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Re-calibrating Iran-India Energy Ties

Shebonti Ray Dadwal is Consultant at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • November 10, 2015

    As the P5+1 prepares to roll back the nuclear-related sanctions on Iran in accordance with the July 2015 accord, the question that springs to mind is whether this will bring about a revival of energy ties with India. More pertinently, once sanctions are rolled back, which way will Iran go? Will Tehran prefer to focus on the more lucrative European energy market, particularly market for natural gas, or will it focus on Asia? Undoubtedly, Iran will be looking at its oil to bring in the much-needed revenue to its cash-starved economy; however, it is Iran’s potential as a gas supplier that is likely to play a bigger role in realising its ambition of becoming a regional as well as geopolitical power, based to large extent on its energy reserves.

    Many European countries, including the European Commission, desperate to find a viable alternative to the Russian gas, believe that Iran could become a major source of natural gas for Europe. However, there is a huge and growing demand for natural gas in Asia too, particularly as indigenous reserves in the region decline. Asia currently accounts for 75 per cent of the global liquefied natural gas (LNG) imports, with demand expected to grow from the current 240 million tons per year to 360 million tons per year by 2025, with much of it presently coming from East and Southeast Asian countries.1 In such a scenario, the Asian gas market may prove to be more attractive for Iran in both near and long term. However, since most of this demand is expected to be met by countries that have gas liquefaction technology, it will be a while before Iran can cater to the demand.

    But South Asia is another matter.

    With two large energy-starved nations, viz., Pakistan and India next door, Iran is keen to revive the gas projects that have languished for decades due to the sanctions. The Iran-Pakistan-India (IPI) gas pipeline project had succumbed to the sanctions regime as well as fierce opposition from the US, with Washington pushing for the rival Turkmenistan-Afghanistan-Pakistan-India (TAPI) project. However, despite progress on TAPI being reported from time to time in the media – the latest being that the Turkmen President has ordered the construction of the Turkmen sector of the pipeline -- the project remains mired with concerns over the continuing turbulence in Afghanistan.

    On the other hand, after the July 2015 breakthrough in the Iranian nuclear deal, Pakistani leaders have been making periodic statements about resuming the IP project. In fact, in April, Pakistan’s Petroleum Minister Shahid Khaqan Abbasi even stated that the Chinese-funded LNG terminal at Gwadar and the pipeline linked to it as part of the China-Pakistan Economic Corridor (CPEC) can actually double up as the IP gas pipeline.2

    In comparison, India is yet to recommit to the IPI project per se. However, there have been statements from the Indian Petroleum Minister Dharmendra Pradhan suggesting that India is keen to import Iranian LNG.3 Given that Iran is yet to gain access to liquefaction technology, India may be looking at importing either piped gas or as LNG through a third country with the requisite technology.

    In late September 2015, Iran and Oman signed an agreement to study two projects -- a sub-sea pipeline as well as an onshore one -- for carrying Iranian gas worth $60 billion over the next 25 years to Oman, scheduled to commence in two-and-a-half years. While part of the exported gas will be used by Oman, the rest will be used for LNG production. Interestingly, as per the agreement, Iran will own the LNG and will be in charge of its marketing. The Iranian Oil Minister Bijan Namdar Zanganeh has stated that gas exports to Oman and entry into its retail market will make it possible to sell the Iranian natural gas to the region, especially Asian countries.4

    Iran and India could therefore resume their gas trade by reviving the Oman-India sub-sea pipeline, with gas sourced in Iran. The pipeline, which was known as the Middle East to India Deepwater Pipeline (MEIDP) project, was originally proposed in the 1990s. This would allow India to bypass Pakistani territory, which was one of the major concerns of India. The proposal for the gas pipeline project, known as South Asia Gas Enterprise (SAGE), could see over 31 million cubic metres of gas per day delivered from Chabahar on the southern coast of Iran and Ras Al-Jafan on the Oman coast to Porbandar in the western Indian state of Gujarat via a deep sea pipeline under the Arabian Sea.

    However, the proposal may not be possible in the wake of the United Nations Convention on the Law of the Sea (UNCLOS) decision of March 2015 to extend Pakistan’s seabed territory by an additional 150 km from the original 200 nautical miles, giving Islamabad special rights, including energy production, in the area under its jurisdiction.5

    There is, however, another option which can be explored – that of a gas swap between India, Iran and Turkmenistan. Tehran has been importing piped gas from Turkmenistan for its energy-starved northern provinces, and could deliver an equal amount to India through its southern ports, thereby allowing India to do business with both Iran and Turkmenistan. The gas could then be brought to India directly through a sub-sea pipeline once the sanctions are lifted, or in the form of LNG via Oman.

    Prime Minister Narendra Modi had stated during his July 2015 Ashgabat visit that although India was committed to the TAPI project, multiple options were being pursued, including a land-sea route through Iran. While he did not elaborate further, a swap deal between Turkmenistan, Iran and India is an option via the SAGE project in exchange for Turkmen gas sent to Iran.6 Recently, Iran has proposed a similar deal with Russia, wherein Iran would receive natural gas, oil and oil products from Russia through its northern terminals, and sell equivalent volumes of the same products to Russia’s clients through its southern terminals.7 The same could be considered with India being the recipient.

    There are certainly several options that could be thought of in order to bring West Asian/Iranian gas to India. However, the biggest hurdle to any such project would be the domestic gas market itself. Although the country’s latent demand for natural gas is enormous, with consumption growing at compound annual growth rate (CAGR) of about six per cent between 2000 and 2008, there was a fall in gas imports due to the difference in price between imported and domestically-produced gas as well as the highly subsidised price of fertilisers, one of the main gas-consuming sectors. Moreover, gas-based power being higher than coal-based power, gas–based generators had few takers. Nevertheless, the demand for gas has increased recently, with India contracting more LNG imports due to the fall in oil-indexed gas.

    Moreover, according to the annual report of the oil ministry, the demand for natural gas is projected to increase to 10 per cent in 2014-15 and more than 12 per cent in 2018-19. The report suggests that despite an expected rise in output the demand will continue to outstrip supply. Interestingly, the report also states that LNG imports will remain at the core of the changes in the natural gas sector in the near future.8

    Under these circumstances, India needs to capitalise on the emerging Iranian gas supply market and the current low price scenario, before rival consumers snap up Iranian exports or prices go up.  Iran is reported to have offered gas to India at $2.95 per million British thermal unit (mmBtu), albeit for supply to a planned urea plant to be set up by India at Chabahar, which is less than half the rate at which India currently imports LNG from the spot or current market. In contrast, long-term LNG supplies from Qatar are four times the Iranian price.9 Given that the Chabahar Port is part of India’s larger regional policy, developing broader relations that entail incorporating gas supplies from Iran would give India greater leverage at a time when other countries in South Asia, including Pakistan and Bangladesh, are emerging as key gas importers.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India