By R. Sasankan

Never too close, never too distant: that is how one could characterise the relations between India and Iran. The two countries have never had to sort out prickly diplomatic issues in the past. But at the conclave of Islamic nations, Iran had tended to support Pakistan on the Kashmir tangle while its traditional foe Iraq – especially under slain ruler Saddam Hussein -- backed India.

Indian public sector companies have been more successful in Iran than in India in discovering oil and gas as it is a hydrocarbon-rich country. India’s ONGC, in partnership with a foreign oil major, discovered oil in the 1970s in Iran. But the Iranian government took over this field under its nationalisation policy. In recent years, the Indian PSUs have discovered a huge gas field in the Farzad B block. As it was not covered by a production-sharing contract, the Iranian government had to decide who would develop the field. Soon after, the US sanctions severely crippled business relations with Iran.

Now that those sanctions have been lifted, an Indian consortium is in the race to grab the rights to develop the gas field. However, the outcome is unpredictable as multinational oil giants with whom Iran has been quite familiar and friendly are understood to be making enticing offers. The decision will be politically influenced since it has to be made so soon after the sanctions were withdrawn. Market circles reckon that Iran may not choose to put all its eggs in the same old baskets.

Meanwhile, Iran and India are currently engaged in some quiet bargaining over a refinery project which the Chennai Petroleum Corporation Ltd (CPCL) intends to put up at Nagapattanam in the Cauvery basin in the south Indian state of Tamil Nadu. The proposed capacity for the refinery is 9 million tonnes per annum which will be established at an estimated cost of Rs 270 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.

Iran has the unique distinction of being the only one from the oil-rich Middle East to invest in a refinery in India. Perhaps, this is the only investment that Iran has so far made in India. It happened way back in 1965 when the Indian government in partnership with Amoco and National Iranian Oil Company (NIOC) set up a 6 million tonne per annum refinery called Madras Refinery Ltd (MRL). In the 1970s, Amoco pulled out of MRL but NIOC opted to stay put. The Indian government later divested its stake in MRL to Indian Oil Corporation (IOC) which rechristened MRL as Chennai Petroleum Corporation Ltd (CPCL) and made it its subsidiary with a 52 per cent stake.

CPCL was designed to process Iranian crudes like Iranian heavy and Lavan blend which are known to have a 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 are understood to have struck long-term deals for Iranian crude at a very favourable price which includes partial rupee payment and long-term credit. This happened prior to the lifting of sanctions.

Several other factors pushed down the price of Iranian crude. Post sanctions, Iran is eager to increase crude oil exports as it is not covered by OPEC quotas at least until May 2017. Iran is not allowed to export crude to the US.

Being an equity partner in CPCL, NIOC has a say in the new refinery project. NIOC is keen to put in its share of equity subject to certain conditions: it wants a 50 per cent share in the refinery’s capacity to process Iranian crude which is being offered at a premium of $ 2 over the Arab Heavy.

A final decision on these demands will again be political as Indian Oil Corporation (IOC) has to consult the government before deciding on it. Sources say both CPCL and IOC are opposed to NIOC’s demand. 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).

The question now is this: will Iran use the CPCL project as a bargaining chip for awarding the Farzad B block to Indian PSUs for development? There are no definite indications of this as yet. There is a win-win proposition for both sides: Iran needs India which is poised to become one of the top four major crude consumers in the world. For India, Iran offers a lot of business opportunities.