India has to move fast for talks with Iran to be fruitful

Hidden behind the heat and dust of possible Greek exit from Euro common currency or resounding fall of Chinese stock, diplomats and Foreign Ministers of a select band of countries had been working almost for a fortnight in a Vienna hotel to arrive at a crucial agreement which could change the global oil market drastically. Not that the talks were smooth or linear.

It was tortuous to say the least, going by the informal leaks since. At one point, these were breaking down and somewhat saved by shouting, threats and counter-threats. A report suggests that in the penultimate day to signing of the agreement, the whole hotel was ringing with raised voices in the closed negotiations room. These were manifestations of frayed nerves in course of detailed and complicated bargains between Iran, on one side, and six major powers on the other.

Although not one of the negotiating countries, the agreement between Iran and major powers ending former’s nuclear programme in return for end of sanctions and Iran’s isolation, could be of immense importance for India for not only oil, India can stand to gain on access in several critical areas.

Foreign Ministers of the UN Security Council, Permanent Members, plus another few, were negotiating with Iran for agreement on its nuclear programme. Iran is facing economic sanctions for its activity in enriching uranium – an essential element used for making nuclear bombs.

Uranium is also used in nuclear power generation accelerators. Thus, while Iran claims that it was enriching uranium for peaceful purposes, US and others alleged Iran was doing this for acquiring nuclear weapons. Hence, the latter imposed sanctions on the country. The sanctions on Iran imposed for the last twelve years have been hurting the country’s development and growth. It also forbade countries to trade with Iran and have financial arrangements with the country. Above all, the sanctions curtailed Iran’s ability to sell its oil and gas openly in the world markets. Thus, the sanctions not only hurt Iran economy, it also limited supply of oil and gas in the global markets as well.

With the agreement, it should be possible for Iran to sell oil and gas openly in the world markets.

Of course, the background nuclear talks have been going on for months now, but these could reach the final critical stage only now when the Foreign Ministers themselves were sitting across the table in Vienna. It is not as if following the agreement, sanctions would be immediately withdrawn on Iran and the country would be free to sell its oil and gas in global markets. The process would take months to really solidify and be implemented.

The two sides would watch each other and the major powers promise to track how Iran gives unfettered access to its nuclear plants to international observers and inspires trust. The major powers insisted on having a provision that sanctions would kick in if Iran is found truant. On the other hand, US legislators have to approve it as well. But despite the caveats, the agreement remains as important when China and US opened to each other with President Nixon meeting President Deng.

Iran is the second largest producer of oil after Saudi Arabia. It has the second largest deposits of natural gas after Russia. Hence, the importance of the outcome. Iran has reportedly some 35-40 ships ready with oil cargo which could more readily flow into the global markets. As for long term supplies, these will not flow for years as Iran’s oil field assets did not receive any investment worth the name for almost two decades now. Only after the oilfields are rejuvenated and brought back to health, experts point out, that sustained oil supplies could come. Similarly for the gas fields, which really need to be developed now.

Anticipating the successful conclusion of the nuclear talks, Big Oil has arrived around Iran. When Iran was completely isolated after imposition of sanctions, the largest oil and gas companies had to withdraw from the country. Oil companies’ chief executives are reportedly making a beeline to meet Iran’s Oil Minister in his hotel room in Vienna. They were lining up billions of dollars for investment in Iran oil and gas fields.

But there are still sticking points. Iran follows a different regime for award of oil and gas exploration and production contracts which are at a variance from standard global practices. Iran so far followed a production sharing contract with oil companies under which the oil produced would be compulsorily have to be handed over to the state by virtue of a buyback clause. Oil and gas companies had opposed this contract and demanded contracts in line with global practices.

The standard format, however, is a cost sharing contract under which the risks are shared between the operator and the awardee government. The costs of developing a field are shared and only after the costs are recovered, the profit from petroleum sharing between operator and government starts.

Iran Petroleum Ministry is currently working on reformulating its oil contracts and dropping the compulsory buy back stipulation favouring the state. This is being replaced with cost sharing contract.

India had been in negotiations with Iran even before the nuclear talks had seriously begun. So the bridges have been built. Besides, during its isolation, regularly second channels were all open. Iran those days had insisted on laying the gas pipeline through Pakistan, rather desperately. Now the proposal for developing an alternative routes for that is actively being pursued. The Chabahar port in south Iran could play a role.

At the same time, China is active in that country and has large economic stakes. India will have to compete with these various interests and players to secure its foothold. But that should start fast.   IPA