Fear of inviting US sanctions may force India’s state-run ONGC Videsh Ltd (OVL) to put the brakes on its proposed multi-billion dollar hydrocarbon projects in Iran, which has the world’s second largest oil and natural gas reserves.
Legal advice obtained by the company cautions it about proceeding with the Iran projects, providing a test case of how far India is willing to go to accommodate US sensitivities at the cost of its energy security.
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A similar legal opinion was sought by GAIL (India) Ltd and Indian Oil Corp. Ltd (IOC) and was reported by Mint on 23 December, after which India was considering giving up on the $7.4 billion (Rs 33,522 crore) Iran-Pakistan-India pipeline project and instead focusing on the Turkmenistan-Afghanistan-Pakistan-India gas pipeline.
A new US law targets Iran’s energy sector, which is the mainstay of its economy, with sanctions. This is over and above the sanctions approved by the UN Security Council in June, the main thrust of which is to discourage, if not ban, military purchases, trade and financial transactions carried out by the Islamic Revolutionary Guards Corps, which controls Iran’s nuclear programme.
The Indian foreign establishment has been nervous about the US law after it was enacted in July, because it seeks to punish companies supplying Iran with petrol and international banking institutions involved with the Revolutionary Guards or its nuclear programme. According to the provisions of the US law, foreign banks that do business with key Iranian banks or the Revolutionary Guards will not be allowed access to the US financial system.
Fearing a threat to the country’s energy security immediately after the law was in place, foreign secretary Nirupama Rao had in a statement said, “We are justifiably concerned that the extra-territorial nature of certain unilateral sanctions recently imposed by individual countries, with their restrictions on investment by third countries in Iran’s energy sector, can have a direct and adverse impact on Indian companies and more importantly, on our energy security and our attempts to meet the development needs of our people.”
This is now beginning to impact.
“We have taken legal opinion. The fact of the matter is that we can’t expose ourselves commercially... We wouldn’t get service providers and funds for the projects. Short of that, we should keep on our engagements with Iran,” said a senior OVL executive, who did not want to be identified.
Oil and Natural Gas Corp. Ltd’s (ONGC) overseas arm is involved in two projects in Iran. One of them is the Farsi natural gas block, the bids for which were won by OVL, IOC and Oil India Ltd (OIL) in 2002. The other opportunity came in 2009 when a consortium of OVL, Petronet LNG Ltd and the Hinduja Group reached an agreement with the Iran government to source six million tonnes of liquefied natural gas (LNG) in exchange for developing gas fields and setting up liquefaction facilities there.
While the master development plan for Farsi natural gas block was submitted around one-and-a-half years back, its approval is yet to come. OVL is the operator of the block with a 40% stake in it. IOC and OIL have 40% and 20% stakes, respectively. The consortium submitted a feasibility report to National Iranian Oil Co. (NIOC) in November 2008. NIOC then accepted the commercial viability of natural gas production at the Farsi block.
“While most of the aspects have been sorted out, a few things remain. This problem is not unique to us. It takes a long time to negotiate... Even under US sanctions, there is provision for ongoing projects. It is India’s interest to engage with Iran,” said the same OVL executive.”
IOC chairman B.M. Bansal said, “Since OVL is the operator, we will go by them.”
Similarly, a top OIL executive, who also requested anonymity, said: “Informally, we are aware of the legal opinion sought by OVL. We will support OVL’s position since they are the operator.” In response to a question about whether the project may go forward given the problems involved, the OIL executive said: “Your guess is as good as mine.”
The Farsi block is estimated to have reserves of up to 21.68 trillion cu. ft (tcf), with recoverable reserves of around 12.8 tcf. Developing the gas field, together with the construction of an LNG terminal to transport the gas, was estimated to require an investment of $8-9 billion. The investment for exploration and production work will amount to around $5.5 billion. While the Indian consortium does not have ownership rights, its members will be paid a 15% return on investment they make once they are awarded development rights.
For its other project, OVL and the Hinduja Group’s Ashok Leyland Project Services Ltd (ALPS), were to take a 40% participating interest in phase XII of the giant South Pars gas field in the Persian Gulf. ONGC, OVL, ALPS and Petronet LNG were to also take a 20% equity in the liquefaction facilities of Iran LNG, with a provision to raise the stake up to 40%, with the Indian investments for the two projects expected to be around $10 billion.
“It is a very complex situation and in the fresh sanctions that US has put, they have included LNG. They have enhanced the scope of sanctions. This is making it difficult to work on the project... We have not taken legal opinion and since OVL is the lead player, we have told them that we will go by the opinion sought by them,” said A.K. Balyan, managing director and chief executive of Petronet LNG.
After India and the US signed a civilian nuclear agreement in 2008, several Iran-related Indian projects have either been put on hold or dropped. India and Iran are also trying to resolve an impasse over the method of settlement for bilateral oil trade, days after India decided to discontinue payment through the 35-year-old Asian Clearing Union system.
Lalit Mansingh, former foreign secretary and ex-Indian ambassador to the US, says the current imbroglio has raised some fundamental questions for Indian diplomacy, especially on how it balances its larger global interests with its strategic stakes in the immediate neighbourhood.
“With reference to the political risk, if we say Iran is a country in our neighbourhood, it’s an important country in the Middle East, can we antagonize it (by pulling out)? We need to take a position that concerning our vital security interests, we can go so far and no further and tell the US that,” he said.
According to him, India would negotiate with the US especially given the fact that Iran has a major strategic role in Afghanistan, from where the US is seeking to extricate itself after its military intervention in 2001. “We will, I expect, negotiate for some freedom for manoeuvrability,” he said.
While NIOC could not be contacted, the embassy of Iran in New Delhi did not respond to questions emailed by Mint. The US embassy in New Delhi declined comment.
A senior government official, on condition of anonymity, sought to allay apprehensions on threats to Indian investments in Iran due to US sanctions. “Taking legal advice doesn’t mean anything. These are just clarifications on whether the companies involved will run afoul of US or UN sanctions. Does it mean we are going to stop buying oil from Iran? I don’t think so.”
Elizabeth Roche contributed to this story.