US Sanctions on Iran Puts India in Catch-22 Situation

New Delhi (Sputnik) — The Indian oil firms importing heavy crude from Iran could see a fall in profitability following US-imposed financial sanctions on Iran, according to Ravi Singh, a research analyst at India's leading financial services conglomerate Karvy. India's private oil firms like Essar Oil and Reliance Industries heavily dependent on the heavygrade Iranian oil, which will now become difficult to import after the imposition of sanctions.

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"The private firms of India are inclined towards Iranian crude due to various advantages such as lower shipping cost, a credit period of 90 days as compared with other Gulf countries at 30 days which indirectly increases the gross refinery margins of refiners," Ravi Singh, a research analyst at Karvy, told Sputnik.

Gross refining margins (GRMs) are the difference between the price of crude oil and the average selling price of refined products. India's private refiners have GRMs as their complex refinery are capable of processing heavy or very low-quality crude that can be sourced cheaper from Iran than light or good quality crude and be processed into fuel.

The Indian government had committed to scaling up Iranian crude imports this February on the promise of better terms. India expected to double its crude imports from Iran up to 396,000 bpd (barrel per day) in 2018-19 from about 205,000 bpd in 2017-18, as per the country's Petroleum Planning and Analysis Cell (PPAC). Most of this increase was expected from  private refiners.

While Essar Oil aimed to buy 120,000 bpd of oil from Iran in 2018-19, Reliance has not disclosed the amount of crude it aimed to receive from Iran.

However, with sanctions imposed on Iran, private refiners are now banking their hopes on other Gulf countries to enhance supplies. However, there is a strong likelihood of Saudi Arabia increasing the price of its supplies to Asia.

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"The market is expected to get more competitive in terms of heavy grade crude prices, which supply most of India's private refiners. Although the minimal effect could be noted over the profitability of refineries, the current competitiveness among other supplier nations will fill up the supply gap. Also, the private players in India are [prefer] spot agreements rather than few long-term contracts minimizing the impact on their profitability," Ravi Singh added.

India has doubled its crude imports from Iran in the last three years since the sanctions on Tehran were lifted by former US President Barack Obama in 2015, while Iran has become the third-largest supplier of crude oil to India. The repercussion of the sanctions will not only limit the energy sector, but also threaten India's attempt to bypass Pakistan to connect Central Asia and Afghanistan through the Chabahar port of Iran. India and Iran have also made significant progress towards inking a long-pending deal on the Farzad B oil block, which may be delayed once again due to the sanctions.

"India's oil imports from Iran will be adversely impacted, mainly due to global insurance, banking, and shipping constraints that will come into play soon due to the sanctions," Narendra Taneja, India's leading energy expert, told Sputnik.

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The analyst expects a sort of arrangement between India and Iran like the one that was put in place during the last sanctions.

"There will definitely be an effort in that direction since Iran is strategically an important country for India in terms of bilateral trade and in the context of Afghanistan and central Asia, but given the size of the American presence in global oil trading, insurance, banking and shipping there will, unfortunately, be many challenges. These sanctions will bring many problems and challenges for India at a time when India needs to deepen its overall bilateral ties with Iran," Taneja added.

Meanwhile, New Delhi cannot afford to turn its back on its commitments with Tehran given China's recent overtures in garnering infrastructure projects in Iran. 

"Post the Joint Comprehensive Plan of Action (JCPOA), there is also the specter of China entering Iran even more aggressively, a move that would haunt India and ensure its choices get even more restricted. Increased pressure on New Delhi to downgrade its ties with Tehran would not only impact Chabahar's future and bilateral trade, but also derail India's carefully calibrated West Asian diplomacy. The Modi government has so far been successful in enhancing its ties with Iran, Israel and the Arab Gulf states simultaneously, partly because the Iranian nuclear deal has eased tensions between the West and Iran," Harsh V Pant,  a distinguished fellow and head of the ORF's Strategic Studies program, wrote Wednesday.

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However, there is a silver lining for New Delhi if the Trump administration does not change the line it had promised last year. "It's our objective to deny financing capacities and to disrupt the activities related to these malign behaviors.  It's not our objective to harm the Iranian people, nor is it our objective to interfere with legitimate business activities that are going on with other businesses, whether they be from Europe, India or agreements that are in place that promote economic development and activity to the benefit of our friends and allies as well," Rex Tillerson, the then US secretary of state had said last October.

The views and opinions expressed by the speakers in this article are those of the speakers and do not necessarily reflect the position of Sputnik.