rouhani’s
visit to New Delhi in February 2018. But bilateral relations were
deteriorating on issues other than trade.
And
then just as suddenly, Iran inexplicably started to exude warmth
towards India. Oil companies say they were now being offered a lot of
incentives and the baits that they now had to seriously consider the
possibility of doubling crude imports from Iran during the current
fiscal from last year’s level. On the controversial issue of the
Farzad-B field, Iran is now sending feelers for a compromise formula
though a final decision is still some distance away. A favourable
decision on Farzad-B, which looks likely, can go a long way in boosting
bilateral relations. For the Indian PSUs, this is a hugely emotional
issue because they discovered the giant gas field.
So, what prompted Iran’s sudden change of heart towards India? Could it
be the threat of sanctions by President Donald Trump? (He is reviewing
the nuclear deal with Iran on May 12). Not really. Iran has ensured that
Europe will not be in lockstep with the US if sanctions are imposed
once again. But what seems to have shocked Iran is Saudi Arabia’s big
overture to Delhi with the promise of a massive investment in the Indian
petroleum sector. Iran sees that as a strategy to undermine its
relations with India. The plot, they say, is backed by the US.
In the politics of the Middle East, Iran has never really been afraid of
Saudi Arabia. They have been at each other’s throat through proxies.
However, Saudi Arabia’s move to establish a strong presence in the
Indian market appears to have rattled Iran. Despite its strained
relations with India, Iran knows that the Indian market is crucial for
it not only for crude oil but also for gas. The present issues with
India are not unresolvable. Iran has also been disturbed by the changing
geopolitics in the Gulf region, signified by India’s growing proximity
to Israel and the ability of the Modi government to persuade Saudi
Arabia – a sworn enemy of Tel Aviv – to allow Air India flights to the
Israeli capital to overfly Saudi Arabian territory. Clearly, India and
Saudi Arabia are ready to broker big deals and concessions – and that is
only something that will leave Iran deeply worried.
Iran had never imagined that Saudi Arabia, conservative as it was, would
make such a massive intervention in the Indian market. Picking up a 50
per cent stake in the country’s proposed 60 million tons per annum
refinery – in which the three state-owned oil marketing companies will
have substantial stakes – is plain incredible. Saudi Aramco itself had
gone on record saying that it was planning a stake in one of the
existing refineries. None of the existing PSU refineries has a capacity
of more than 15.5 million tons per annum. This was understandable and
Iran was not worried about such an entry.
But Iran has probably failed to grasp the implications of the drastic
policy changes that Saudi crown prince Mohammad bin Salman has initiated
both internally and in its relations with other countries. This change
in Saudi’s attitude coincided with India’s emergence as the
fastest-growing economy and third largest crude importer in the world,
at a time when the fossil fuel industry is facing threats from electric
vehicles which are looking to make deep inroads into the transportation
sector. The success of electric cars will significantly undermine the
consumption of transportation fuels. India being large and slow moving,
fossil fuels are reckoned to rule the roost for quite a few years more.
Saudi Arabia’s entry into India has brightened the prospect of Iran’s
participation in the proposed 9 million tons refinery of Chennai
Petroleum Corporation Ltd (CPCL) without a great deal of bargaining. The
public sector entity has decided to set up its new refinery project at
Nagapattinam in the south Indian state of Tamil Nadu. CPCL is a
subsidiary of Indian Oil Corporation (IOC). The expansion project has
already been endorsed by IOC’s board and a detailed project report is
under preparation.
Iran was the first Middle Eastern country to invest in India’s petroleum
sector. It picked up a 13 per cent stake in the erstwhile Madras
Refineries Ltd (MRL) formed as a joint venture in 1965 in which the
Government of India held a 74 per cent stake and AMOCO 13 per cent. The
original capacity of the refinery was 2.7 million tons and a total
investment Rs 430 million. AMOCO disinvested in favour of the government
in early 1980s but National Iranian Oil Company retained its stake.
After the restructuring and following the government’s sale of equity to
IOC, MRL was rechristened as Chennai Petroleum Corporation Ltd (CPCL),
in which IOC holds 51.89 per cent stake and NIOC, through its affiliate,
15.40 per cent.
CPCL has two refineries at present with a total capacity of 11.5 million
tons per annum. The Manali refinery near Chennai has a capacity of 10.5
million tons. The second one at Cauvery, with a capacity of 1 million
tons capacity, has been set up mainly to process ONGC-produced crude.
The new refinery being planned at Nagapattinam will have a 9 million
tons capacity with an estimated cost of Rs 274 billion.
Iran has been bargaining hard with IOC for its participation in the new
refinery. IOC is willing to go it alone but would not like to ignore
NIOC. There is virtually a stalemate over NIOC’s participation as it has
been making demands which are unpalatable to IOC. It wants a $2-3
premium for the crude supplied for the refinery and wants 50 per cent of
the crude for the refinery to be sourced from Iran.
In the changed scenario, NIOC will not be in a position to drive a hard
bargain. Industry circles see Iran relenting on its conditions and, in
fact, it may not be averse to even enhancing its stake if such an offer
is made. A clear picture, however, will emerge only after President
Trump announces his decision on Iran’s nuclear deal. After all, Saudi
Arabia is perceived to be close to Trump.
Clearly, the winds of change have started to blow – and India will look to take advantage of it.
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