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.