Iran And India Expected To Seal $25bn Gas Deal

Jo Johnson, The Financial Times:

Iran on Monday was expected to sell India a significantly smaller-than-expected amount of liquefied natural gas in a $25bn multi-year deal that highlights the tough competition New Delhi faces from Beijing in securing energy supplies to fuel its economic growth. READ MORE

The deal will also be a preliminary test of US sanctions policy ahead of an imminent decision by India and Pakistan over whether to proceed with a separate $4.5bn gas pipeline to Iran, a project that Washington vigorously opposes and that could expose them to a backlash in the US Congress.

Under the terms of the expected agreement, a consortium of Indian firms will purchase 5m tonnes of LNG per annum for 25 years from the second half of 2009-10, rather than the 7.5m secured in a preliminary deal announced in January.

The combined appetites of the two Asian giants are pushing up global energy prices, with India and China moving the market against themselves as they compete to lock up long-term contracts with suppliers.

“We have been insisting that the LNG quantity be raised to 7.5m tonnes. ... We have to wait for the outcome of my talks with Iranian Oil Minister Bijan Zanganeh,” India's petroleum Minister Mani Shankar Aiyar said on Monday.

India had in addition been seeking to secure a fixed price contract for the long-term gas purchase from Iran, but has been obliged to accept a deal that will see the price largely pegged to that of Brent crude, subject to a ceiling of $31 per barrel.

“India has been asking for more, but Iran is insisting it will only sell the rest at a market price. They are adamant because they know India needs gas and that there's a scarcity of resources,” said Rajat Kapur of Petrowatch, an oil & gas newsletter in New Delhi.

The Iran Libya Sanctions Act 1996 says it is US policy to deny Iran the ability to support acts of terrorism or buy weapons of mass destruction by limiting “its ability to explore for, extract, refine, or transport by pipeline its petroleum resources.”

US diplomats on Monday said the act was unlikely to apply to a commercial deal of the type signed on Monday. “It gets a bit fuzzy. Generally, ILSA would apply more for infrastructural investments in refining or transportation capabilities,” one said.

For Indian policymakers such as Mr Aiyar, who is sceptical about US foreign policy, ILSA is at best a secondary concern to his pursuit of the national interest. With the share of gas in Indian energy consumption set to treble to 20 per cent by 2025, securing new sources is a priority.

The same is true for oil. India imports about 70 per cent of its crude, but this will rise to 85 per cent in 20 years. Per capita consumption of oil in India is already roughly one-third of the global average and one-fifth of the level in the US, and continues to rise.

Gail, the Indian state-run gas utility will market 40 per cent of the Iranian gas imported under the deal, Indian Oil Corporation (IOC) 35 per cent and Bharat Petroleum Corporation (BPCL) the remaining 25 per cent.