India Will Be Awash in Oil – From Iran and Saudi Arabia

The Iran-US nuclear deal opens a window of opportunity for India on the oil import front, writes Shishir Asthana

The Deal: What it means for India

• Low oil prices will bring down India’s import bill leaving a chunk amount for growth projects
• Deal with Iran on Chabahar port can be of strategic use as Iran can sell more oil to India
• Lifting of sanctions on Iran will open up trade with many countries for India
• Indian companies can tap into the oil production and downstream industry in Iran which will see a surge in investment

Seventeen days of intense negotiations helped Iran break the logjam with six nations and helped lift the over decade-long sanctions on the country. While Iranians rightfully rejoiced, their fellow oil-producing countries were not so happy. The deal resulted in a global fall in crude oil prices by nearly 2% with a further drop expected in the near future.

Low oil prices is good news for India as the country’s oil bill, which accounts for a major portion of imports, will come down. This leaves more money in the hands of the government to invest in growth projects.

But low oil prices are not the only positives for India from the deal. India was one of the few countries with whom Iran had a steady relationship during the years of sanctions. India along with China was among the main buyers of Iranian oil. India was able to carry out trade with Iran in rupee and not in dollars or euro, helping the country save valuable foreign exchange. Iran was the second largest source of oil for India after Saudi Arabia, supplying 9 million tonnes of oil. The volume to be imported was restricted by the terms of the sanctions on Iran.

Advantage India

With sanctions lifted Iran can now sell more oil to India. Iran offers logistical advantage over Saudi Arabia. India recently reached an agreement with Iran to develop its Chabahar port which offers many strategic advantages to India. First, it is only 940 km from Mundra port in Gujarat, which makes the logistics of oil transport easier. India can use the Iran card to demand better prices from Saudi Arabia, which sells crude oil at a premium to Asian countries as compared to developed ones.

Secondly, the port opens up an opportunity for India to import gas from Iran. At present, India only trades in oil with Iran and imports gas from other countries, mainly Oman. With the Iran-Pakistan-India gas pipeline remaining a pipe dream Chabahar port offers a new opportunity to start imports through the sea route.

Logistics is a bigger cost in transportation of gas than in oil, so Chabahar’s proximity will play an important part in India selecting Iran over other countries to meet its gas demand.

Thirdly, and the most important benefit of the Chabahar port is that it can be used to increase the volume of trade with Afghanistan which is currently restricted because it has to pass through Pakistan. The port opens up higher trading opportunities with other countries like Turkmenistan, Uzbekistan and Kazakhstan.

The Chabahar Connection

Indian metal and mining companies which have been looking for iron ore in Afghanistan over the past few years have already drawn up plans to export the ore to India using Chabahar. India’s Border Road Organisation (BRO) is laying a 213-km road and the government is helping it by financing $750 million for the project. The Chabahar port is another strategic plus for the country as it is close to Gwadar which is being developed for Pakistan by China.

The withdrawal sanctions on Iran opens up trade with many countries for India. Presently India has been in a barter trade with Iran as part of the oil for food programme. The amount of food and essential goods Iran could import was restricted by the volume of oil it exported. With the restrictions now lifted this trade can be expanded manifold.

Opportunities for Iran

Iran is likely to see a surge in investment, especially in oil production and downstream industry. Indian companies, especially the capital goods and machinery and rig suppliers will find good opportunity in the country. In oil exploration and production India has already taken the initiative with ONGC discovering oil but awaiting clearance from the Iranian government. The clearance it seems was held back on account of the sanctions.

What Iran offers to India, apart from the conventional oil for food goods is an opportunity of developing the country’s infrastructure both physically and electronically. Further, health infrastructure, pharmaceutical companies and other service providers can find good growth opportunities in the country.

But as far as consumer goods and automobiles are concerned, Iran is like any other Arab country. Iranians prefer American and European brands over anything else.

But the Indian government and Indian companies will have to have their business plans in place as lifting of sanctions would also mean that Iran will once again get access to its $100 billion in assets that had been frozen during the embargo.

(The writer is a Mumbai-based market analyst)