Last week, India’s Mangalore Refinery and Petrochemicals managed to make a US$100 million payment for Iranian oil – by transferring it through a third party bank in Istanbul.

That is because there is a continuing oil payment crisis between India and Iran, caused by the US government’s determined efforts to make sure as little oil money as possible seeps into Tehran. It also highlights New Delhi’s dilemma in trying to satisfy its growing energy needs, which are expected to double in the next decade.

Until last week, India owed Iran more than US$5 billion for oil imports as a result of US moves to isolate Iran, which Washington suspects of seeking to build nuclear weapons. .

But despite the move by going through a Turkish intermediary, India’s problems with doing business with Iran are far from over, given Washington’s resolve. The US has been applying intense pressure for more than a decade to block India from not only buying crude from Iran, OPEC’s second-biggest producer, but from joining an ambitious US$7.5 billion Iran-Pakistan-India (IPI) gas pipeline project proposed as long ago as 1966. India signed an agreement to join the pipeline project in 1999, but has since stalled under American pressure. In addition there is the matter of US$8 billion in proj4ected investment to develop Iran’s gas rich Farsi block. The US can impose sanctions if investments by any firm exceed US$20 million in a year in Iran’s energy sector.

There is little doubt that the international pressure on Iran, a country with a badly distorted economy in the first place, is hurting as the west grows more alarmed at Tehran’s bomb-making ambitions. Although the US doesn’t have the clout to bully the Eurozone nations to stop their purchases, Germany, the UK and the United Arab Emirates have refused to provide fuel for Iranian passenger jets. Major trading houses, accounting firms and energy companies have joined governments in the Iranian boycott although China has committed for purchases through 2011.

Last month, Iran threatened to cut oil supplies to India from Aug. 1 unless India paid up. India examined a variety of subterfuges including using multiple currencies including the rupee, to pay for the 12 million barrels of oil it imports from Iran every month before Mangalore Refinery resorted to the third-party bank scheme.

India, which imports nearly 80 percent of its crude oil requirements, needs all it can get to feed its ever-growing transport and manufacturing sectors. India’s crude imports in the nine months ended Dec 31 were more than 115 million metric tons, according to official data. India’s oil imports in April-May 2011 were valued more than US$20 billion. (It takes 7.3 barrels of crude to make up one metric ton.)

Fearing problems from the sanctions and other issues, Indian refiners MRPL, Bharat Petroleum, Hindustan Petroleum, IOC and Essar have recently begun backing away from Iran, beginning dealings with Saudi Aramco and Kuwait to seek alternative supplies. Over the past few months top-level meetings have been taking place between Saudi and Indian officials. Riyadh has said that it is willing to more than double the amount of oil it currently supplies to India and will sign a 30-year supply agreement, as it has done with other nations.

That has added fire to continuing problems between Tehran and Riyadh, which go well beyond OPEC oil supply strategy. Saudi Arabia, the world’s largest supplier, wants to boost the global supply to push prices down and Iran, needing the foreign exchange for its flagging economy, is not happy about that. Iran exports about 2 million barrels of oil per day. Iraq is the third-largest producer.

The latest events again underline that there is no immediate hope that India will join the gas pipeline project, a 48-inch pipeline that is projected to stretch 2,775 km from Iran to India and to deliver 55 cubic meters of natural gas per year.

While Iran is dealing with Pakistan bilaterally over the transfer of gas, the possibility is increasing that the pipeline will instead go to China.

That puts New Delhi in a dilemma. It needs to delay or opt out of the pipeline to keep Washington happy for US support at the Nuclear Suppliers Group, as well as hopes that will extend to a potential UN Security Council seat at some point. India is aware that there are strategic reasons for keeping China and Pakistan in check, but the potential loss of the gas – to China in fact -- to keep America happy is a Hobson’s choice.

There is also uncertainty over the investment in the gas-rich Farsi block by India’s state-owned oil firms ONGC, IOC and OIL to develop Iran’s gas rich Farsi block. US can impose sanctions if investments by any firm exceed US$20 million in a year in Iran’s energy sector.

India’s private sector major Reliance Industries Limited (RIL), which operates refineries that sell fuel to Iran, has already substantially curtailed such exports. RIL has invested US$3.6 billion in US shale assets and is wary of the political implications in Washington of the sale of anything to Iran.

The US is assisting India in its own domestic shale gas exploration. There are plans to auction blocks later this year. Although conversion of shale to energy takes up vast amounts of energy itself, and is ruinous to the environment, analysts say shale gas could be a game changer in India’s energy security plans given the projected failure of the pipeline and the falling output from India’s eastern Krishna Godavari basin. Presently, India has to import expensive LNG.

The west’s attempt to squeeze out Iran as an oil supplier to India can pose additional problems. In the absence of more choice and the existence of demand from multiple markets, Saudi Arabia is regarded as having little incentive to cut crude prices. It also introduces an element of uncertainty in oil supplies to India, as Riyadh could call the shots in any negotiations. Given such equations, India will need to calibrate its relations with Iran very carefully.

(Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com)