US Sanctions on Iran disrupts India's oil imports

By TN Ashok. Dated: 5/10/2019 12:49:22 PM

India has been pushed into a major quandary with the US President Donald Trump's flat refusal to waive the sanctions on Iran for another 180 days beyond May one this year, thus, making India and eight other countries scamper for alternate supplies to meet its growing demand for oil as a fuel to keep its lifeline going. So, India has to stop importing crude oil from Iran following the US move (promised by the previous Obama govt) to end sanction waivers, and will use alternate supply sources such as Saudi Arabia to make up for the lost volumes.
India is also looking at newer territories such as Guyana, in South America, where new oil fields have been discovered as also West Africa, such as Mozambique, where also there is great promise of plentiful oil supplies. India's plan is twofold, one to make up for the short supply by disruption in oil supplies from Iran following US sanctions and second to create newer overseas oil assets to strengthen its energy security profile. That India will use ONGC Videsh to set up oil exploring infrastructure and refine them at IOCL facilities and export them to 3rd countries on revenue sharing basis with these countries is the distinct possibility.
"Essentially in Guyana, we are looking at whether we can get farm-in opportunities. We are also looking at getting steady supplies and to establish term contracts. Under a "farm-in" contract, an energy firm acquires a stake in a discovered or producing field the lease of which is owned by another firm. Typically, "farm-in" contracts are costlier than those inked for non-discovered fields. Guyana and West Africa fit into the plan perfectly. India does want to use the stealth method like some countries, where Iran dispatches oil to Dubai and these countries buy from the gulf state to bypass US sanctions and still maintain its supplies as also remain above board. But this 3rd country import of oil from Iran is fraught with danger as US intelligence agency CIA is using satellites and ground agents to discover how such oil supplies are routed from Iran to Dubai. Other international Intel agencies are also assisting the US in this exercise.
Until now, the Indian energy firms have invested around $38 billion to buy equity energy stakes in 28 countries, including Australia, Azerbaijan, Bangladesh, Brazil, Canada, Indonesia, Iran, Iraq, Libya, Nigeria and Russia to create overseas assets to build up a strong energy security for the nation.
India could cut US shale import to offset Iran loss: Sources in government claimed that said that once the US sanctions on Iranian oil kicked in, India's future purchases from alternative energy suppliers will be finalised keeping in mind the country's energy and commercial security. The question that faces the government and policy planners is that how does India make up the shortfall in supply and at what cost. India, the world's third-biggest oil consumer, meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports. Iran is the 4th largest exporter of crude oil to India. Domestic oil and natural gas production have been declining since the nations' inability to match the energy needs of the growing economy.
India is Iran's top oil buyer after China. In 2018-19, it imported 23.5 million tonnes from Iran; in the previous year, almost 10% of its total 220.4 million tonnes of crude imports was from Iran. Iran was the fourth largest supplier of oil to India in 2018-19, and other suppliers may not have the capacity to provide the quantity Iran provided, forcing India to look for multiple sources.
To answer the question at what cost alternate supplies go up, one has to see how the current upsurge in the global benchmark crude oil rates, coupled with a depreciating Rupee against the Dollar and increased reliance on imports, is likely to push India's crude oil import bill higher by a whopping 42% per cent to $125 billion or Rs 881,282 crore in the current financial year ending March 2019.
A detailed analysis on the subject conducted by a research team of a leading economic daily in India shows that this would be the highest-ever annual cost of oil imports for India in the recent past. "India's crude oil import bill is estimated to increase by 42% from $88 billion in 2017-18 to $125 billion in 2018-19 considering the Indian basket crude oil price of $77.88/bbl. and $/Rs exchange rate of 72.22 for the remaining part of the year," Petroleum Planning and Analysis Cell (PPAC), the oil ministry's technical arm, has said in a report.
In volume terms, the country's crude oil imports are set to rise 3.72% to 228.6 MT in the current fiscal from 220.4 MT last financial year. The crude oil import bill during the first six months (April-September) of the current fiscal had increased 56.11% to $58.7 billion. Oil imports rose 5.80% to 113 Million Tonne (MT). Before this, the highest peak of annual crude oil imports for India was witnessed in 2013-14 when the Indian basket of crude oil averaged $105.52 per barrel. The country had imported 189.23 MT of crude oil then, valued at Rs 864,875 crore.
As a free market operates in India, the retail prices of petrol and diesel are directly impacted by international fuel prices rise disrupting the dynamics of the oil supply-demand. Increase in crude oil and petroleum product prices, coupled with the increase in taxes levied by the centre and state governments, have resulted in domestic fuel prices breaching record highs in the last two months.
India accepts US demand on Iran sanctions : India has said the country is "sufficiently prepared" to deal with the impact of the US decision to curtail the temporary exemption from sanctions on the purchase of Iranian oil. Government mentioned that "a robust plan" has been put in place for adequate supply of crude to refineries.
India's oil and gas minister Dharmendra Pradhan has said that the country plans to increase imports from major oil producing nations other than Iran, indicating that it will be acceding to the U.S. plan to reduce Iran's oil exports to zero.However, Ratings agency ICRA has estimated that stopping oil imports from Iran could cost Indian refineries as much as ?2,500 crore.
Current account deficit: Analysts point out that higher crude oil prices will widen the trade deficit and current account deficit, as import costs goes up with crude oil, and that the quantity imported tends to be quite stable in general. According to CARE, a permanent increase in crude oil prices by 10% under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5% of GDP.
How the INR ( Indian National Rupee) is affected if the trade and current account deficits were to widen. Any increase in the import bill would pressure the rupee's exchange rates with major international currencies such as the USD, British pound, French Franc with whom we have major trade relations.
The Trump Administration wants to isolate Iran with its sanctions on the nuclear issue and the US decision has so far deprived the regime of more than $10 billion in oil sales. India has also suffered collateral damage as we have an basmati rice for oil barter trade as part of the Indo-Iran bilateral trade relations. Basmati growers and exporters have a major problem on their hands, who have suffered a big shock since 2014 as they invested their surplus earnings in real estate, hoping to ride on the crescendo of rising realty rates, but have actually suffered reverses as the real estate market crashed after the Modi government took over and launched a major anti-black money and anti-corruption drive.
Iran's retaliation: Iran, which is in a heightened state of emotional stress as its run by the clergy, has threatened to close the Strait of Hormuz, a neck of water between its southern coast and the northern tip of the sultanate of Oman. The Strait of Hormuz lane is a major waterway through which a third of the world's seaborne oil passes every day. Iran had made the threat earlier also this strategic area has seen several flashpoints erupt in Tehran's fraught relationship with the West over the years, the study points out. Though United States expects to reduce Iran oil imports to Zero, in reality it will not actually reach zero. "China will continue buying Iranian crude; perhaps as high as several hundred thousand bpd, to save face, oil analysts point out. China may barter for the oil or wall off banks to handle transactions in its currency renminbi. India may likely take a similar position, to bale Iran out of a major crisis, even as other countries stop Iran supplies under US sanctions, oil analysts say.
The Hormuz threat of Iran could threaten Saudi exports as the route is used for most oil shipments from the kingdom. The US has in a statement warned that if Chinese imports from Iran do not drop quickly, the US sanctions could be applied to Beijing's central bank, the People's Bank of China.
A major collateral damage that could be caused by Iran closing the Hormuz straits could have a global effect as International energy markets are critically dependent on reliable transport. Over 60% of the world's petroleum and other liquids production move on maritime routes. Blocking the maritime choke points can lead to huge increases in energy costs and world energy prices.
Choke points are also the places where tankers are most vulnerable to pirates, terrorist attacks, political unrest, war, and shipping accidents, analysts warn adding, If India is to protect its interests in the ever-volatile global oil market, the government will need to take steps to diversify its supplier base and also work towards increasing domestic sources of energy supplies. Opening up the renewable energy sector for more investments will also help avoid over-dependence on oil from the global market to meet the country's rising energy needs.
All in all, the US-Iran stand-off could further complicate the international oil scenario if US persists with its Oil sanctions against Iran and Iran closes the Hormuz straits in retaliation. In short the new government that comes in June in India this year, has a major problem to solve, the first one, the OIL CRISIS.



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