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India & Iran Team Up To Boost Oil Refinery Capacity

By Orkhan Jalilov January 6, 2019


Indian Prime Minister Narendra Modi received Iranian President Hassan Rouhani, during his three-day trip in New Delhi in February 2018. / Adnan Abidi / Reuters

According to an official at the Indian oil company Chennai Petroleum, Iran is planning to invest roughly $218 million to help build up its capacity.

“Iran will invest about 15 billion rupees (about $218 million) to expand a refinery run by Chennai Petroleum Corp. [in south India],” said S.N. Pandey, the Managing Director of the state-run company Chennai Petroleum, according to a report published in The Times of India on January 2.

Pandey said that the company is boosting capacity at its Nagapattinam facility by nine-fold to process nine million tons per year, and the investment is Naftiran Intertrade Co.’s share of the $4 billion expansion plan.

While Naftiran’s investment will help Chennai Petroleum’s fundraising, it also helps cement Iran’s grip on India, despite strict sanctions imposed on Iran as a result of U.S. President Donald Trump pulling out of the Joint Comprehensive Plan of Action, better known as the nuclear deal. A surging fuel demand in India makes it a prized market for oil exporting countries, such as Iran. Over the years, Tehran has been a reliable and cheap source of crude for India, extending favorable credit terms.

Chennai Petroleum plans to invest up to $5.1 billion to replace the 20,000 barrel per day (bpd)-producing Nagapattinam Refinery, located in India’s southern state of Tamil Nadu, with a 180,000-bpd plant. Naftiran Intertrade, the Swiss subsidiary of National Iranian Oil Company, holds a 15.4 percent stake in Chennai Petroleum, while Indian Oil has about a 52 percent share.

The chairman of India’s biggest refineries, Indian Oil Corp Ltd., Sanjiv Singh, said on January 2 that Iran may still invest in a refinery expansion project at one of its subsidiaries. Iran has not ruled out participating in the expansion at Chennai Petroleum Corp Ltd., another 20,000 bpd refinery. Meanwhile, Tehran’s participation is being questioned after India cut back its Iranian crude oil imports following U.S. sanctions that went into effect early last November.

India is Iran’s top oil client after China and has turned to paying for Iranian oil using Indian rupees due to U.S. sanctions. India’s finance ministry announced at the end of December that payments made in Indian rupees for the purchase of Iranian oil will be exempt from a high withholding tax. The exemption allows Indian refineries to settle about $1.5 billion of outstanding payments to the National Iranian Oil Company (NIOC) through direct rupee payments.

Iranian Foreign Minister Mohammad Javad Zarif will be on an official two-day visit to India from January 7 – 9 as part of ongoing consultations regarding Afghanistan and the commissioning of Chabahar Port in southeastern Iran. Zarif’s visit is taking place at a time when India is taking over operations at Chabahar, providing New Delhi with a critical link to land-locked Afghanistan, located in Central Asia, and bypassing its longtime foe Pakistan. India has committed $500 million to developing the port.

India had asked the U.S. to keep Chabahar out of the purview of Iran-related sanctions, contending that its interest in the port is primarily meant for reaching the people of war-torn Afghanistan.

On November 7, Washington announced that it would waive sanctions on certain parts of the Chabahar port, along with the Chabahar-Afghanistan railway project and Iranian petroleum exports to Afghanistan. Since Islamabad is not allowing India to use Pakistani territory for direct business with Afghanistan, Chabahar is important for Indian access not only to Iran but to Afghanistan and beyond.

The diversification of energy resources is a key pillar of Indian energy policy. If sanctions continue to punish the Iranian energy sector after the U.S. waivers expire, India will reduce oil imports from Iran and increase imports from Iraq and Saudi Arabia.

Chabahar is the closest and best access point within Iran to the Indian Ocean. In May 2016, Iran and India signed a deal to equip and operate containers and multi-purpose terminals at Shahid Beheshti port in Chabahar with a capital investment of $85.21 million and annual expenditure of $22.95 million on a 10-year lease. 

Iran became India’s third-largest oil supplier during the period April-June 2018, exceeding Saudi Arabia. The total imports from Iran to India stood at $11 billion in April-November 2018, out of which 90 percent of the shipments comprised crude oil.

Indian refineries, wary of the impact of sanctions, had boosted imports from Iran ahead of their introduction, with imports averaging about 563,000 bpd from April-November, a growth of about 32 percent from a low base in the previous fiscal year. Under the exemptions granted in November, the U.S. allowed India to import as much as 300,000 bpd of Iranian oil for six months. That is less than Iran’s average daily exports to the country of about 540,000 barrels in 2018, and almost 450,000 barrels in 2017.