by R. Sasankan

President Donald Trump’s threat of looming US sanctions against Iran appears to have had one unforeseen consequence: it has blighted the prospect of Iran’s investment in state-owned Chennai Petroleum Corporation’s new refinery project in Tamil Nadu. The US sanctions – expected to kick in sometime in November – will stall Iranian crude oil exports and block its access to global banking channels, thereby scuppering Iran’s investments in projects around the world.

India has maintained an ambivalent stand on the US threat of sanctions against Iran, which is designed to arm twist Tehran into signing a new nuclear agreement and circumscribe its influence over the Middle East. India is not supporting the sanctions that President Trump intends to re-impose on Iran but at the same time it is not in a position to defy them. That places India in a peculiar position vis-à-vis Iran. Not very long ago, in an article in this column I wrote: “Never too close, never too distant: that is how one could characterise the relations between India and Iran.” This attitude will continue to permeate India’s relations with Tehran even after President Trump pulls the trigger. India will attempt to seek some waiver to blunt the full effects of the US sanctions on crude purchases from Iran but it may not be able to extract a significant concession this time round.

The National Iranian Oil Company (NIOC) and Indian Oil Corporation (IOC) have been wrangling over the terms and conditions for investing in a 9 million tonne per annum (MTPA) refinery project that Chennai Petroleum Corporation Ltd (CPCL) has proposed to establish at Nagapattanam in the south Indian state of Tamil Nadu. At one stage, the talks had reached an impasse and the differences seemed unbridgeable. Back then, neither Saudi Arabia nor United Arab Emirates (UAE) had made any overtures to invest in India’s refinery sector. As soon as these two Gulf nations announced their intentions, the differences between IOC and NIOC quickly evaporated and the latter agreed to invest in the project.

Among the Middle-Eastern oil-rich countries, Iran was the first to invest in a refinery in India. Back in the 1960s, National Iranian Oil Company (NI0C) picked up a 15 per cent equity stake in the government of India-promoted Madras Refineries Ltd (MRL). AMOCO also invested in the project. While AMOCO pulled out in late 1970s, NIOC opted to stay invested. Later, the government of India sold its stake in MRL to IOC which rechristened MRL as Chennai Petroleum Corporation Ltd (CPCL) and turned it into a subsidiary.

CPCL was designed to process Iranian crudes like Iranian heavy and the Lavan blend which are known to have high sulphur content and are highly acidic. Although the listed price of Iranian crude is above the Arab Heavy, it is cheap in the international markets as many refiners are not able to process this crude. This forces Iran to sell its crude at a cheaper price. Indian companies such as RIL and erstwhile Essar Oil had struck long-term deals for Iranian crude at a very favourable price which included partial rupee payment and long-term credit. These deals were struck before the earlier US sanctions, imposed by former President Barrack Obama in late 2011.

NIOC did not participate in the expansions that CPCL undertook. This was understandable considering Tehran’s running battle with the US. The negotiations between NIOC and IOC began after the Obama administration lifted the sanctions against Iran in January 2016. The proposed 9 million tons per annum refinery was estimated to cost Rs 270 billion, which has now escalated to Rs 300 billion. The refinery capacity could later be expanded to 15 million tons. CPCL already has a 1 million ton refinery in that location in addition to its 10.5 million ton per annum refinery at Manali near Chennai.

IOC is India’s largest refining and marketing company which is expanding its capacity very aggressively. The management of IOC has always enjoyed a very good equation with NIOC. However, this could now become complicated by the fact that IOC, in collaboration with BPCL and HPCL, intends to partner Saudi Aramco and ADNOC in the proposed mega refinery project in the state of Maharashtra.

The Indian PSUs have nursed a grouse ever since Iran stopped them from developing the Farzad-B field in that country which they had discovered in the first place. It is natural that Saudi Aramco and ADNOC will try to consolidate their positions in India as Iran goes through another phase of agony created by the sanctions.

In view of the sanctions, NIOC’s investment cannot reach India through normal banking channels. IOC, therefore, cannot accommodate NIOC for the time being in CPCL’s new refinery project. Industry circles, however, do not rule out the possibility of IOC finding a way out of the mess.

IOC can always agree to dilute its stake in the new refinery at an appropriate time in favour of NIOC. The contentious issue will be at what price and on which date. This can be handled in any number of ways. IOC could levy a carrying cost at an agreed rate (say 12-15 per cent). Or, the price could be based on an independent valuation at the time of the sale or the market price of the shares of the proposed refinery.

Being an equity partner in CPCL, NIOC will have a say in the new refinery project. Iran is now weak, but Iranian crude will always remain an attraction for Indian refiners. The IOC management is trying to ensure that it does not wreck that relationship with its Iranian counterpart.