Differences between Iran and India over development of the ONGC Videsh Ltd (OVL)-discovered Farzad B gas field have been resolved, Iran’s Oil Minister Bijan Zangeneh said following a meeting with his Indian counterpart Dharmendra Pradhan on the sidelines of last week’s International Energy Forum in New Delhi. According to Mr. Zangeneh, Indian energy companies are going to submit an improved development plan for the Persian Gulf field within the next two months. Contrary to a former $11bn-worth proposal, which involved expenditures for both development of Farzad B and construction of a gas liquefaction facility, from where the converted gas would be shipped to India, and which was deemed overly costly by the Iranian authorities, OVL has this time come up with a $3-4bn offer. Having been forced to redo the math of the investment, in order to be granted the field’s development rights, OVL will most likely have to abandon the idea of an LNG plant and instead focus exclusively on upstream activities, allowing Iran to deal with the export arrangements. Iran has reportedly agreed with OVL to have natural gas from Farzad B delivered to a landfall point on its territory, so that the expensive LNG option would be automatically left out of consideration. In this way, Indian firms will only have to spend on the upstream development, whose overall cost they wish to reassess by drilling an appraisal well -another matter of contention during last year’s negotiations with Tehran. However, the rate of investment return, revised by Iran from 15% to just 5-6%, continues to divide the two sides despite the apparent optimism exuded by Mr. Zangeneh’s statements in New Delhi.
Farzad B, discovered in the Farsi block and declared commercial by an OVL-led consortium (also including Oil India and Indian Oil) about ten years ago, has been the cause for the severance of oil ties between the two countries since the past year. OVL, who has so far invested more than $80M on a field with estimated recoverable gas reserves of 12.8Tcf, had to interrupt operations in 2012 because of the Western sanctions imposed on Tehran over its uranium enrichment program. OVL’s return to the country after adoption of the 2015 nuclear accord was accompanied by the aforementioned technical plan and financial proposal, that were later rejected by Tehran. In a snub to India, Iran in June 2017 inked a pact with Russia’s Gazprom for the Farzad B development. Nevertheless, it has always kept the door open for awarding development rights to the Indian partners, while awaiting Gazprom’s financial proposal for Farzad A, Farzad B, North Pars and Kish gas fields. In response to Tehran’s refusal to concede exclusive rights to OVL, India decreased, in July 2017, its purchase of Iranian oil by 16.3%, compared with a month earlier, to 414.9kbbl/d. At the time, Oil Minister Zangeneh had assured that Iran is not worried by this fall in imports by India and that the Islamic republic did not intend to conclude unprofitable deals under threat.
In light of an emerging settlement of the Farzad B issue, there might also be room for the restoration of normal climate in the Iran-India oil relationship. In the current Iranian year, that started in March 2018, India’s four state-owned oil refineries are going to double imported volumes of Iranian oil (396kbbl/d vs 205.6kbbl/d received throughout the previous calendar year), benefiting from the discounts given by Iran to its second most important oil client after China, in competition with neighbor exporter and regional foe Saudi Arabia. Serving as a typical example of energy-deficient country, along with China and Pakistan, India’s oil imports are projected to keep growing as a result of the high demand that will need to be covered in the sectors of petrochemicals and transport. Thus, the vulnerability of the domestic economy to the oil price volatility will be intensified, in the opinion of the International Energy Agency. It is no wonder that India and China have decided to explore the possibility of jointly bargaining for crude oil in an attempt to secure better prices and abolish the so-called “Asian premium”. It should also be borne in mind that India’s petroleum self-sufficiency has dropped to 17.9% of total consumption in the last fiscal year (April-February 2016-2017), while the 32.642Mt of crude output achieved from April 2017 until March 2018 represents a further 1% decline of the above percentage, marking a record seven-year low. Still, India seems determined to make things right by attracting bidders for its “not so glorious geology”, in the words of Oil Minister Pradhan. This is why it recently launched the first auction for some 55 exploration blocks spread across the country under a new licensing regime that replaces old rules which used to put burdens on the interaction between the government and the energy industry.
Under these circumstances with respect to India’s energy self-sufficiency and import pricing, it is made clear that Iran is not a producer New Delhi can afford to lose. A potential agreement on Farzad B, providing that the two states find common ground on the cost of the upstream investment and the return rate, will deprive Gazprom, who is also planning large-scale spending on Iran’s oil and gas sector under MoUs signed with NIOC, of a promising field. Moreover, it will contribute to a boost of Iranian oil exports to India, on condition that US sanctions are not renewed any time soon. With a series of pending investments in the development of Iranian fields (including Farzad B and Susangerd), as well as with its involvement in the practically frozen Iran-Pakistan-India pipeline project, that was thought of as a regional game changer before the outbreak of the Yemen war, India aspires to control its own energy base in Iran, in coexistence (and in geopolitical confrontation) with the US and Western countries also wishing to do business in the region. For the moment, one has to wait and see whether the imminent wave of new US-EU sanctions will actually manage to shut the spigot of relatively cheap crude to the energy-thirsty country.
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