New Delhi: In the first such instance since the 1979 revolution that overthrew the monarchy in Iran, the Gulf country has offered a production-sharing contract (PSC) to Indian firms to develop the Farzad-B gas field in its offshore Farsi block, but local firms are non-committal because Iran faces sanctions due to its nuclear programme.

Iran has been working on a new contract arrangement to attract foreign investors to its hydrocarbon sector in the backdrop of US and European Union (EU) sanctions over its nuclear programme. Iran maintains it is developing nuclear energy for peaceful purposes and not to make bombs.

Iran has offered the first such pact globally to an Indian consortium comprising ONGC Videsh Ltd (OVL), Indian Oil Corp. Ltd (IOC) and Oil India Ltd (OIL), which won a bid for the block in 2002 from National Iranian Oil Co. (NIOC). Although the group does not have ownership rights, it was to be paid a 15% return on investment once it was awarded development rights.

“There has been no decision on the PSC and the issue is till hanging," an OIL executive said, requesting anonymity. “Frankly speaking, we want to get out of it because of the US sanctions. We have already invested in the US and are interested in more properties there."

OIL and IOC jointly acquired a 30% stake in Carrizo Oil and Gas Inc.’s shale assets in the Denver-Julesburg Basin in Colorado last year.

After India and the US signed a civil nuclear deal in 2008, several Iran-related Indian projects have either been put on hold or dropped. This PSC will also provide a test case of India’s resolve for energy security vis-à-vis the willingness to accommodate US sensitivities.

“The Iranians have proposed a PSC, which is a first. It is a sweetener from their side," said an IOC executive, who also declined to be named. “Let’s see how this contentious issue of sanctions can be avoided. It is important as anyone doing business there will attract sanctions in other places. If that can’t be resolved, we may not sign it. Let’s see how this works out."

These sanctions, combined with the ones by United Nations (UN) Security Council that include strictures against Iran’s energy and banking sectors, could hurt firms from other countries doing business with Tehran.

OVL, the overseas arm of state-owned explorer Oil and Natural Gas Corp. Ltd (ONGC), is the operator of the block, in which it holds a 40% stake. IOC has an equal stake and the balance 20% is held by OIL.

The 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 a liquified natural gas terminal to transport the gas, is estimated to require an investment of $8-9 billion. The investment for exploration and production work will amount to around $5.5 billion.

“The discussions have been on for some time now. If we ink it, it will be the first such PSC offered by Iran," an ONGC official said on condition of anonymity. “We have to see how this works."

OVL exited its only hydrocarbon asset in the US in 2003 before investing in Africa’s civil war-ravaged Sudan, fearing a backlash.

“While it is true that Iran has offered a PSC to us, how will this work out is left to be seen," said another IOC executive, who also wanted to remain unnamed. “Getting into such an arrangement will have implications on us and our business interests given the sanctions that Iran faces. It will not be such a simple arrangement."

Mint reported on 12 January 2011 about legal advice sought by OVL cautioning it against proceeding with the Iran projects. Similar legal opinion was sought by GAIL (India) Ltd and IOC, after which India decided to focus on the Turkmenistan-Afghanistan-Pakistan-India gas pipeline instead of the Iran-Pakistan-India pipeline project.

“Any contract signed with Iran will definitely affect India’s relationship with the United States and the EU. However, it appears that India is willing to pay this price for securing relatively cheap access to oil and gas from Iran," said Lydia Powell, head at the Centre for Resources Management at New Delhi-based think tank Observer Research Foundation.

While the Iranian embassy in New Delhi and NIOC didn’t respond to queries emailed on Thursday, a ministry of external affairs spokesperson asked Mint to contact India’s petroleum ministry for details and comments.

D.K. Sarraf, managing director of OVL, and the spokesperson for the petroleum ministry declined comment. S.K. Srivastava, chairman and managing director of OIL, didn’t respond to phone calls or a message left on his mobile phone.

Curbs imposed by the West on Iran for its suspected nuclear weapons programme have affected crude oil sales by the country. In April-December 2012, India imported 9.69 million tonnes (mt) of crude oil from Iran valued at 24,814 crore. After the sanctions, Iran dropped to seventh position as a supplier of crude oil to India for the April-December 2012 period from the second spot in 2009-10.

Not only have the sanctions made it difficult to make payments, getting insurance for ships moving cargo to and from Iranian shores has also become virtually impossible.

Iran’s oil minister Rostam Ghasemi visited India last month to discuss a range of issues including crude oil purchase, marine insurance, re-insurance cover for Indian refineries, and arrangement of ships for transportation.

“Both sides agreed to discuss outstanding issues related to the development of Farzad-B gas field," said a 27 May joint statement by the two countries.

India is the world’s fourth largest oil importer and a major customer for Iran’s 1.7 million barrels per day of oil exports. It needs to import fuel given the limited nature of domestic energy sources.

India’s dependence on imports is as high as 80% for crude and 25% for natural gas. India’s energy demand is expected to more than double by 2035, from less than 700 million tonnes of oil equivalent (mtoe) now to around 1,500 mtoe, according to the oil ministry.

Elizabeth Roche contributed to this story.

Close