Vienna’s august Palais Coberg Hotel, a grand palace built in 1845, is these days home to what could be one of the better diplomatic achievements of the global community as Iran and the P5+1 states, led by the US, enter the final stages of negotiations over the former’s nuclear program.
The journey till this juncture has not been easy and an extraordinary set of diplomatic maneuvers and compromises from both the Western powers and Iran, cautiously backed by Moscow and Beijing, have brought them to a place where a deal could be achieved. However, even now, both sides are trying not to sound over-optimistic, suggesting the negotiations could still go either way.
Iranian Foreign Minister Javad Zarif, American educated and a thorough statesmen, who has been leading the country’s delegation, in a recent opinion piece published in London’s The Financial Times said, “All that is clear about what will happen next is that things will not go back to the way they were”. However, other reports have also highlighted how heated the negotiations behind closed doors have become, with a Russian official being quoted by some sections of Iranian media as saying that Zarif at a point yelled towards his American counterparts to “never threaten an Iranian”.
Another account highlights that during negotiations over the weapons embargo enforced on Iran, Zarif “erupted again”, insinuating towards his counterparts that Iran should take “every one of you to international courts for supporting Saddam (Hussein)” over a debate on regional security measures, which the Iranian Foreign Minister had also addressed, in a much cooler tone, in his op-ed in FT.
As the negotiations get extended further through this week, and keeping the realpolitik aside for a minute, on the sidelines global oil and gas giants have been camping in and around Tehran for months, working quietly towards creating space and influence within the Iranian government for the expected sprint towards securing a piece of the country’s vast untapped hydrocarbon resources. Oil giants such as Shell, ExxonMobil, BP which was born from the belly of the erstwhile Anglo-Iranian Oil Company (AIOC) and others from China and Russia are looking to beat consortium-led competition for Iran’s natural wealth, which amounts to the world’s fourth largest proven oil reserves and second largest proven natural gas reserves.
India’s energy diplomacy
During the peak period of sanctions against Iran, which specially intensified between 2012 and 2014, the Iranian oil and gas sector saw dwindling sales as buyers found it next to impossible to execute financial transactions with Iranian banks. While many of Iran’s overseas accounts were frozen, Tehran took to the age-old system of barter to try and get around this anomaly, in desperate attempts to keep its economy ticking.
Prior to these events, Iran was the second largest supplier of oil to India, a country that imports nearly 80% of its oil and around 50% of its natural gas demands. In 2013, Iran had fallen to seventh place on its exports of oil to India. Not just a mere buyer, India had even committed $1 billion to develop the Farzad B project in the natural gas Farsi block, a sign of Delhi’s growing energy diplomacy with Iran at that time. This opportunity offered both transportation and cost security due to its close proximity across the Arabian Sea, possibilities of an under-sea pipeline; most importantly the Iranian quality of heavy crude oil was most suited for Indian refineries such as those operated by MRPL in Mangalore, Karnataka and Essar in Jamnagar, Gujarat.
Energy ties started showing signs of strain between Delhi and Tehran after Iran was subjected to four resolutions (in 2006, ‘08, ‘09, ‘10) in the United Nations to pursue economic and political blockades against the country as a reaction to its nuclear program. The fact that India voted against the then Iranian government of former President Mahmoud Ahmadinejad in the UN resolution passed by the IAEA in 2009 did not help the diplomatic optics.
This meant not only did it become extremely arduous a task for India to conduct energy trade with Iran, but Delhi also found itself in a position where Washington was applying pressure on it to forego energy transactions with the country. Seeing this situation, Tehran also did not hold back, and pressured India to up its trade and investments which, knowingly or unknowingly, had actually provided Indian companies an open door at a time when most of its other more powerful competitors from the West were being kept out by their own governments.
However, even as Iran presented this opportunity, India balked. The reasons behind India’s safe stance were both legitimate and vigilant. First, any official financial transactions during that time with Iran would have seen Delhi violating a host of financial treaties that India was signatory to. Keeping this in mind, Iran advised India “alternate means” via middle-paths in Oman as far as the issue of financial transactions for energy products were concerned after the sole remaining official route, via a bank in Turkey, also became a victim of the sanctions.
India, avoiding to be seen as a country which was not against the Iranian nuclear program, instead decided to keep purchasing energy products in reduced amounts but deposited the payments in a UCO Bank branch in Kolkata while refusing permission for Iranian banks to open branches in Delhi and Mumbai. At its peak, this bank branch operated by Iran had nearly $5 billion worth of money, but to its immense frustration could not withdraw and move out of the country.
Tehran’s global foray
Now, as the situation changes and a thaw in Iran’s global isolation, which Zarif has called out as “the most indiscriminate (sanctions) imposed on any nation in human history”, Tehran is preparing to get back into global economics in a major way. It is imperative to remember here that Iran, in general, is seen as a tough customer when it comes to commercial and political negotiations. Its tendencies to change colors without warning, corrupt practices, not adhering to sovereign guarantees and other such misdemeanors have made it an infamous nation to deal with. However, commercial viability of its hydrocarbon reserves seemingly supersedes these risks.
Even throughout its period of sanctions, the Iranians did not make any significant cuts in the amount of oil they were producing in order to hold on to market share (though there were no dramatic increases either). In 2013, due to this, Tehran found itself in a dilemma as it started to run out of space to stash its reserve capacity and resorted in some instances to storing in oil tankers and anchoring them off its coast. While Asian economies such as China, India, Japan and South Korea continued to be significant buyers, the import numbers had indeed dropped and Iran’s import losses from Europe were hurting it significantly.
An Indian oil executive returning after a visit to Tehran recently exclaimed that he found almost all hotels in the city bustling with Western businessmen, who, if not camping, are now visiting very frequently and looking for that first mover advantage. In fact, a new report suggests that over the past year, Iranian shipping companies have amassed the world’s largest fleet of Very Large Crude Carrier (VLCC) oil tankers as it looks to link itself back to the global energy markets.
In the impending opening of Iran’s energy sector, Indian companies in fact, may have to rely on Delhi’s diplomatic maneuvering to gain any kind of significant foothold. As it stands currently, even the Farzad B project may not be seen as firmly in ONGC Videsh’s hands as in the past out of frustration, Tehran had threatened to open the field to a bidding process, which could mean it can be lost to bigger companies with more cash to throw around.
Iran’s courting of global oil and gas leaders has also been steadily taking shape for more than a year. On the sidelines of the World Economic Forum in Davos, Switzerland, last year Iran’s President Hassan Rouhani convened a small conclave of global leaders of the hydrocarbons industry to invite them to prepare for investments in the country. Curiously, no Indian company was present at this event.
Indian companies, which could have built a stronghold in Iran during the period of sanctions had the realpolitik capacity allowed, may not fare well when the Iranian energy is opened up to everyone. The reason behind this is purely economics and competition. Currently, most of Iran’s energy fields are in a derelict state technology wise, and just to bring them up to speed with the ways of modern exploration and production would take billions of dollars’ worth of capital infusion and only after that recovering costs can be factored in.
Even as Indian companies such as ONGC Videsh, Oil India Ltd. and ONGC have got better budget infusions this year, it will almost certainly not be enough to ward of competition by the likes of ExxonMobil, BP, Shell, ENI and so on.
So, what is India’s best path forward? Other than making absolutely sure that Farzad B remains with India as the biggest player in the block, participating in consortiums with others as has been done before in Sudan, Russia, Syria would be ideal. This would guarantee both commercial market penetration in a region that can be very fruitful for the country’s energy security and also regain lost political and economic mileage between India and Iran.