An opaque slick of secrecy surrounds the controversy over India's payment for the crude it imports from Iran. The Reserve Bank of India stopped facilitating payments from December last year, following the US sanctions against Iran imposed a few months earlier. Indian officials are markedly reluctant to discuss the matter, while the Iranian embassy turned down repeated requests for comments.
The two countries have held several rounds of talks to solve the problem, but made no headway. At the end of the last fruitless two-day negotiation in May, the Indian government put out a bland media statement saying: "Both sides agreed to continue their engagement in the matter."
But an Indian diplomat familiar with the talks hinted India was looking at the viability of diffusing payment to Iran through a variety of currencies and institutions to sidestep the constraints. There are strong indications that Iran continues to supply oil as before, though there is no official confirmation.
No official word on how much India owes Iran is available, but knowledgeable estimates put India's outstanding for the past three months alone at over $4 billion or around Rs 18,000 crore. A Deutsche Bank report suggests that the growth in India's oil imports in recent months has been modest precisely because Indian officials are aware of this mounting debt which will have to be repaid at some point - and perhaps at short notice.
There is little in India-Iran trade besides oil. Oil imports made up $10.19 billion, or 88 per cent of India's total imports of $11.54 billion in the financial year 2009/10, according to the Commerce Ministry. But if India needs Iran's oil, Iran, too, needs India. India is one of its biggest buyers, with about 10 per cent of Iran's daily oil production being earmarked for it. Hydrocarbons in turn contribute 25 per cent to Iran's gross domestic product.
ANALYSIS:Challenges that plague the oil world
Strangely neither the stakeholders nor analysts appear unduly concerned about oil supply from Iran being disrupted. MRPL, the biggest importer, which brings in around 7 million tonnes annually, recently paid an advance tax of Rs 97 crore for the April 1 to June 15 period, which was 45 per cent higher than what it paid for the same period last year. The advance tax paid is a pointer to company expectations for the current financial year, and MRPL seems to have no worries of a sudden crisis throwing its financials out of gear. It also continues to get the highest - or triple A - rating from credit rating agency ICRA.
Analysts are just as insouciant. While acknowledging the mounting bill, they note that even if the supply of Iranian crude to India is disrupted, there are alternative sources.
"Saudi Arabia could export to India," says Ali Al-Saffar, Economist-Middle East at the Economist Intelligence Unit, London. "It will have to double its current exports to India, adding an additional 400,000 barrels a day to make for the lost imports from Iran."
K. Ravichandran, Senior Vice President and co-head, Corporate Ratings, ICRA, echoes Al-Saffar. "In a worst case scenario, Saudi Arabia or Kuwait could step in," he says. "Crude markets are very liquid at the moment."
But the matter is not so simple. Iranian crude has high sulphur content, and is categorised as sour crude. The refineries processing it are relatively inflexible and geared to handling sour crude alone. They are not equipped to switch from one kind of crude to another. Al-Saffar, however, says Saudi crude is not very different in quality from that of Iran.
Coming down hard
Some experts, unwilling to be named, also note that the complete silence of both the Indian and Iranian governments suggests there may be a lot to the oil trade between the two countries that is not in the public domain.
The root of the problem goes back to June last year when, with Iran refusing to halt its uranium enrichment programme, the United Nations called for stricter sanctions against it. Within a month, the US passed the Comprehensive Iran Sanctions, Accountability and Divestment Act, or CISADA, which sought to put the squeeze on Iran's earnings from petroleum.
CISADA prohibited any kind of significant US investment in developing Iran's hydrocarbons sector; more importantly, it barred US banks from facilitating Iran related dealings.
Skirting the sanctions
With the dollar the medium of trade between most countries, barring special arrangements, India-Iran dealings should have been immediately hit.
If it was not, it was because the two countries did have a special arrangement. This was a body called the Asian Clearing Union, or ACU, set up in 1974 at the behest of the UN to promote regional cooperation, comprising the seven South Asian countries, Maldives and Iran.
Using the ACU enabled India and Iran to bypass American banks since it allows individual trade transactions between any two countries to be offset against each other, with only the difference being settled in dollars or euros by their respective central banks.
It was too good to last. American sanctions were being made a mockery of. In December last year - significantly within a month of US President Barack Obama's five day visit to India - the RBI announced it would not facilitate payments any longer through the ACU. This was being done since it could in no way monitor the end use of funds routed through the ACU, and ensure they were not used for Iran's nuclear programme.
This left MRPL and HPCL - and the Petroleum Ministry by extension - in the lurch, ready to pay, but unable to transfer the money. A breakthrough seemed possible in February this year, when Germany allowed the money transfer to the European-Iranian Trade Bank in Berlin. But in April, under pressure from other Western countries Germany backtracked. One payment made was even returned.
No matter how it is resolved, the current payment problem could not have been more ill timed. Assured oil supplies are essential for India at a time when, not only do crude prices remain high due to the continuing turmoil in West Asia, but global oil consumption is growing, threatening oil scarcity and still higher prices.
The global consumption of oil in 2010 grew 3.1 per cent to 87.4 million barrels a day, while production grew by just 2.2 per cent, says the BP Statistical Review in its latest report. "Globally, energy consumption grew more rapidly than the economy, meaning energy intensity of economic activity increased for the second consecutive year," the review adds.
In a separate development, in late June, the US Federal Reserve lowered its economic growth forecast for 2011 from the 3.1 per cent to 3.3 per cent estimate made in April. It is now between 2.7 per cent to 2.9 per cent. This has triggered speculation that the Fed could expand its balance sheet and unleash liquidity to spur growth.
An unintended consequence of a loose monetary policy of the US could be a spike in oil prices. The scenario gets bleaker given that the pace of economic activity is slowing down in India, partly on account of the 10 rounds of interest rate increases since March 2010 by the RBI to rein in inflation.
The government's aim to complement RBI's anti-inflationary steps by restricting its fiscal deficit - the borrowing that covers the gap between spending and income - to 4.6 per cent of gross domestic product threatens to come undone if crude prices keep rising or oil supplies from Iran dry up and India has to go searching in oil markets elsewhere. Currently, public sector oil refiners are losing Rs 289 crore a day by underpricing products like diesel, cooking gas and kerosene.
According to a survey of the Indian economy by the Organisation for Economic Co-operation and Development, the energy subsidy in India is about $36 per person, and the bulk of it goes towards lowering the domestic price of oil-based products. India's per capita oil subsidy is almost three times higher than China's, which makes the economy and society highly sensitive to the slightest disruption in the flow of oil imports.