By Sumitha Narayanan Kutty
Reports earlier this month indicated that in comparison to last year, India took 46 percent more oil from Iran between the months of January and July. So far this year, India has received about 270,600 barrels per day (bpd) with the month of July registering an average of 210,300 bpd.
Today India is Iran’s second best customer of its crude oil after China. India was briefly #1 in 2012 after sanctions levied by the United States and the EU saw competitors China, Japan and South Korea race to cut back more ‘significantly’ than it. Despite the waiver from Washington,
India drastically curbed imports the following year, cutting back even further than the targeted 15 percent reduction mark. This saw Iran plummet from second largest supplier of crude to seventh place.
A quick glance at where imports stood since 2011 shows that we are currently inching toward pre-2013 levels that existed before the ‘American squeeze’.
Source: Reuters (Thomson Reuters Oil Analytics)
How did this come about?
1. Relief from Interim Nuclear Deal
The first reason of course being the breakthrough interim deal struck between Iran and the P5+1 (US, UK, Russia, France, China plus Germany) nations in November 2013 as they began trudging down the long road of negotiating a nuclear agreement. The interim agreement kicked into force in January and allows Iran to keep its oil export levels to 1 million bpd (less than half of pre-2012 levels). Today the country maintains levels at approximately 1.1 million bpd, a little more than the cap, but American officials aren’t exactly complaining.
Indian players, private refiner Essar Oil Ltd and state-owned Mangalore Refinery and Petrochemical Ltd (MRPL), are the only two regular importers of Iranian crude (other irregular importers include Indian Oil Corp, Hindustan Petroleum Corp and HPCL-Mittal Energy Ltd). Essar Oil, the biggest Indian buyer of Iranian crude, more than doubled shipments from January. They rose from 54, 200 bpd in December to 141,900 bpd in January and crossed 231,000 bpd by end of March this year. A wary MRPL, however, plans to keep its annual purchases from Iran around last year's levels of about 80,000 bpd in spite of the interim relief. Because it fears that’s exactly what the relief is – “interim.”
The Iranian nuclear negotiations have not had a very smooth ride since January. The talks failed to meet the initial July deadline but with neither party (read US and Iran) willing to give up just yet, the negotiations have now been extended till November.
Despite this narrow window of opportunity and high degree of uncertainty, the mood on Iranian crude imports remains positive.
“This year, we plan to restart Iran oil purchases. We are already talking to the re-insurers for this, and we are getting positive responses so far.”-- S. Venkataramana, MD, Chennai Petroleum Corp. (MRL) to Bloomberg News
After a two-year gap, Chennai Petroleum Corp. (MRL) , a unit of India’s largest refiner Indian Oil Corp (IOCL), plans to resume crude imports from Iran (Naftiran Inter Trade Co., the Swiss-based subsidiary of National Iranian Oil Co., also holds a 15.4 percent stake). This change of heart has primarily come about because the European Union eased its sanctions on insuring cargoes after the interim deal and insurers are now returning to the market, albeit cautiously.
2. Urgent Need for Diversification: The Iraq Crisis
A second and increasingly concerning reason is the instability in parts of the Middle East, in particular Iraq. The country overtook Iran in 2012 to become India’s second largest supplier of crude oil. The Islamic State (IS) may not yet have taken southern Iraq where the Basra oilfields are located, but the instability spreading through the country has New Delhi already mulling over contingency plans.
In June, the government instructed public sector oil companies to draw up long and medium term plans with emphasis on diversifying India’s oil import basket. India ideally wants to reduce its dependence on a volatile Iraq and, at the same time, not increase its dependence on Saudi Arabia. Given these circumstances, both the government and refiners believe that Iran offers an immediate, proximal solution with lower transportation costs than say Latin America or Africa.
It is a tight window of opportunity till November after which the outcome of the Iran-P5+1 nuclear negotiations will decide if this upward trend for Iranian crude continues.
This post first appeared on Logos, the public policy blog of The Takshashila Institution.
Sumitha Narayanan Kutty is a foreign affairs analyst and journalist specializing in Iran and South Asia. She is also a scholar at Takshashila Institution—an independent, non-partisan, non-profit organization in India. Follow @sumithakutty