By R. Sasankan

US President Donald Trump can cast his influence far and wide. Last May, the US withdrew from the global nuclear agreement with Iran and announced a new strategy to change the behaviour of the Islamic Republic’s leadership. What followed was a string of economic sanctions culminating in a near total freeze on worldwide crude imports from Iran – choking the lifeblood of the nation’s revenues.

“Our objective is to starve the Iranian regime of the revenue it uses to fund violent and destabilizing activities throughout the Middle East, and indeed around the world,” said Secretary of State Michael R. Pompeo at a press conference last November.

The US has granted exemptions to China, India, Italy, Greece, Japan, South Korea, Taiwan, and Turkey for an unspecified limited period. “Two of those eight have already completely ended imports of Iranian crude and will not resume as long as the sanctions regime remains in place. We continue negotiations to get all of the nations to zero,” Pompeo said.

The reverberations of the US policy is now being felt at Chennai Petroleum Corporation Ltd (CPCL) at Nagapattanam in the south Indian state of Tamil Nadu.

Iran has been keen to invest in the refinery expansion project finalised by CPCL, which is a subsidiary of Indian Oil Corporation (IOC), the country’s largest refining and marketing company. Iran has already indicated its intention to participate in the project and IOC is equally keen to accommodate it. In fact, IOC chairman Sanjiv Singh has gone on record to say that Iran should be able to invest in the project.

But here’s the rub: Iran’s participation in the project, given the current hardline stand taken by President Trump, will not be decided by either Iran or IOC. It will depend on whether Indian authorities are prepared to annoy the US by fast-tracking Iranian investment in the refinery expansion project.

National Iranian Oil Company (NIOC) is a founder equity partner along with Amoco and the Indian government in the erstwhile Madras Refineries Ltd (MRL). NIOC, which holds 15.4 per cent stake in CPCL, is entitled to a stake in the expansion project.

At one stage, NIOC’s participation looked almost certain after the Obama administration lifted the sanctions against Iran. NIOC and IOC wrangled over the terms of the investment for over a year. NIOC sought certain conditions to put in its share of equity: it wanted a 50 per cent share in the refinery’s capacity to process Iranian crude which was offered at a premium of $ 2 over the Arab Heavy. IOC refused to give in. NIOC finally relented when other Middle East oil majors such as Aramco, ADNOC and KPC sought to invest in India’s refinery sector. But before any deal could be concluded, the Trump administration swung into action against Iran, making even overseas investment difficult for it.

The proposed capacity for the refinery is 9 million tonnes per annum which will be established at an estimated cost of Rs 357 billion. The refinery could later be expanded to 15 million tonnes. CPCL already has a 1 million tonne refinery in that location in addition to its 10.5 million tonne per annum refinery at Manali near Chennai.

In the 1970s, Amoco pulled out of MRL but NIOC opted to stay invested. The Indian government later divested its stake in MRL to Indian Oil Corporation (IOC) which rechristened MRL as Chennai Petroleum Corporation Ltd (CPCL) and turned it into a subsidiary in which it had a 52 per cent stake.

CPCL was designed to process Iranian crudes like Iranian heavy and Lavan blend which are known to have high sulphur content and be highly acidic. Although the listed price of Iranian crude is above the Arab Heavy, it is cheap in the international market as many refiners are not able to process this crude. This forces Iran to sell its crude cheaper. Indian companies such as RIL and Essar Oil have also struck long-term deals for Iranian crude at a very favourable price which includes partial rupee payment and long-term credit. These deals were wrapped up prior to the lifting of the earlier US sanctions.

The proposed refinery configuration includes a hydrocracker unit to maximise the yield of middle distillates. If Iranian crude is used as 50 per cent of the total feedstock, then the middle distillate yield will come down by 1-2 per cent. Obviously, this coupled with the demand for a premium on crude price will adversely impact the IRR. (MRPL, which was also designed to process Iranian crude, suffered when the US imposed sanctions against Iran as it could not get adequate quantities of crude of the same quality. It was bailed out by Saudi Arabia).

India’s relations with Iran deteriorated soon after the earlier US sanctions were lifted. Indian PSUs had threatened to cut crude imports from Iran in retaliation against the latter’s refusal to allow India’s state-owned companies to develop the Farzad-B gas field that they had discovered. The two nations managed to resolve the wrangle and seemed confident of rebuilding robust trade relations when Donald Trump struck with fresh sanctions against Iran. IOC will be careful not to invite the Trump’s administration wrath at this stage. It will prefer to wait and consider Iran’s investment at a later stage when things cool down.