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In return for its commitments to the deal, the
P5+1 are to provide Iran with “limited, temporary,
targeted, and reversible” relief while retaining
most of the sanctions, including those relating
to oil, finance, and banking. If Iran fails to
meet its commitments, the “relief” can be revoked.
The package of concessions includes a commitment
not to impose new nuclear-related sanctions for
six months, provided Iran abides by its commitments
under the deal. While most of Iran’s approximately
$100 billion in foreign exchange holdings will
remain inaccessible or restricted by the current
sanctions regime, the relief package will provide
Iran approximately $7 billion in funds including
revenue from permitted oil exports and approximately
$1.5 billion from the suspension of sanctions
on gold and precious metals, auto sector, and
its petrochemical exports.
Sanctions against the Central Bank of Iran and
approximately two dozen other major Iranian banks,
financial services providers to Iran including
insurance, stay unchanged. Access to the US financial
system continues to be restricted. Sanctions on
several sectors of Iran’s economy, including shipping
and shipbuilding, remain in effect along with
broad US restrictions on trade with Iran.
 Impact
on Oil Exports
According to the text of the deal or the Joint
Action Plan (JAP), the following voluntary (relief)
measures relating to Iran’s crude oil would be
undertaken - “Pause efforts to further reduce
Iran’s crude oil sales, enabling Iran’s current
customers to purchase their current average amounts
of crude oil. Enable the repatriation of an agreed
amount of revenue held abroad. For such oil sales,
suspend the EU and U.S. sanctions on associated
insurance and transportation services.”
The Fact Sheet distributed by the Barack Obama
administration on the nuclear deal, which amplifies
the position on oil exports contained in the JAP,
indicates that the relief package on the deal
allows purchases of Iranian oil at their current
level (1 million barrels per day or bpd) which
is 60 per cent less than what it was two years
ago (2.5 million bpd in early 2012). Therefore
under the first phase of the deal, Iran will be
permitted to sell approximately one million bpd
of crude oil to its existing buyers - in effect
ensuring that there is no increase in sale of
Iranian oil from the current levels. Also from
the proceeds of the sale of this oil, only $4.2
billion will be allowed to be transferred in installments
if, and as, Iran fulfils its commitments. The
balance of nearly $15 billion of its oil revenues
during this six month period will go into restricted
overseas accounts increasing the balance of Iran’s
money in these accounts. Also sanctions on long-term
investment in and provision of technical services
to Iran’s energy sector remain in effect.
Implications
For a better assessment of the implications of
the deal on India’s oil imports from Iran it must
be viewed according to its timeline for both;
Iran’s fulfilment of its commitments and the corresponding
realisation of the relief provided under the deal.
Second, though the news of the deal between Iran
and the P5+1 caused the Brent to fall by more
than $3 per barrel through the weekend, it rallied
sharply to pre-nuclear deal levels the next day.
The agreement will pressure prices but not result
in any appreciable drop in the short-term. Thirdly,
while few are optimistic that a larger deal can
be pieced together in six months, analysts feel
that even lifting of the sanctions wouldn’t allow
Iran to raise production to 2012 levels, given
lack of investment and technology. Iran, though,
could sell crude out of accumulated stocks. Hence
increased production of Iranian oil is expected
only in the long term.
India’s imports of Iranian oil had fallen to
194,000 barrels per day (bpd) for January-September,
down from 324,000 bpd in the same period last
year as some refiners cut purchases from Iran
because European reinsurers, due to Western sanctions,
had declined cover to ships carrying Iranian oil
and excluded claims arising during the processing
of Iranian oil from their reinsurance coverage
of the local insurers. While India’s general insurers
provide risk cover to oil refiners, they in turn
re-insure with global re-insurers after paying
a premium to cut down risk on their books. Reinsurance
hedges up to 90 per cent of the insurance cover
provided.
In response the Indian government had decided
to set up a sovereign fund to back local insurers
covering such refineries. The fund, called Indian
Energy Insurance Pool (IEIP), was to be set up
by contribution from Oil Industry Development
Board (OIDB) state-run general insurers and General
Insurance Corporation. However, as on date, the
fund is yet to be instituted. The Iran nuclear
deal is expected do away with the requirement
of the `2,000 crore IEIP as the Western reinsurance
would now be available for Iranian oil starting
December, as indicated by France’s foreign minister.
This will provide an opportunity to Indian refiners
to import more crude oil from Iran within their
annual average and the Iranian cap of 1 million
bpd.
Also reduced to a mere formality would be the
action of obtaining six monthly waivers from the
US in respect of the sanctions imposed on purchasing
oil from Iran. At present, Iran’s oil customers
must continually show a reduction in their purchases
to be eligible for a waiver from the US sanctions.
Japan obtained its fourth six-month waiver recently
while other top buyers — China, India and South
Korea — will have their exemptions due for another
round of extension in December.
Mangalore Refinery and Petrochemicals (MRPL)
and Essar Oil are the largest purchasers of Iranian
oil in India. In September, MRPL replaced Essar
Oil Ltd as the biggest importer of Iranian oil
after it shipped 133,000 bpd. MRPL had resumed
imports from Iran in August after a fourmonth
halt over the insurance issue. The point here
is that despite the reinsurance hurdle Indian
refiners have shown a preference for Iranian oil
because of the terms of payment on offer and better
refining margins.
Future Impact
India’s crude oil imports from Iran declined
from 18.5 metric tons (mt) of crude in 2010-11,
to 17.4 mt in 2011-12 and 14 mt in 2012-13. Consequently,
India imported about 51 per cent more oil from
Latin America and 20 per cent more from Iraq in
the first nine months of the year as it decreased
its procurement from Iran. While energy security
requires India to diversify its sources of energy
and fossil fuel, strategically, due to short travel
time and absence of chokepoints, Iran is India’s
preferred source of crude oil supply. From the
foreign policy perspective, as India seeks to
enhance its trade, transport links, economic cooperation
with Iran, the country will be a more secure source
for Indian energy imports.
Also, under the US embargo that started on February
6, Iran’s six remaining buyers — China, India,
Japan, South Korea, Turkey and Taiwan — have to
purchase their crude oil requirements with their
own currencies and not with dollars or euros,
and must deposit payments in accounts for Iran
to only purchase local goods. Iran’s nuclear pause,
in effect, preserves this arrangement by restricting
purchases of Iranian oil to existing customers
at their current average, albeit under the total
cap of 1 million bpd. However, when the comprehensive
deal is struck, India would find that competition
for Iranian oil would increase and the terms of
sale would change. An eventuality it must prepare
for.
- The author is a Research
Fellow with the Society for Policy Studies, New
Delhi.
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