India faces Farsi ultimatum

By Siddharth Srivastava

After keeping its distance from the Iran-Pakistan-India (IPI) pipeline project, New Delhi is now under increasing pressure from Tehran to commit fully to the development of the Farzad-B gas venture.

Fears that Iran’s nuclear ambitions contain a weapons programme, as well as concerns over US sanctions, prompted India to avoid the US$7.5 billion IPI scheme. After missing out on this potentially very fruitful project, India is once again in the hot seat over Iran’s energy supplies.

This time, the fate of a US$5.5 billion investment by a consortium of Indian firms in Farzad-B, which lies in the Farsi block offshore Iran, hangs in the balance.

Tehran, faced with new sanctions from the US and the European Union, has threatened to cancel the award of the block owing to delays by partners ONGC Videsh Ltd (OVL), Indian Oil Corp (IOC) and Oil India Ltd (OIL) in signing the Farzad-B field development contract.

“Iran has given a one-month ultimatum to India on developing the Farzad-B gas field,” the semi-official Fars news agency quoted an unnamed Iranian oil official earlier this month. Speaking to AsianOil, official sources in India’s Foreign Ministry have said the Iranian government has sent many messages to New Delhi, but, they added, this was not “unusual, as the two countries’ hydrocarbon relationship runs deep.”

“We are preparing appropriate responses [on Farsi] and action is being initiated via more dialogue with the entities concerned to prepare the way forward. We are also in discussions with US officials to seek a waiver for Indian firms,” one official said.

Farsi prospects

In August-September 2010, OVL, the overseas arm of India’s state oil company Oil and Natural Gas Corporation (ONGC), submitted a revised Master Development Plan (MDP) for the gas field it had discovered.

However, OVL has so far refrained from signing a contract owing to concerns that US sanctions could be imposed on the company, given that such sanctions can be implemented on any firm that invests more than US$20 million in Iran’s energy sector in any 12-month period.

Farzad-B was declared commercial in 2008 after several wells were drilled in the Farsi block awarded to OVL in 2002. OVL, the project’s main operator, owns a 40% stake in the 3,500-square km block, state refiner Indian Oil Corp (IOC) also has 40% stake, while Oil India Ltd (OIL) holds the remaining 20%.

The consortium also intends to produce liquefied natural gas (LNG) and ship it to India where the supply and demand gap has widened considerably. Another US$2.5 billion would be needed to set up the liquefaction plant for this, however.

Reserve estimates for Farzad-B are good, with more than 21.5 trillion cubic feet (608.9 billion cubic metres) of gas in place, of which 12.8 tcf (362.5 bcm) are recoverable, much more than India’s largest gas producing field KG-D6, operated by Reliance Industries Ltd (RIL), a company that has considerably reduced its business with Iran over fears of sanctions.

Mounting pressure

ONGC, meanwhile, is under increasing pressure to deliver sufficient oil and gas supplies to meet rising domestic demand.

Hamstrung by mature assets, ONGC’s chairman and managing director, Sudhir Vasudeva, recently said the company planned to invest US$33 billion during the five years from April 2012. About US$7.5 billion will be deployed to develop ONGC’s gas assets in the Krishna Godavari (KG) Basin.

Answering questions from AsianOil about ONGC’s overseas plans, Vasudeva said company officials were in “constant touch with counterparts in Iran, including our investments and prospects.”

On the topic of sanctions, Vasudeva said: “There are political aspects involved, which are being worked upon and all options explored. We will go by whatever the government decides.”

The ONGC chairman, however, has already admitted that a jump in ONGC’s output can only come about from newly discovered fields.

India strategy

After missing out on IPI, India will be loath to miss out on Farsi. Official sources in the foreign ministry have told AsianOil that New Delhi will most likely seek to buy more time on the issue before making taking a definitive stance.

“India is keen to keep its access to Iran’s immense oil and gas resources intact. However, it does not want to annoy Washington as well,” one official explained.

Sources added that India would offer defence and nuclear power business opportunities to US firms in the hope of securing an exemption from Washington on Iran, which the White House can grant if it so chooses. New Delhi is also expected to point out that it has followed the US’ lead on Tehran in the past, unlike Pakistan, which is implementing a truncated IPI project for much needed gas supplies.

Despite Indian Finance Minister Pranab Mukherjee recently saying India would keep its hydrocarbon relations with Iran intact, the matter is just not that simple.

New Delhi has been working through payment issues over Iranian oil imports, which account for 12% of the Asian state’s oil demand. The situation is forcing Indian refiners to seek crude elsewhere.

Earlier this month, Mangalore Refinery and Petrochemicals (MRPL), India’s biggest importer of Iranian crude oil, bought its first cargo of oil from Libya to diversify oil supply.

Meanwhile, privately owned major RIL has substantially curtailed petrol exports to Iran to avoid problems in fuel sales to the US.

India will seek to buy itself more time on the issue as it struggles to find a middle ground between political polar opposites the US and Iran. How much latitude either will give India, however, remains very much to be seen.