It’s a double-edged sword for India. As US restrictions on import
of oil from Iran come into effect from November 4, India has a tough choice to
make: Either stop oil imports from Iran and spoil trade relations, or continue
with the supplies adopting a tough line and face the ire of the Donald Trump
administration.
While other oil importers such as China and Turkey have said they will not accept the US diktat, India, Iran’s top oil buyer after China, is negotiating with Washington to get a waiver from restrictions.
However, there is the small matter of US President Donald Trump's belligerence.
In an ultimatum to China, Trump tweeted:
While other oil importers such as China and Turkey have said they will not accept the US diktat, India, Iran’s top oil buyer after China, is negotiating with Washington to get a waiver from restrictions.
However, there is the small matter of US President Donald Trump's belligerence.
In an ultimatum to China, Trump tweeted:
.....China has been taking advantage of the United States on
Trade for many years. They also know that I am the one that knows how to stop
it. There will be great and fast economic retaliation against China if our
farmers, ranchers and/or industrial workers are targeted!
For now, India has its oil stock covered.
The country’s largest oil marketing company, Indian Oil Corporation (IOC), and other refiners have already placed orders for October to the National Iranian Oil Company. A senior oil ministry official tells ET Prime that by the time the sanctions come into effect, “we would have imported 70% of the [total annual] crude requirement [from Iran]”.
Ministry officials indicate that around 8 million metric tonnes (MMT) of oil have already been contracted from Iran.
“We are still negotiating with the White House for a waiver. We may not place orders for November and December shipments from Iran. Meanwhile, we may manage to negotiate with the US on waivers and then start importing from January. Since we have already contracted around 8MMT out of the total import for this fiscal of around 12MMT, we can hold our orders for a month or two,” a senior ministry official says.Why Iran is important for India
BN Bankapur, former director, refineries, Indian Oil Corporation, says, “Iran offers various grades of light and heavy crudes which are much cheaper, and a better payment credit period. Shifting to alternative sources will increase costs for India at a time when the price of crude is rising and the rupee depreciating.”
Oil from Iran’s Hengam oil and gas field is the lightest in the world, while oil from other fields in the Persian Gulf, such as Soroush, Noruz, and Forouzan, are among the heavy ones.
Even as India strategically looks at alternatives for sourcing crude from other countries like Saudi Arabia and the US, it will know that the kind of discounts it enjoys from Iran will not be available.
Vivek Jain, director, India Ratings and Research, a Fitch group company, explains that in the past, when the US imposed sanctions on the Islamic nation, importing countries managed to keep buying limited volumes of oil by seeking exemptions and getting creative with payments and shipping. Jain emphasises that this time there are countries which are likely to defy US demands, given the global trade frictions that the Trump administration’s policies have caused.
Meanwhile, the tension between Iran and the US could impact countries like India in more ways than one.
That’s because Iran’s President Hassan Rouhani has countered Trump with a threat to close the Strait of Hormuz, a channel that leads out of the Persian Gulf all, and through which much of West Asia’s oil is shipped and exported.
Maritime oil trade from the Arabian peninsula relies exclusively on two strategic choke points: the Strait of Hormuz, to the United Arab Emirates’ north, and Bab el-Mandeb to the south. More than a third of the world’s petroleum trade by sea passes through the Strait of Hormuz, which is just 50km wide. It connects the Persian Gulf to the Arabian Sea and, thus, the Indian Ocean. China, Japan, India, South Korea, and Singapore are the largest destinations for oil moving through the strait. On the north coast lies Iran, and on the south coast the United Arab Emirates.According to Debasish Mishra, head of energy at consultancy firm Deloitte Touche Tohmatsu India, Iran may not be able to permanently block the Strait of Hormuz but can certainly disrupt traffic and create an atmosphere of insecurity.
“Any disruption in crude supply from the Persian Gulf is going to have a catastrophic impact on an already tight oil market,” he says. Problems will arise when both choke points are disrupted. If Iran disrupts the channel, there will be a huge spike in oil prices. Iran has already started storing unsold crude in supertankers, a practice known as floating storage.
India, besides being the second-largest crude oil importer, also has a major commitment of investing USD500 million for the development of the strategic Shahid Beheshti Port in Iran’s Chabahar, and USD2 billion to build a rail line through Zahedan in Iran to Afghanistan, to circumvent trade restrictions by Pakistan.
Looking beyond OPEC could help
As part of its diversification plan, India is also importing crude oil in small quantities from Oman and Bahrain.
India’s effort to diversify its oil imports has also a lot to do with the discriminating market strategies of the Organization of the Petroleum Exporting Countries (OPEC) members, who have for long imposed a surcharge on oil-importing Asian nations. Handicapped by few alternatives to Gulf crude and little bargaining power, Asian importers, including India, have been paying up to USD6/barrel more for their oil, compared to US or European refiners.
According to the petroleum ministry, a USD1/bbl change in crude prices results in an increase or decrease in the import bill of about INR10,880 crore per annum (assuming an annual average exchange rate of INR65 to the dollar).
According to the BP Statistical Review of World Energy 2018, the total global proven oil reserves in 2017 were 1,700 billion barrels, which is sufficient to meet the next 52 years of global production at the current rate of consumption.India has also discussed with China the possibility of forming an “oil buyers’ club” that can negotiate better terms with sellers as well as get more US crude oil to cut the dominance of the oil bloc. It would provide a better negotiating ground for the two biggest Asian crude oil buyers to positively impact the selling price for West Asian crude oil to the rest of Asia.
A senior oil-ministry official says “meetings have been held between India and China, both at ministerial and company levels. Both sides expressed an interest to cooperate in dealing with high crude-oil and gas prices through increased communication between companies.”
In the past, India’s oil imports from the US have not been regular.
After 1975, India received its first shipment of crude oil from the US in October 2017. IOC imported 1.6 million barrels at the Paradip port in Odisha. A very large crude carrier (VLCC) named MT New Prosperity was used to transport the oil.
Though it is said that the US provided oil to India at a discount of USD2 per barrel compared to the OPEC countries, senior IOC officials say, “The discounts were negligible since the transportation cost was higher.”
The reason cited for importing oil from the US was the effort made by the Indian government to meet a long-standing demand of the Trump administration to reduce trade deficit. According to data from the commerce ministry, India’s exports to the US stand at USD72 billion, while imports come to only USD30 billion.
For now, India won’t shut any door
Since Iran is one of India’s crucial trade partners, the government is exploring the possibility of reviving a rupee-rial arrangement by allowing an Iranian bank to set up shop in India. According to senior finance ministry officials, the ministry has already given the nod to Bank Pasargad to set up a branch, which will help India continue importing oil supplies and make payments.
Earlier, when sanctions were imposed, India continued its trade with Iran with a rupee-payment mechanism from Uco Bank. However, the country's largest lender State Bank of India has communicated to oil refiners that the euro-payment route will be not available after November, when the second round of sanctions set in.
(Graphics by Ankita Mehrotra)
The country’s largest oil marketing company, Indian Oil Corporation (IOC), and other refiners have already placed orders for October to the National Iranian Oil Company. A senior oil ministry official tells ET Prime that by the time the sanctions come into effect, “we would have imported 70% of the [total annual] crude requirement [from Iran]”.
Ministry officials indicate that around 8 million metric tonnes (MMT) of oil have already been contracted from Iran.
“We are still negotiating with the White House for a waiver. We may not place orders for November and December shipments from Iran. Meanwhile, we may manage to negotiate with the US on waivers and then start importing from January. Since we have already contracted around 8MMT out of the total import for this fiscal of around 12MMT, we can hold our orders for a month or two,” a senior ministry official says.Why Iran is important for India
BN Bankapur, former director, refineries, Indian Oil Corporation, says, “Iran offers various grades of light and heavy crudes which are much cheaper, and a better payment credit period. Shifting to alternative sources will increase costs for India at a time when the price of crude is rising and the rupee depreciating.”
Oil from Iran’s Hengam oil and gas field is the lightest in the world, while oil from other fields in the Persian Gulf, such as Soroush, Noruz, and Forouzan, are among the heavy ones.
Even as India strategically looks at alternatives for sourcing crude from other countries like Saudi Arabia and the US, it will know that the kind of discounts it enjoys from Iran will not be available.
Vivek Jain, director, India Ratings and Research, a Fitch group company, explains that in the past, when the US imposed sanctions on the Islamic nation, importing countries managed to keep buying limited volumes of oil by seeking exemptions and getting creative with payments and shipping. Jain emphasises that this time there are countries which are likely to defy US demands, given the global trade frictions that the Trump administration’s policies have caused.
Meanwhile, the tension between Iran and the US could impact countries like India in more ways than one.
That’s because Iran’s President Hassan Rouhani has countered Trump with a threat to close the Strait of Hormuz, a channel that leads out of the Persian Gulf all, and through which much of West Asia’s oil is shipped and exported.
Maritime oil trade from the Arabian peninsula relies exclusively on two strategic choke points: the Strait of Hormuz, to the United Arab Emirates’ north, and Bab el-Mandeb to the south. More than a third of the world’s petroleum trade by sea passes through the Strait of Hormuz, which is just 50km wide. It connects the Persian Gulf to the Arabian Sea and, thus, the Indian Ocean. China, Japan, India, South Korea, and Singapore are the largest destinations for oil moving through the strait. On the north coast lies Iran, and on the south coast the United Arab Emirates.According to Debasish Mishra, head of energy at consultancy firm Deloitte Touche Tohmatsu India, Iran may not be able to permanently block the Strait of Hormuz but can certainly disrupt traffic and create an atmosphere of insecurity.
“Any disruption in crude supply from the Persian Gulf is going to have a catastrophic impact on an already tight oil market,” he says. Problems will arise when both choke points are disrupted. If Iran disrupts the channel, there will be a huge spike in oil prices. Iran has already started storing unsold crude in supertankers, a practice known as floating storage.
India, besides being the second-largest crude oil importer, also has a major commitment of investing USD500 million for the development of the strategic Shahid Beheshti Port in Iran’s Chabahar, and USD2 billion to build a rail line through Zahedan in Iran to Afghanistan, to circumvent trade restrictions by Pakistan.
Looking beyond OPEC could help
As part of its diversification plan, India is also importing crude oil in small quantities from Oman and Bahrain.
India’s effort to diversify its oil imports has also a lot to do with the discriminating market strategies of the Organization of the Petroleum Exporting Countries (OPEC) members, who have for long imposed a surcharge on oil-importing Asian nations. Handicapped by few alternatives to Gulf crude and little bargaining power, Asian importers, including India, have been paying up to USD6/barrel more for their oil, compared to US or European refiners.
According to the petroleum ministry, a USD1/bbl change in crude prices results in an increase or decrease in the import bill of about INR10,880 crore per annum (assuming an annual average exchange rate of INR65 to the dollar).
According to the BP Statistical Review of World Energy 2018, the total global proven oil reserves in 2017 were 1,700 billion barrels, which is sufficient to meet the next 52 years of global production at the current rate of consumption.India has also discussed with China the possibility of forming an “oil buyers’ club” that can negotiate better terms with sellers as well as get more US crude oil to cut the dominance of the oil bloc. It would provide a better negotiating ground for the two biggest Asian crude oil buyers to positively impact the selling price for West Asian crude oil to the rest of Asia.
A senior oil-ministry official says “meetings have been held between India and China, both at ministerial and company levels. Both sides expressed an interest to cooperate in dealing with high crude-oil and gas prices through increased communication between companies.”
In the past, India’s oil imports from the US have not been regular.
After 1975, India received its first shipment of crude oil from the US in October 2017. IOC imported 1.6 million barrels at the Paradip port in Odisha. A very large crude carrier (VLCC) named MT New Prosperity was used to transport the oil.
Though it is said that the US provided oil to India at a discount of USD2 per barrel compared to the OPEC countries, senior IOC officials say, “The discounts were negligible since the transportation cost was higher.”
The reason cited for importing oil from the US was the effort made by the Indian government to meet a long-standing demand of the Trump administration to reduce trade deficit. According to data from the commerce ministry, India’s exports to the US stand at USD72 billion, while imports come to only USD30 billion.
For now, India won’t shut any door
Since Iran is one of India’s crucial trade partners, the government is exploring the possibility of reviving a rupee-rial arrangement by allowing an Iranian bank to set up shop in India. According to senior finance ministry officials, the ministry has already given the nod to Bank Pasargad to set up a branch, which will help India continue importing oil supplies and make payments.
Earlier, when sanctions were imposed, India continued its trade with Iran with a rupee-payment mechanism from Uco Bank. However, the country's largest lender State Bank of India has communicated to oil refiners that the euro-payment route will be not available after November, when the second round of sanctions set in.
(Graphics by Ankita Mehrotra)
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