United States President Barack Obama will arrive in New Delhi in November on his state visit to be met with less than outright enthusiasm, complicating the US's growing relationship with India.

In addition to consternation over the president's intention to block tax breaks to companies globalizing their IT operations (Asia Sentinel, Sept. 14) – a major source of foreign exchange for India – he will be met with pleas from the government against the imposition of US sanctions on a consortium of Indian state-run oil firms that plan to invest nearly US$8 billion in Iran's rich Farsi gas fields.

"Obama will be met with a lot of black flags," an Indian economist told Asia Sentinel. "(Former President) George Bush remains our president. Obama talks big but he doesn't keep his promises." It was Bush who broke the logjam of sanctions against India's decision to abrogate the nuclear nonproliferation treaty to test a bomb. India now expects to expand its nuclear energy industry significantly.

The US continues to be determined to act against hydrocarbon firms that carry out any trade with Iran, due to Tehran's supposed independent nuclear weapon program. But India, having lost out on a US$7.5 billion Iran-Pakistan-India (IPI) pipeline pact due to security, transit and geostrategic issues, is looking to secure investment in Iran's Farsi gas fields to satisfy Delhi's voracious need for energy.

In September 2008 the Iranian government approved exploitation of the Farsi block, with recoverable gas reserves over 12.8 trillion cubic feet, about a quarter more than India's largest gas producing field, operated by Reliance Industries Ltd. India's state-owned firms – the largest explorer Oil & Natural Gas Corp (ONGC) and the biggest oil marketing firm Indian Oil Corp (IOC) – are equal partners with 40 percent interest each to jointly develop the Farzad-B area of the Farsi block. Oil India (OIL) is the third partner with 20 percent.

The consortium won the right to explore the Farzad-B block under the umbrella of ONGC's foreign arm ONGC Videsh, initially investing US$90 million. In the second phase the three must to invest about US$5.5 billion in producing natural gas from the area for which they expect to earn a 15 percent annual rate of return. Another US$2.5 billion is needed to set up a liquefaction plant to transfer LNG to India.

India remains a major importer of Iranian crude, importing more than 435,000 barrels per day in the fiscal year of 2008-2009. In return, India supplies Iran's imported oil, gasoline and diesel fuels. The US has vainly sought to stop Japan, South Korea and Taiwan, among others, from doing business in Iran as well. Legislation enacted July expands the scope of violations under the Iran Sanctions Act (ISA) linked to any hydrocarbon related activity. The proposed sanctions provide for action against persons, including foreign firms that invest in excess of US$20 million in Iran's energy sector in any 12-month period. These include selling refined gasoline, shipping insurance or similar services and supplying equipment/constructing oil refineries in Iran, one of the richest in natural oil and gas resources.

Meanwhile, Reliance Industries, which operates refineries that sell fuel to Iran, has had to substantially curtail its exports to Iran to avoid problems with the US. Reliance is keen to keep Washington happy. Over the last four months the sprawling conglomerate has invested nearly US$3.6 billion in US shale assets and does not want suffer any US political actions.

Reliance was already warned last year of the possibility of penalties for its business ties with Iran. In a letter to the US Export-Import Bank, several US congressmen warned: "We urge you to secure an understanding that Reliance will commit to ceasing its (oil) shipments to Iran." Reliance had taken US$900 million in two loan guarantees from the Ex-Im Bank including expansion of its giant Jamnagar refinery complex, the world's biggest.

Pleading With Obama

Obama has the authority to grant reprieves to entities that make them eligible for international finance and technology that would be difficult to come by otherwise. Official sources say that India will seek to secure new business possibilities in defense and nuclear energy to American firms in exchange for the Iran exemption. Delhi will also argue that it has heeded Washington's discomfort with Tehran in the case of the pipeline, dropping its investment unlike Pakistan. Tehran and Islamabad have formally signed a gas pipeline deal under which Iran will supply India's energy-deficient eastern neighbor with natural gas from 2014. It will be a truncated 1,100 km version of the larger 2,600 km IPI project.

The US has warned Pakistan against the project. US Special Representative Richard Holbrooke has said, "Pakistan should be wary of opting for gas deal with Iran. New sanctions on Iran can impact Pakistan."

Iran recently proposed to bring in Bangladesh in the cross-border gas pipeline. China too has expressed interest and would be a major investor in Pakistan-portion.

Gas From Iran

There is every indication that New Delhi is keen to take play a role in obtaining Iran's oil and gas resources, given India's rising domestic requirements in the household, power and auto sectors. India imports nearly 25 percent of its gas needs, which could rise to 50 percent by 2020 unless new domestic sources of energy are developed. Media reports over the last year have spoken about India negotiating prospects of importing natural gas from Iran via a sea pipeline. Indian state owned gas utility GAIL and a private entity are studying prospects.

Earlier this month, the Iran Daily quoted deputy oil minister and managing director of the National Iranian Gas Company Javad Owji as saying: "India has expressed a willingness to restart negotiations through an international firm to independently import natural gas from Iran via a sea pipeline."

Siddharth Srivastava is a New Delhi-based correspondent. He can be reached at srivastava_siddharth@hotmail.com