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Iran-India logistical cooperation set to jump amid scaled-back energy ties

India is well-versed in the game of balancing ties with Iran and the United States and is set to use the current situation over sanctions to promote logistical cooperation with Tehran while limiting oil imports from Iran.

Amid reports of detailed talks between the United States and India to cut New Delhi’s oil imports from Iran, Indian refiners are reportedly moving to reduce their crude loadings from the Islamic Republic. Yet, India has also taken the step of allowing its state refiners to use Iranian tankers and shipping insurance ahead of the re-imposition of US sanctions targeting Iranian oil exports and banking on Nov. 4. Given these mixed signals, consideration of the historical, technical and political dimensions of the sanctions issue is imperative to understand what likely lies ahead.

If history is any indicator, India will not deprive itself of the benefits it stands to extract from the current situation. During the previous round of US sanctions on Iranian oil exports (2011-15), India maintained reduced oil imports from Iran. It greatly benefited from the situation largely due to an arrangement in which it withheld payments for a large portion of oil purchases for years. Of note, Iran was at the time subject to an international embargo, under which its oil exports plunged to less than 900,000 barrels per day (bpd). In contrast, the current sanctions are unilateral, and many important actors have clearly indicated that they will not implement them. Even ignoring differences between the past and forthcoming sanctions regimes, India still stands to gain similar benefits. Indeed, New Delhi knows this game and plays it well.

Iran needs its second-largest and irreplaceable oil customer, and the United States needs its biggest partner in Asia, so both Tehran and Washington will tolerate a little frustration in their relations with Indian. As one example, the United States recently declined to impose sanctions on India over its purchase of the Russian S-400 anti-aircraft missile system, as it had been threatening to do.

Although it is unlikely that India will drop Iranian oil imports altogether, Tehran should bear in mind that India is capable of making unexpected decisions. The most relevant example is India voting against Iran at the International Atomic Energy Agency’s Board of Governors’ meetings in 2005, 2006 and 2009. Some observers in Iran and India viewed this as New Delhi “selling out” to Washington by taking a harsh stance on Iran’s nuclear file to promote its own nuclear dealings with the United States. The votes generated political turmoil in India then, and today for some observers it raises questions about the independence of New Delphi’s foreign policy.

There are also technical issues that could preempt the US goal of completely stopping Indian oil imports from Iran. India imports around 4.5 million bpd to feed its vast network of refineries. Depending on the season and political landscape, Iran accounts for some 400,000 to 700,000 barrels of that total per day. Most of India's refinery network consists of state-owned or state-controlled refineries calibrated for specific types of crude oil. It would be costly and time-consuming, if not impossible, for the refineries to switch to different types of crude oil. Moreover, differences in crude oils' density and sulfur content can affect the quality and volume of the petroleum products.

Thus, absent Iranian oil, the only reasonable option for India would be to replace its refineries’ current feedstock with a similar type of oil, like that produced in Iraq, Saudi Arabia or Kuwait. Many analysts, however, believe OPEC members lack the production capability to replace Iranian oil. Indeed, analysts predict that if as expected Iran’s oil exports plunge by 1 million bpd as a result of US sanctions, crude prices could jump to $85-$90 per barrel. This scenario combined with Iran’s lucrative offers to its buyers — such as considerable discounts as well as offering CIF (cost-insurance-freight) terms instead of FOB (free-on-board) terms — makes the options for its customers clearer.

Simply put, an Indian state-owned refinery like Mangalore, which works with Iranian crude, has the option of either continuing to buy Iranian oil and receiving it at its port or obeying US sanctions and buying FOB crude from other suppliers, most of them farther afield than Iran, and simultaneously accepting the risk of increasing global crude prices. This line of reasoning was reflected by an anonymous senior Indian official who told journalists after the Sept. 6 India-US 2+2 summit in New Delhi, “[It is] clear that these are commercial decisions, dependent on how competitively oil is priced and on the requirements of our refineries.” The Indian government also faces domestic issues, including the danger posed by higher energy prices in the form of inflation as well as strains on state accounts and finances at a time when the rupee is experiencing unprecedented lows.

Of course, the argument above ignores the risk of US sanctions actually being imposed on India’s petroleum industry. Several signs suggest that Washington intends to deal with the issue more cautiously than that. Indeed, during the 2+2 summit, US Secretary of State Mike Pompeo denied that the purpose of his trip was to convince India to stop buying oil from Iran. Moreover, whenever he or other high-level US officials have addressed the matter, they have said that the United States will consider sanctions waivers where appropriate and that their aim is “not to penalize a great strategic partner like India.” Adopting such a tone does not sound like an administration truly firm on the matter.

Mindful of all the components of the situation, one can reasonably infer that Iranian oil exports to India will likely not remain fully intact but will also not drop to zero. To the extent that India manages to find an equivalent supplier to switch to, it would replace a certain amount of Iranian oil and get a green light from the United States to continue importing the rest from Iran. In the grander scheme of things, Iran could actually benefit from this reduction as well.

Indeed, India’s negotiations with the United States on Iran have apparently not been limited to Iranian oil exports. Iranian Minister of Roads and Urban Development Abbas Akhoundi, on a visit to India concurrent with the 2+2 summit, said on Sept. 7 that Tehran will be handing over management of the Chabahar port to its Indian partner within a month. Operations at the southeastern Iranian port — a key initiative that connects landlocked Central Asia to open waters and provides India with a route to Afghanistan that bypasses Pakistan — had halted even before the United States withdrew from the Iranian nuclear deal on May 8. In this vein, it is worth bearing in mind that Iran as recently as last month had criticized India for not fulfilling its investment commitments to the project.

Accordingly, that the announcement of a breakthrough on Chabahar was made while Iranian and US officials concurrently visited India could signal a nascent compromise between the United States and India. Indeed, such a compromise cannot be viewed in isolation from Iranian oil exports, because even a partial Indian reduction in oil imports from Iran could have provided leeway for bargaining over the bigger issue of Chabahar. Hence, as the long-overdue Chabahar project appears set to come to fruition, Iran must think twice before frowning upon a reduction in Indian oil imports.

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