Pacific Money

India Eyes Iraqi Oil

As scrutiny over China’s involvement in Iraq’s energy sector grows, India is quietly strengthening its partnership with Baghdad.

Even as China’s involvement in the Iraqi oil sector has come under increased scrutiny in recent weeks, India is quietly cementing a growing partnership with Baghdad centered on Iraq’s energy supplies.

A report in the Hindustan Times this weekend said increasing Iraqi oil exports to India will top the agenda of External Affairs Minister Salman Khurshid’s trip to Iraq scheduled for the middle of next week. The local newspaper said that India’s interest in increasing its consumption of Iraqi crude derived from the steep decline in the amount of oil it purchases from Iran.

India has joined other Asian countries in drastically reducing its oil imports from Iran in order to evade U.S. and EU sanctions. The Financial Times forecast last week that Iran oil exports in May reached a 25-year-low, with India importing just 117,000 barrels a day (b/d), a 56 percent drop from the same time a year before. During the last fiscal year India’s oil imports from Iran declined by an estimated 26.5 percent.

India has struggled to insure refineries that deal with Iran crude after the EU—where most of the insurance companies are located— threatened to cut off all insurance for companies using Iranian energy supplies. The Indian government has considered insuring national refineries itself and Iran recently offered to cover the refineries itself.

At the same time, India has been seeking to establish alternative sources of oil. Saudi Arabia is far and away India’s largest oil partner, with Riyadh sending an estimated 36.62 million tons of oil to India in FY 2012-2013. Although Saudi Arabia has long been India’s top supplier, its share of India oil imports has skyrocketed since 2011 when Saudi Arabia agreed to double its oil exports to India.

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Meanwhile, Iran’s position has slipped from India’s second largest oil supplier in 2010-2011 to its third largest supplier in 2011-2012 and just its seventh largest supplier in the fiscal year that ended in March.

Iraq has arguably been the biggest beneficiary of the drop-off in India’s consumption of Iranian oil. For the past few years it has been India’s second largest oil supplier after Saudi Arabia, with The Hindu newspaper estimating that India bought over 24 million tons of oil from Baghdad in 2012-2013 FY.

Meanwhile, the EIA estimates that India was the destination for 19 percent of Iraq’s crude oil exports in 2012, which the EIA has as a larger share than the 13 percent it estimates went to China. During the same year, the EIA estimates that 13 percent of India’s crude oil imports came from Iraq, compared to just 6 percent from Iran. Late last month Iraq's Minister of Water Resources, Mohanad Salman Alwan Al-Shaibani, said in an interview that Iraq was considering increasing its oil supplies to India by as much as 30 percent.

“India has requested 80,000 barrels per day of additional crude oil supply. We will increase the supply depending on the availability,” Al-Shaibani said.

India-Iraq relations date back centuries, and historically the two countries have enjoyed strong trade ties. Delhi publicly opposed both the first and second Gulf Wars against Iraq.

After the 2003 U.S. invasion disrupted this economic relationship, India began wooing Iraqi leaders as early as 2005, when Prime Minister Manmohan Singh sent his special envoy for West Asia, CR Gharekhan, to meet with Iraqi leaders. During the meeting, Gharekhan presented a personal note from Singh that announced India’s commitment to help rebuild the war-torn Persian Gulf state. To this end, India pledged US$10 million to the International Reconstruction Fund Facility for Iraq (IRFFI) and has funneled an additional US$20 million through the United Nations.

Still, relations have only begun substantially improving in the last few years, as India has sought to reduce its dependence on Iranian oil.

The fact that India has turned to Iraq to make up for its reduction in Iranian crude has more to do with economic realities than strategic interests, however. According to the Hindustan Times report, Iraqi crude is the same as Iranian crude, which makes it preferable to Indian refineries, which are largely geared towards refining the Iranian variant.

That being said, the strategic implications of China’s growing presence in Iraq— combined with its Gwadar port in Pakistan— has not gone unnoticed by Indian policymakers.

Zachary Keck is assistant editor of The Diplomat.