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India Seeks ‘Auspicious Re-Birth’ in Iran’s Energy Sector

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India Seeks ‘Auspicious Re-Birth’ in Iran’s Energy Sector

A new strategic level of cooperation could be emerging between Iran and India in energy and commercial transportation.

After Iran had rejected India’s early May offer to develop of Iran’s Farzad-B offshore natural gas block, New Dehli is making a renewed new effort to woo Tehran’s approval. ONGC Videsh Ltd. (OVL), the overseas arm of India’s state-owned Oil and Natural Gas Corporation reportedly is now prepared to make concessions on cost recovery and capital expenditure to secure the Farzad-B contract. Under pressure from the United States during the sanctions regime, India delayed and ultimately relinquished Farzad’s development and also withdrew from the Iran-Pakistan-India pipeline project slated to bring 11.3 billion cubic meters of Iranian natural gas per year to India. In Persian, the name Farzad means “auspicious birth.” With a recently proposed Iran-Oman-India undersea gas pipeline potentially in the offing, New Delhi is hoping for an “auspicious re-birth” in Iran’s natural gas industry by seeking to regain the Farzad development project.

In 2008, OVL discovered natural gas in the block, now estimated to hold 759 billion cubic meters (bcm) of in-place reserves. One of the two 40 percent stakeholders in the gas block, OVL became the operator for Farzad-B’s development. Yet, under pressure from the United States and facing difficulties obtaining technology and financing due to international sanctions against Iran, OVL and its two Indian partners delayed the $8 billion project. India was forced to surrender Farzad-B to Iran, which put the block back up for auction in 2014.

In the last week of July, an Indian delegation composed of Rajiv Mehrishi, the Indian Finance Ministry’s Secretary of Economic Affairs, Ashutosh Jindal, Joint-Secretary in India’s Petroleum and Natural Gas Ministry, and officials from OVL visited Tehran to press New Delhi’s case for developing the Farzad-B gas field. Jindal had lead an earlier delegation that met with Iranian officials in mid-April only to see Tehran turn down their offer in early May. The July delegation that included Economic Affairs Secretary Mehrishi apparently included discussions of how New Delhi would expedite payment of the $8.8 billion debt it owes to Islamic Republic for crude oil purchases during the sanctions regime.

On August 13, 2014, Iran’s Press TV reported that Biswajit Roy, the business development director Oil India Ltd., one of OVL’s two partners in the original Farzad-B development project, claims that the Iranian Petroleum Ministry gave a verbal commitment that Tehran would award Farzad-B’s development to the OVL-led consortium. Roy was part of the July delegation that visited.

If true, the news may signal the beginning of an overall comeback in India’s strategic energy relations with Iran. As the former managing director of OVL R. S. Butola explained in a mid-July article in the Indian newspaper Business Standard, “Now, it is not easy to get the block back. It has to be well played, both by the companies and at the diplomatic level.” The news also bodes well for India’s efforts to secure the Iran-Oman-India pipeline, reversing the economic and strategic setbacks India suffered from its withdrawal from the Iran-Indian-Pakistan pipeline.

Similar to the Farzad-B development project, India also abandoned the Iran-Pakistan-India pipeline project in 2009 under pressure from Washington. Although Iran built its section of the pipeline to the Pakistani border, the fate of what became simply the Iran-Pakistan (IP) pipeline remained in limbo – that is, until China revived the IP pipeline by agreeing to construct most of Pakistan’s portion. Less than three weeks after the April 2, 2015 Framework Agreement between Iran and the P5+1 nations over Iran’s nuclear program, Beijing signed an agreement with Islamabad to construct the bulk of the Pakistani segment of the IP pipeline, from Pakistan’s Chinese-built Gwadar port to Nawabshah, where it can join Pakistan’s domestic gas distribution network. Pakistan has promised to construct the remaining 80 km of the pipeline from Gwadar to the Iranian border once sanctions end.

The IP pipeline agreement is part of a $46 billion infrastructure package to establish the China-Pakistan Economic Corridor (CPEC), extending from the Chinese-administered Gwadar port on Pakistan’s Indian Ocean coast to China’s westernmost city Kashgar (Kashi) in Xinjiang. A subsidiary of the state-owned China National Petroleum Corporation will construct the pipeline financed by a $2 billion Chinese loan, covering 85 percent of the construction cost.

For China, the IP pipeline is an energy geopolitics masterstroke, advancing China’s Silk Road Economic Belt and Maritime Silk Road initiatives (collectively termed “One Belt, One Road,” or OBOR). Most critically, the IP pipeline potentially can be extended to China’s western border, allowing for the transport of Iranian gas via Pakistan to China’s vast northwestern province of Xinjiang. Home to the restive Uighur minority, Beijing needs reliable gas supplies to rapidly develop the province to secure its integration within China and to establish it as China’s OBOR gateway to Central Asia.

Far from standing idly by and watching Beijing orient the flow of gas exports from a post-sanctions Iran to China, New Delhi is responding with a grand initiative of its own called the International North-South Transit Corridor (INSTC), whose centerpiece is India’s construction of Iran’s first deep-water port to meet modern shipping standards at Chabahar, 72 km west of Gwadar. Another project that India had suspended under U.S. pressure, India has recommitted itself to the construction of the Chabahar port along with road and rail routes running north through Iran and Afghanistan to create the most cost-effective transportation corridor for European-Indian Ocean trade. Compared to the conventional Indian Ocean-Europe transport route through the Red Sea, Suez Canal, and the Mediterranean Sea, the Chabahar-based INSTC is estimated to be 40 percent shorter and will reduce Indian trade costs by 30 percent.

The Chabahar port is also inextricably linked to India’s receiving piped natural gas imports from Iran, as the port would also serve as the point of origin for the proposed Iran-Oman-India pipeline that would transport the same 11.3 bcm annual volume of Iranian natural gas India was slated to receive from the erstwhile Iran-Pakistan-India pipeline.

The negotiations over India’s development of Farzad-B reportedly include a proposal for swapping gas produced at Farzad with gas produced from other Iranian fields that can be sent to Chabahar and then transported by pipeline to India. On July 25, Alireza Kameli, managing director of the National Iranian Gas Exports Company, told Iran’s Shana Energy News Agency that he was prepared to negotiate a gas export contract with South Asia Gas Enterprises (SAGE) Ltd., which has been at the forefront of developing plans for what it calls the Middle East to India Deep-water Pipeline (MEIDP), connecting Iran to India via Oman.

India’s brightening prospects for returning to the development of the Farzad-B may be an auspicious sign for a new strategic level of cooperation between Iran and India in energy and commercial transportation. Certainly the establishment of a dedicated undersea pipeline for Persian Gulf gas exports to India would fundamentally reconfigure the pattern of energy relationships across the Arabian Sea.

Micha’el Tanchum is a Senior Fellow with the Eurasian Energy Futures Initiative at the Atlantic Council. Follow him on Twitter @michaeltanchum.