India, Iran and the IPI pipeline

Rohit Pattnaik, who is a Visiting Scholar at IDSA in Delhi, recently wrote a well-researched piece arguing why India can afford to take a more hardline positon vis-a-vis Iran in the oil pipeline negotiations (“India can drive a hard bargain on the IPI Pipeline“)

Below are some excerpts:

“The general impression is that Iran has gained tremendously from rising oil prices, fuelled by its vast oil wealth. In reality, however, given increased domestic consumption coupled with inefficient usage and subsidies, Iran is actually struggling to produce enough oil and gas for export.

…Though Iran has abundant oil reserves, estimated at around 137 billion barrels, it has not even been able to generate its OPEC quota due to lack of technical expertise and skills. Nothing illustrates this better than the fact that while before the Islamic Revolution Iran pumped 6.1 million barrels of oil a day, today it produces only 3.9 million barrels a day.

…Domestic consumption outstrips supply and Iran has been forced to import US $5 billion worth petrol last year. Its oil imports amount to a third of its energy needs…The government has for the first time started a rationing plan for gasoline to curb inefficient energy consumption.

…Fears about Tehran blockading the Straits of Hormuz and suspending its oil exports are not therefore realistic given that Iran’s economic conditions are not as healthy as assumed. Oil exports amount to between 80 and 90 per cent of state revenue and between 40 and 50 per cent of the budget. Any reduction in revenue would affect social spending and lead to domestic unrest given the high unemployment rates.

…Due to the lack of newer investment opportunities, Iran is now actually a net importer of gas, something it will continue to do until the end of this decade. Tehran has signed a spate of energy deals with Kazakhstan, China and is keen on signing the deal with India for gas to hedge against its vulnerability to sanctions.

…The Indian team involved in price negotiations for the IPI pipeline would do well to adopt a cautious stance in spite of the fact that Pakistan has broken ranks and sided with Iran. The pressure being applied on India to sign an agreement should be resisted and the pipeline, though important, should be put on hold if terms are not favourable.

…Gas from Iran through the IPI pipeline could prove a success story in terms of integration of the economies of the three countries. The pipeline could also be networked with pipelines from Central Asia to deliver oil and gas to India.

However, given the ongoing crisis over Iran’s wish to enrich uranium, it makes sense for India to adopt a pragmatic policy and hedge till the nuclear issue is resolved. Apart from the security of the pipeline in Pakistan, the ability to turn off gas if relations deteriorate between either of the countries cannot be ruled out. Russia turning off gas to Ukraine when bilateral relations nose-dived is a telling reminder in this regard.

As India looks to expand it energy supply base for its rapidly growing economic needs, it will have to increasingly participate in the geopolitical melee to dictate favourable conditions in the oil exporting nations of the world.”