INDIA STRENGTHENS OIL AND GAS TIES WITH IRAN

C O N F I D E N T I A L SECTION 01 OF 03 NEW DELHI 000300

SIPDIS

SENSITIVE

STATE PASS EPA, EXIM, OPIC
USDOC FOR 4530/MAC/ANESA/OSA/DROCKER/STERN
USDOC FOR 3131/USFCS/OIO/ANESA/RMARRO/CSHARKEY
USDOC FOR 6000/TD/AC/BLOPP
DOE FOR TOM CUTLER
TREASURY FOR INTERNATIONAL-SOUTH ASIA/MACDONALD

E.O. 12958: DECL: 11/05/2014
TAGS: ENRG EPET ECON PREL IR IN
SUBJECT: INDIA STRENGTHENS OIL AND GAS TIES WITH IRAN

REF: A. 2004 NEW DELHI 7089


B. 2004 STATE 177574

C. 2004 NEW DELHI 4871

D. 2004 NEW DELHI 4590

E. 2004 NEW DELHI 1770

F. 2004 STATE 166919

G. 2004 STATE 108728

Classified By: Ambassador David C. Mulford, Reasons 1.4 (b) and (d)


1. (C) Summary: On January 7, India and Iran strengthened
significantly their oil and gas relationship when they
reached an agreement in which India will purchase a total of
7.5 million tons per year (MMTA) of LNG for 25 years
beginning in 2009. Iran will reportedly allow Indian
state-controlled companies to participate in at least three
upstream oil and gas projects (South Pars, Yadavaran, and
Jufeyr). Although the deal has not been formalized and the
contracts have not been signed, the LNG and upstream
investment elements of the deal appear to be quite firm. If
the deal goes through, it could have ILSA implications. We
will continue to raise our concerns with both the Ministry of
Foreign Affairs and with the oil companies, all of which are
aware of our ILSA concerns. The deal also included proposals
for an Indian and Iran state-controlled companies to
cooperate in petrochemical manufacturing and CNG development.
The package represents still further evidence that the Indian
oil companies, cheered on by the GOI, are vigorously seeking
properties abroad. The two governments also decided to
discuss in February issues relating to an Iran-Pakistan-India
gas pipeline. With the GOI's decision to enter into large
and long-term LNG purchase agreements, Embassy believes that
the commerical prospects of an Iran-Pakistan-India gas
pipeline recede further even as the idea remains a topic of
Iran-India diplomacy. End Summary.


2. (C) India took some significant steps in intensifying its
oil and gas relationship with Iran and strengthening its
energy security during the first weekend of January. After
more than a year of negotiations, the two countries reached a
wide-ranging oil and gas package agreement on the sidelines
of January 6-7 Asian Oil Ministers meeting in New Delhi. The
announcement was made on January 7 by India Petroleum and
Natural Gas Minister Mani Shanker Aiyar and Iranian Oil
Minister Bijan Namdar Zanghneh. The deal has not been
formally signed and has some ways to go before the various
elements are concluded. Some parts of the deal such as
proposed participation by Indian state-controlled companies
in Iran's oil and gas sector could be ILSA-sanctionable
depending on the nature of the participation and how the
contracts are structured. The GOI and the Indian oil
companies, none of which have any significant U.S. interests
or presence, are well aware of our ILSA concerns. We will
continue to raise our concerns with both the Ministry of
External Affairs and with the oil companies.

Large LNG Deal
--------------


3. (U) For India, the most significant and firm element of
the package deal is the commitment to buy 7.5 million metric
tons of LNG per year for 25 years beginning in 2009. The
state-controlled Indian companies Indian Oil Corporation
(IOC) and GAIL India Limited will purchase the LNG from the
National Iranian Gas Export Corporation (NIGEC). It is not
clear which Iranian field will supply this gas.


4. (SBU) Much of the delay in reaching the LNG agreement was
over pricing. An official of GAIL told Econoff that the
Indian companies will buy the gas at a price that is capped
at $3.21 per million british thermal unit (MBTU). The price
will be fixed at $2.97 per unit for three years, after which
it will be allowed to float at a formula that comprises a
fixed price of $1.2 per unit plus 6.25 percent of the Brent
crude price. The Indian companies had resisted the link to
crude prices but conceded after the maximum allowable Brent
crude price was fixed at $31 per barrel.


5. (SBU) The India companies are not getting as good a price
as they have in place for ExxonMobil's RasGas from Qatar.
The price for this gas is fixed at $2.53 per unit until 2008,
after which it will be linked to crude in the $16-24 range.
Nonetheless, GAIL Chairman Proshonto Banerjee said "In the
present circumstances, it is a good deal."
A Second LNG Deal
--------------


6. (SBU) The two government's also endorsed a December
agreement between IOC and the Iranian oil company Petropars
for a 40 percent IOC share in the development of one of the
blocks in South Pars gas field (Ref A). IOC would also get
60 percent stake in a 9 MMTPA LNG liquefaction plant related
to this development. The 25-year agreement would provide IOC
about 4.5 MMTPA of LNG. Total development costs of this
project are estimated at $3.2 billion. GAIL had loudly
complained about being left out of the deal in December,
claiming that GOI policy has been to allow Indian
state-controlled energy companies to invest overseas only in
a consortium. GAIL removed its opposition after it was
brought into the overall package. The LNG imported in the
two deals -- the 4.5 MMPTA from South Pars and the 7.5 MMPTA
(para 2) will be marketed in India by GAIL, IOC, ONGC, and
Oil India Limited in the 40:25:25:10 proportions.

Other Parts of the Package
--------------


7. (U) Yadavaran: ONGC Videsh Limited (OVL),the overseas
arm of the Indian state-run oil exploration company Oil and
Natural Gas Corporation, will get a 20 percent share in the
development of Iran's on-shore Yadavaran oil field. This
equity stake is equivalent to about 60,000 barrels per day.


8. (U) Jufeyr: OVL will get a 100 percent stake in the
Iran's Jufeyr field. This field is expected to yield 30,000
per day when developed.


9. (U) Bandar Assaluyeh: Iran offered IOC participation in
a petrochemical complex under development at Bandar
Assaluyeh. The proposed terms for taking part in the project
were not disclosed.


10. (U) CNG: GAIL proposed investing in development of CNG
for Teheran and Esfahan and signed an agreement with the Iran
Fuel Conservation Organization for cooperation on CNG
development.


11. (SBU) Pipeline: An Iranian team will visit India in
February to discuss issues relating to trans-Pakistan gas
pipeline. The Indian official who backgrounded the overall
agreement for the media downplayed the importance of these
discussions by emphasizing that security of gas supplies
remained a key issue.

Comment
--------------


12. (C) Although some parts of the deal are merely
commitments for further discussion, India's agreement to buy
Iranian gas and invest in Iranian upstream oil and gas
developments appear to be quite firm. The deal is huge for
India -- its 12 MMTPA of LNG represents about half of India's
current natural gas production. Together with the 5 MMTPA
imported from ExxonMobil's RasGas development, India is
becoming a major player in the Asian LNG markets. The deal
represents still further evidence that the Indian oil
companies, cheered on by the GOI, are vigorously seeking
properties abroad. The GOI's goal is to enhance Indian
energy security. The oil companies, especially IOC, aspire
to become international players who can compete with the
majors.


13. (C) With the GOI's decision to enter into such large and
long-term LNG purchase agreements, Embassy believes that the
commerical prospects of an Iran-Pakistan-India gas pipeline
recede further. Mani Shanker Aiyar stirred up a flurry of
excitement about such a project soon after he assumed office
last summer. The excitement appears to have abated now as
conditions -- first MFN, then transit rights through Pakistan
-- have been appended at the insistence of MEA's Pakistan
hands. MEA Joint Secretary Jaishanker told Ambassador that
he believes, despite Aiyar's enthusiasm, the obstacles to a
trans-Pakistan pipeline are enormous. He characterized
Aiyar's public statements in support of a pipeline as "more
smoke than fire."


14. (C) Embassy notes that large and expensive projects such
as a 3,000 kilometer pipeline generally require a private
sector backer and promoter. We are not aware that any
international oil and gas company has shown an interest in
becoming involved. Our contacts in the Indian oil and gas
industry are not enthusiastic, saying that the pipeline is
probably not economically viable given the extra risk
management costs involved and the projections of alternative
sources of supply. In any case, to our knowledge no serious
cost-benefit analysis has been done.
MULFORD