INDIA AND IRAN:

ENERGY RELATIONSHIP
Geopolitics of Energy
ASLESHA DHILLON

 INTRODUCTION
“THIS IS NOT THE SAME IRAN. IT’S A NEW IRAN, A NEW WEST ASIA, WHICH HAS BEEN IGNORED
AND NEGLECTED FOR A DECADE AND A HALF BY INDIA. SO THE SAME MANTRAS ARE NO LONGER
VALID IN A NEW STRATEGIC ENVIRONMENT IN WHICH THE US HAS ALLOWED IRAN TO PLAY A
BIGGER ROLE, AFTER THE P5+1 NUCLEAR DEAL WAS ANNOUNCED."1: FORMER INDIAN
AMBASSADOR K.C. SINGH

There are three main factors that affect India’s relationship with the Iran, namely: a) energy

security, b) India’s domestic Muslim constituency (mainly the Shi’a population) and c) the

Afghanistan situation.2 While the last two issues are significant, energy and economics have

dominated the bilateral relationship of the two states. Iran, a major player in the hydrocarbon

industry, presents both an opportunity and challenge for India. Iran’s hydrocarbons can partly

provide for India’s growing demand for oil and natural gas. However, India’s willingness to

transform its energy ties with Iran beyond purely commercial transactions coincided with its desire

to negotiate a civil nuclear deal with the US. Previously, some of the energy deals between the two

states have halted due to price disputes and technological complications; and some others have

come under international scrutiny and pressure3 The international sanctions against Iran

undermined India’s ability to pursue its energy relationship with Iran. However, as the

international sanctions against Iran have been lifted, new economic and geopolitical opportunities

are created for the Indo-Iranian ties. This paper will first examine the domestic profiles of India

and Iran respectively. Next, the paper will analyze the impact of Iran’s re-entry into the oil market

post, the lifting of the international sanctions for both Iran and India. After that, the paper will

1
Haidar, Suhasani, and Kallol Bhattacherjee. "Modi Likely to Travel to Iran on May 21." The Hindu. The
Hindu, 1 May 2016. Web.
2
Shebonti Ray Dadwal (2012) “India–Iran Energy Ties: A Balancing Act”, Strategic Analysis, 36:6, 930-
940, DOI: 10.1080/09700161.2012.728865
3
P. R. Kumaraswamy (2013) “India's Energy Dilemma with Iran” Journal of South Asian Studies, 36:2,
288-296, DOI: 10.1080/00856401.2013.793646
examine the current energy and connectivity deals with geopolitical, strategic and economic

significance.

DOMESTIC PROFILE: INDIA

India is the third largest energy consumer in the world followed by China and the United States.

The tenth largest economy in the world with a GDP of $2.04 trillion4, India accounts for 18% of

the world’s population. However, it only accounts for 6% of the total global energy use. The energy

consumption in India has almost doubled since 2000 but it accounts for only one-third of the global

average. Moreover, 300 million people in India live in energy poverty while, the remaining

electrified population only have intermittent electricity access. Globally, India is expected to be

the major contributor to the projected rise in energy demand. This is mainly because of its growing

economy and demographic expansion. India’s power sector is heavily dependent on coal as it

accounts for over 70% of generation and is one of the most abundant domestic natural resource.

However, despite having large coal reserves, India is increasingly dependent on imported fossil

fuels.5 India’s proven (very modest) oil reserves

are around 5.7 million barrels and are primarily

located in the western part of the country, namely

in the state of Rajasthan and in offshore areas near

Gujarat and Maharashtra.6 As the domestic

production fails to meet the demand, India was the

Figure 1: Indian Imports of Crude Oil and LNG

4
"The World's Top 10 Economies | Investopedia." Investopedia. N.p., 24 Feb. 2015. Web.
5
"India." U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
6
"India Energy Outlook”. International Energy Agency. OECD/IEA, 2015. Web.
third largest importer of crude oil in 2014. The Middle East was the main source of crude oil

imports to India in 2014-2015, as depicted in Figure 1. However, because of its refining industry

it is also a major exporter of oil products.7 The domestic crude oil production of India, just over

900 thousand barrels per day (kb/d) fails to meet the needs of the refinery capacity of 4.4 mb/d.8

But, the output of the refinery industry is capable of meeting India’s current consumption of oil

products at 3.8 mb/d.9

DOMESTIC PROFILE: IRAN

Iran has the world’s the second largest natural gas reserves and the fourth-largest proved crude oil

reserves. The international sanctions have strongly impacted Iran’s energy sector by impacting the

foreign investment and limiting technology and expertise access to develop their natural resource

capacity. Thus, resulting in a cancellations and delays of upstream oil and gas projects. Moreover,

regardless of the state’s plentiful resources, Iran’s crude oil production has substantially declined

and the growth of natural gas production has also slowed down. According to the Iranian domestic

law any foreign or private ownership of natural resource is prohibited. The state-owned National

Iranian Oil Company (NIOC) is responsible for all oil and natural gas projects.10 According to the

current Iranian oil contract model, International Oil Companies (IOCs) can join only the

exploration and development phases through buyback contracts.11 But Iran is planning to change

the contract and allow IOCs to participate in all phases of an upstream project.12 Iran has 10% of

7
"India Energy Outlook”. International Energy Agency. OECD/IEA, 2015. Web.
8
"India Energy Outlook”. International Energy Agency. OECD/IEA, 2015. Web.
9
"India Energy Outlook”. International Energy Agency. OECD/IEA, 2015. Web.
10
"Iran" U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
11
"Iran" U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
12
"Iran" U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
the of the world’s crude oil reserves of which 70% are located onshore and the remaining are in

the onshore Persian gulf.13 Due to the sanctions, imposed by the United States and European

Union, the exports of Iran dropped from 2.6 million b/d I 2011 to approximately 1.4 million b/d in

2014. India, China, Japan, South Korea, and Turkey are the largest buyers Iranian crude oil and

condensate.14 It is also critical to note that after the sanctions against Iran were lifted in January

2016, India’s oil imports from Iran increased by approximately 21 percent in the month of February

alone and were 50 percent more than the same month, last year.15 India was pressurized by the

West to cut imports from Iran in February 2015 due to the sanctions.

IRAN’S RETURN TO THE OIL MARKET

On 6 January 2016, the nuclear sanctions imposed against Iran were lifted post the certification by

the International Atomic Energy Agency (IAEA) that Iran had achieved its obligations under the

Joint Comprehensive Plan of Action (JCPOA) decided by the six world powers in July 2015.16

The deal has given Iran access to the previously frozen, billions of dollars of assets, in international

bank accounts and will also result in a dramatic increase in the production of Iranian crude oil as

they have committed to reaching pre-sanction levels of production. The return of Iran in the oil

market resulted in prices dropping to a new low. Mohammad Bagher Nobakht, a close advisor to

the Iranian President Hassan Rouhani has stated that other members of Organization of the

Petroleum Exporting Countries (OPEC) should cut production to make space for Iranian oil

13
"Iran" U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
14
"Iran" U.S. Energy Information Administration. EIA - Independent Statistics and Analysis, n.d. Web.
15
Reuters. "21% Rise in India's Oil Imports from Iran in February." The Times of India. Times of India, 3
Mar. 2016. Web.
16
Shebonti Ray Dadwal. “Impact of Iran’s Return for the Oil Market and India.” Strategic Analysis.
Vol. 40, Iss. 3, 2016. <http://www.tandfonline.com/doi/full/10.1080/09700161.2016.1156253>
exports for two primary reasons.17 First, Iran did not make it decisions on the basis of the price of

oil. Second, the sanctions allowed other OPEC countries to increase their markets shares, therefore,

now they should scale back and let Iran have its share in the market.18 The Iranian officials post

the announcement of the deal, stated that following an immediate release of 500,000 barrels per

day, Iran intends to increase their output by one million barrels per day (mb/d) and potentially

resume their pre-sanction levels of 3.5 mb/d within one year.19 Although, there are doubts about

whether Iran can realistically produce such large amounts of oil within a few months after the

removal of the sanctions. First, the oil sector of Iran has suffered a lot of damage during the

sanctions year which according to the Iranian Oil Minister is estimated at $200 billion.20 Second,

the current oil price scenario creates a lot of uncertainties regarding the enormous capital

investment essential to bring Iranian oil and gas to pre-sanction point, especially with companies

cutting back costs in the oil sector. While Iran has signed agreements after the lifting of the sanction

with countries such as China, France and Italy, they are limited to supplying these countries with

energy for a period of time. However, it is important to note that Iran’s main focus at this point is

to regain its market share so it is ignoring the price and the impact on the oil market.

The collapse of oil prices has significantly affected the Gulf states. In the past, Saudi Arabia has

played the role of a swing producer by adjusting their production levels according to the price of

oil. So, if the market was oversupplied and the prices declined, Saudi Arabia would cut production

to balance the market and oil prices and in the case of the market being undersupplied and oil

17
Fred Pleitgen, ‘For Iran, Oil Exports Matter More than Price’, CNN Money, January 27, 2016, Web.
18
Fred Pleitgen, ‘For Iran, Oil Exports Matter More than Price’, CNN Money, January 27, 2016, Web.
19
Shebonti Ray Dadwal. “Impact of Iran’s Return for the Oil Market and India.” Strategic Analysis.
Vol. 40, Iss. 3, 2016. DOI:10.1080/09700161.2016.1156253
20
Mahnaz Abdi, ‘Iran Needs $200b to Develop Oil Industry: Zanganeh’, Tehran Times, February 10, 2016.
Web.
prices rising, Saudi Arabia would increase their production. However, this time Saudi Arabia has

prioritized its market share over its traditional policy of price first. This is because Saudi Arabia

wants to market to force high-cost producers, like the Americans and Russians, to be forced out

and because it did not want to give up its market share to its biggest regional rival Iran. Moreover,

the failure of OPEC to reach any consensus regarding oil production freeze has exposed the failure

of the organization and as a result the member countries are competing with OPEC and non-OPEC

producers for their market share.

So, what impact does the fall in oil prices have for oil-importing countries such as, India? In the

short-term the low oil prices would naturally be beneficial. As India has already seen their oil

import bills decrease by $4.5 billion (Rs.300,000 Crores) in the last fiscal year.21 However, if the

oil prices remain low for longer time, it could create heavy dependence on crude oil imports and

result in economic and financial constraints for countries dependent on oil revenues and their

trading partners. The World Bank, has stated that continued low prices could reduce remittances

from the GCC (Gulf Cooperation Council) countries in the medium to the long term.22 This is a

significant concern for India as approximately 7 million Indian reside in the Gulf countries.

Moreover, the economic and financial constraints can further impact bilateral trade and

negotiations. It is important to note that India’s exports to the GCC countries, that include

petroleum products, have decreased. According to government data, India’s exports to the six GCC

countries have fallen 18.8 per cent during April–November 2015 from $34.35 billion in the

21
Shebonti Ray Dadwal. “Impact of Iran’s Return for the Oil Market and India.” Strategic Analysis.
Vol. 40, Iss. 3, 2016. DOI:10.1080/09700161.2016.1156253
22
Remittances growth to slow sharply in 2015, as Europe and Russia stay weak; pick up expected next
year”, The World Bank, April 13, 2015. Web.
equivalent period the year before, specifically, exports to Saudi Arabia have witnessed the sharpest

fall at 46 per cent.23

However, despite the risks associated with the fall in oil prices, it is imperative to note that the

more Iranian oil on the market, the greater the leverage India has to negotiate with other sellers,

especially Saudi Arabia, its largest crude oil suppliers. Iran’s return to the global community

provides a great opportunity for India and it should advance its stated intentions of strengthening

relations with a post-sanctions Iran. Strategically, politically and economically, India is facing a

huge competition by China as it has signed a $600 billion deal that includes a 10-year oil purchase

plan.24 India on the other hand has delayed its bilateral deals with Tehran, thereby losing the first-

mover advantage. However, India is now returning its focus on energy relations with Iran as India’s

Oil Minister, Dharmendra Pradhan and Foreign Minister, Sushma Swaraj payed two quick visits

to Iran to initiate further progress on the Chabahar port and India’s equity stake in Faraz-B gas

field.

ENERGY AND CONNECTIVITY

Iran’s significance for India primarily lies in its geographic location and a major source of crude

oil and natural gas. Iran controls the entry and exit to the Strait of Hormuz through which large

quantities of crude oil pass.25 Furthermore, Iran also provides an alternative route to India to trade

and commerce with the Central Asian countries. Due to India’s geopolitical position in the

23
Rajesh Pandathil ‘Oil Nears $32/bbl: Don’t Rejoice Too Much; Low Price for Too Long Can Backfire
on India’, First Post, January 11, 2016, Web.
24
Shebonti Ray Dadwal. “Impact of Iran’s Return for the Oil Market and India.” Strategic Analysis.
Vol. 40, Iss. 3, 2016. DOI:10.1080/09700161.2016.1156253
25
Gupta, A. (2012). India can Play a Stabilizing Role in the Region. Indian Foreign Affairs Journal, 7(4),
379-387.
 subcontinent and tensions with Pakistan and China, connectivity to Central Asia via Iran, is a

critical part of its foreign policy for a number of years. The development of Chabahar port, the

International North South Trade Corridor (INSTC) and connection with Zarani-Delagram road in

Afghanistan are important for both India and Iran. However, while none of these projects have

taken off, but there are positive bilateral and diplomatic talks pushing these projects. Iran wanted

India to invest in building the infrastructure for the connectivity in the region but the Indian

companies were hesitant due to the problems arising from the international sanctions.26 However,

this has changed due to the lifting of the sanctions against Iran.

CHABAHAR PORT: The Iranian port of Chabahar located on the Makran coast of Sistan and

Baluchistan province of Iran is located in a very strategic transit location as it intersects with

several significant international

corridors such as: East-West, North

corridors, South corridor and

TRACECA.27 It is often called the

“Golden Gate” to Afghanistan and the

landlocked Commonwealth of

Figure 2:Chabahar and Gwadar Ports in Iran and Pakistan, Respectively. Independent States (CIS).28 The port of

Chabahar has great potential to connect business centers in India (Jamnagar, Mumbai, etc.), Dubai,

26
Gupta, A. (2012). “India can Play a Stabilizing Role in the Region”. Indian Foreign Affairs Journal, 7(4),
379-387.
27
Roy, M.S. (2013) "India and Iran Relations: Sustaining the Momentum." IDSA. Institute for Defence
Studies and Analysis, 20 May 2013. Web.
28
Roy, M.S. (2013) "India and Iran Relations: Sustaining the Momentum." IDSA. Institute for Defence
Studies and Analysis, 20 May 2013. Web.
Central Asia and Afghanistan.29 The port is also close to the key shipping routes that connect Asia

and Europe. Since a feasible transit option via Pakistan is not possible for India, Iran is a critical

transit route to Central Asia and Afghanistan. Therefore, this port also has great strategic and

geopolitical significance for India. India’s Prime Minister Modi, has advocated greater linkages

during a recent visit. Moreover, China’s presence in the region and specifically in the port of

Gwadar in Pakistan (see Figure:2) has pushed India to invest $20 billion in upgrading the Chabahar

port.30 While the talks and discussions regarding this port have been on for decades and have also

stalled many times; India is aiming to move forward and its transport minister wants the port to be

operational by the end of 2016.31 According to BBC, Indian firms will lease two existing berths at

the port and intend to use them as multipurpose cargo and container terminals. 32

GAS PIPELINES: Over the years there have been several pipelines that have been proposed to

be built in the West Asian Region. The latest gas pipeline proposed by Iran is the undersea gas

pipeline to Gujrat, India. The managing director of the National Iranian Gas Export Company

(NIGEC) has stated that negotiations are underway to lay a $4.5 gas pipeline from the Iranian cost

via Oman Sea to Gujrat, India.33 Although India is highly interested in importing gas from Iran,

this pipeline seems highly unlikely due to absence of committed Indian gas buyers and securing

finance for its construction.34 The two other pipelines, that have been under discussions over the

29
Roy, M.S. (2013) "India and Iran Relations: Sustaining the Momentum." IDSA. Institute for Defence
Studies and Analysis, 20 May 2013. Web.
30
"Iran, India to Expand Energy Ties during Post-sanctions Era." Mehr News Agency. N.p., 10 Apr. 2016.
Web.
31
Madan, Tanvi. "India and the Iran Deal." The Brookings Institution. N.p., 20 July 2015. Web.
32
"How Iran's Nuclear Deal Affects India." BBC News. N.p., 16 July 2015. Web.
33
Niayesh, Umid. "Iran-India Undersea Gas Pipeline Unrealistic." TCA Regional NewsDec 09
2015. ProQuest. Web. 8 May 2016 .
34
Niayesh, Umid. "Iran-India Undersea Gas Pipeline Unrealistic." TCA Regional NewsDec 09
2015. ProQuest. Web. 8 May 2016 .
years are the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline and Iran-Pakistan-India

(IPI). In December, 2015 Turkmenistan began the construction of the ambitious and long-delayed

TAPI pipeline, worth $7.6 billion.35 This pipeline is expected to supply 33 million cubic meters of

gas per day to India and if finished on time it is expected to become operational by the end of

2019.36 Albeit, while the construction of the pipeline has commenced, the political and regional

conflicts in the region prove to be a major threat for the successful operation of the pipeline.

CONCLUSION

In light of the steady economic growth, the Indian government has prioritized energy security as a

key foreign policy concern to maintain the socio-economic development critical to India’s rise in

the global system. With Iran’s re-emergence in the oil market due to the international sanctions

being lifted, India has found a reliable and geopolitically beneficial energy partner. Moreover, Iran

is seeking to regain its pre-sanction market share and India presents a very good market for Iran.

India’s energy needs, Iran’s market share, connectivity to Central Asia and regional complications

have shaped the Indo-Iranian relationship so far. India is making a conscious effort of developing

the energy relationship with Iran. A case in point: just prior to Modi’s visit to Iran, the central

banks of India and Iran have reached an agreement to use European Banks to process $6.4 billion

pending oil payments to Tehran.37 For India, Iran continues to remain important for geopolitical,

strategic, economic and security reasons. However, it is critical that India is able to maintain

separate bilateral relationships with Saudi Arabia and Iran, as they are both major oil suppliers to

India but also regional competitors.

35
"Iran-India Energy Cooperation Opens New Horizons." Al-Monitor. N.p., 14 Jan. 2016. Web.
36
"Iran-India Energy Cooperation Opens New Horizons." Al-Monitor. N.p., 14 Jan. 2016. Web.
37
Verma, Nidhi. "India, Iran Agree to Clear $6.4 Billion in Oil Payments via European Banks: Minister."
Reuters. Thomson Reuters, 06 May 2016. Web.
 BIBLIOGRAPHY

1. "How Iran's Nuclear Deal Affects India." BBC News. N.p., 16 July 2015. Web.
2. "India Energy Outlook”. International Energy Agency. OECD/IEA, 2015. Web.
3. "India." U.S. Energy Information Administration. EIA - Independent Statistics and
Analysis, n.d. Web.
4. "Iran-India Energy Cooperation Opens New Horizons." Al-Monitor. N.p., 14 Jan. 2016.
Web.
5. "Iran, India to Expand Energy Ties during Post-sanctions Era." Mehr News Agency. N.p.,
10 Apr. 2016. Web.
6. "Iran" U.S. Energy Information Administration. EIA - Independent Statistics and
Analysis, n.d. Web.
7. "The World's Top 10 Economies | Investopedia." Investopedia. N.p., 24 Feb. 2015. Web.
8. “Remittances growth to slow sharply in 2015, as Europe and Russia stay weak; pick up
expected next year”, The World Bank, April 13, 2015. Web.
9. Fred Pleitgen, ‘For Iran, Oil Exports Matter More than Price’, CNN Money, January 27,
2016, Web.
10. Gupta, A. (2012). India can Play a Stabilizing Role in the Region. Indian Foreign Affairs
Journal, 7(4), 379-387.
11. Haidar, Suhasani, and Kallol Bhattacherjee. "Modi Likely to Travel to Iran on May
21." The Hindu. The Hindu, 1 May 2016. Web.
12. Madan, Tanvi. "India and the Iran Deal." The Brookings Institution. N.p., 20 July 2015.
Web.
13. Mahnaz Abdi, ‘Iran Needs $200b to Develop Oil Industry: Zanganeh’, Tehran Times,
February 10, 2016. Web.
14. Niayesh, Umid. "Iran-India Undersea Gas Pipeline Unrealistic." TCA Regional NewsDec
09 2015. ProQuest. Web. 8 May 2016.
15. P. R. Kumaraswamy (2013) “India's Energy Dilemma with Iran” Journal of South Asian
Studies, 36:2, 288-296, DOI: 10.1080/00856401.2013.793646
16. Rajesh Pandathil ‘Oil Nears $32/bbl: Don’t Rejoice Too Much; Low Price for Too Long
Can Backfire on India’, First Post, January 11, 2016, Web.
17. Reuters. "21% Rise in India's Oil Imports from Iran in February." The Times of India.
Times of India, 3 Mar. 2016. Web.
18. Roy, M.S. (2013) "India and Iran Relations: Sustaining the Momentum." IDSA. Institute
for Defence Studies and Analysis, 20 May 2013. Web.
19. Shebonti Ray Dadwal (2012) “India–Iran Energy Ties: A Balancing Act”, Strategic
Analysis, 36:6, 930-940, DOI: 10.1080/09700161.2012.728865