As the U.S.-Iranian dispute escalates, both Washington and Tehran seek friends and allies. New Delhi is caught in the middle. While the U.S.-Indian partnership has grown closer in recent years, New Delhi’s approach toward Iran’s suspected nuclear program causes concern in Washington. Overshadowing the debate is India’s own nuclear program. With the July 2005 U.S.-Indian civilian nuclear deal yet to win U.S. Senate ratification, is India seeking to strengthen its energy security through Iran? Or is New Delhi pursuing the civilian nuclear deal without being sensitive to Washington’s concerns vis-à-vis Iran?

Indo-Iranian ties extend beyond the energy portfolio although it would be an exaggeration to claim New Delhi and Tehran’s rapprochement equates to the formation of a new axis.[1] Western observers have argued that the increasing ties between Iran and India have much more to do with Indian great power aspirations and a concomitant Indian expansive agenda for Central Asia.[2]

While both countries speak in terms of civilizational ties and both shared antipathy toward the Taliban in Afghanistan and perhaps Pakistan, New Delhi’s Iran policy has one unspoken cardinal ground rule: India will develop its friendship with Iran only when Tehran acts in a friendly manner toward its Arab neighbors. At the height of Iran’s revolutionary fervor in the 1980s when Tehran actively sought to export Islamic revolution to neighboring states, Indian policymakers maintained only lukewarm relations. Khomeini’s fatwa against Indian-born British author Salman Rushdie also poisoned relations. New Delhi favored ties with Baghdad over Tehran, not only because Iraq was then a major oil supplier for India but also because the Indian Congress Party found a common ground in secularism with Iraq’s Baath Party. Successive Indian governments appreciated Baghdad’s support for the Indian position on Kashmir while many other Arab countries cast their lot with Pakistan, and Saddam Hussein never forgot India’s political support during his long war with Iran. Ties began to fray only after the 1990 Iraqi invasion of Kuwait.

It was around this time that Tehran began to reach out to the outside world and settle its differences with its Arab neighbors in a more peaceful manner. Khomeini died in 1989; former president ‘Ali Khamene‘i succeeded him as Supreme Leader. Indian authorities considered the new president, ‘Ali Akbar Hashemi Rafsanjani, to be pragmatic. The Indian government, meanwhile, having lost its Cold War-era Soviet patron and its partnership with post-Kuwait war Iraq, sought to reorient its Middle East policy.

It was under such circumstances that India opened a new chapter vis-à-vis Iran. Since the visit of Prime Minister P. V. Narasimha Rao to Tehran in 1993 and Rafsanjani’s reciprocal 1995 visit to New Delhi, bilateral ties have blossomed. Six years later, ties cemented as Indian prime minister Atal Behari Vajpayee visited Iran, a trip reciprocated by Muhammad Khatami in January 2003 with a visit to India. General consensus emerged in India, including that of the Congress Party and the Bharatiya Janata Party (BJP), that India and Iran should enjoy closer ties. There were domestic reasons as well. India has the second largest Shi‘i population in the world after Iran.[3]

However, in recent years, economic factors have shot to the forefront of Indo-Iranian relations. In 1991, New Delhi abandoned the Soviet-style command economy and introduced economic reforms. Then-finance minister (and current prime minister) Manmohan Singh’s liberalization led to steady economic growth, inching slowly towards double digits.[4]

Accompanying India’s economic development has been an increase in energy demand of about 6 percent per year for the last two decades. Domestic crude oil production has not kept up and remains constant at about 32 million metric tons per year.[5] Dependence on energy imports has increased to fill the gap. Currently, India imports over two-thirds of its hydrocarbon needs. In 2005-06, such imports exceeded US$50 billion worth of oil and natural gas, equivalent to a third of India’s total imports.[6] The Paris-based International Energy Agency estimates that by 2030 as much as 87 percent of India’s oil needs will be met by imports.[7]

To address its energy needs, the Indian government has pursued a two-pronged strategy: First, it has moved away from its past practice of ad hoc procurements and now seeks long-term arrangements with the suppliers. One such arrangement was a 25-year contract with Qatar RasGas to supply 5 million tons of liquefied natural gas annually.[8] The first shipment arrived in January 2004. Second, New Delhi has taken advantage of more than $200 billion in foreign reserves to promote both state-owned and private Indian investment in the oil industry abroad. The Oil Ministry has set a target of securing 60 million tons of oil and gas assets abroad by 2025.[9] As of February 2007, the state-owned Oil and Natural Gas Commission has been active in twenty-five projects in sixteen countries.[10] This strategy enabled Indian policymakers to reconsider their relationship to Iran.

Indians are currently engaged in three energy deals with Iran. Together, they reflect India’s long-term energy security strategy and highlight New Delhi’s determination to capitalize on Iran’s possession of the world’s second greatest reserves of natural gas and third largest oil reserves.

In June 2005, India’s petroleum minister, Mani Shankar Aiyar, signed a 25-year agreement in Tehran for the annual supply of 5 million tons of liquefied natural gas to commence in 2009, a deal worth perhaps $22 billion.[11]

With the amelioration of India-Pakistan tensions, Indian officials have also revived plans for construction of a 1,700-mile (2,700 kilometer) pipeline to carry natural gas from Iran via Pakistan even though this places some degree of Indian energy security in Islamabad’s hands.[12]

Lastly, a consortium of three state-owned Indian oil companies—Oil and Natural Gas Corporation (ONGC) Videsh, Ltd., the external arm of India’s Oil and Natural Gas Commission; the Indian Oil Corporation; and Oil India Limited—is exploring the Farsi offshore block in the Persian Gulf, approximately 60 miles (90 kilometers) from Bushehr. In May 2007, they announced discovery of an estimated 10 trillion cubic feet of gas.[13]

Either by design or accident, however, all three Indo-Iranian energy deals have problems, be they technical, financial, and/or political. The liquefied natural gas project has technical as well as pricing problems. In order to implement the arrangement, the Gas Authority of India Limited (GAIL) committed to building a liquefied natural gas plant in Iran, that country’s first.[14] But, never has such a terminal been built without U.S.-made components. To proceed, therefore, might cause the project to violate the U.S. Iran-Libya Sanctions Act (ILSA), which requires sanctions on annual investments in excess of $20 million in Iran’s energy sector.[15] At present, the deal is sidelined by some technical difficulties, saving both Washington and New Delhi a public spat, but should these get resolved, U.S. policymakers may decide to oppose the deal publicly.

Then, even before the ink could dry, Iranian authorities began demanding a higher price. In June 2005, Iranian and Indian officials agreed that India would pay $3.215 per million British thermal units (mBtu). When the deal was announced, many Indians were jubilant that they had managed to secure a better price with Iran than its earlier deal with Qatar.[16] Satisfied with the price, the Indian government even expressed interest in importing an additional 2.5 million tons annually.

Iranian authorities, however, had a different idea. As a country steeped in the culture of the bazaar, it has perfected the art of bargaining and brinkmanship. The Supreme Economic Council of Iran, the ultimate authority on economic matters, announced that it would not accept the price to which Iranian negotiators had agreed. They demanded renegotiation.[17] Two external events contributed to the hardening of Tehran’s position. First, New Delhi sided with Washington in September 2005 and instructed its representative on the International Atomic Energy Agency (IAEA) Board of Governors to find Tehran in violation of its commitments under the Non-Proliferation Treaty’s safeguards agreement. In February 2006, the Indian delegate to the IAEA voted with the United States in the IAEA’s referral of the Iran nuclear question to the U.N. Security Council.[18] Then, amid continuing instability in Iraq, the price of oil rose steeply. The $3.215/mBtu might be reasonable when oil sold for $31/barrel, but with oil selling at $55, Iranian authorities demanded India pay $4.78 per mBtu.

Indian officials said they would pay a higher price for the additional 2.5 million tons they sought but insisted that their Iranian counterparts should adhere to the price to which they had committed in 2005. In a counterproposal, Iran suggested it would stick to the original terms if India were prepared to pay $7.92 mBtu for the additional supplies. In simple terms, this would mean that the Indian government would pay $4.78 mBtu for the entire 7.5 million tons of liquefied natural gas.[19]

Likewise, the pipeline project ran into difficulties. Even though Indian and Iranian authorities had carried on negotiations for over a decade, it was only in 2005 that the proposal entered onto the U.S. radar screen.[20] During her maiden visit to India in March 2005 as secretary of state, Condoleezza Rice explicitly expressed U.S. concerns over the pipeline.[21] Subsequent statements from other U.S. officials have grown stronger.

The July 14, 2005 agreement in which the U.S. government agreed to support development of civilian nuclear infrastructure in India complicated the issue. Washington seemed willing to abandon its traditional reluctance to offer civilian nuclear technology to India despite New Delhi’s refusal to sign the Nuclear Non-Proliferation Treaty in hopes of fulfilling Indian energy needs and thereby lessening the importance of the Iran pipeline for India’s energy security.

Soon after the July 14 nuclear deal, Prime Minister Singh hinted at the political problems surrounding the pipeline. He told The Washington Post, “I am realistic enough to realize that there are many risks … considering all the uncertainties of the situation there in Iran. I don’t know if any international consortium of bankers would probably underwrite this.”[22] Given the improved financial situation of India, even a medium level private company could easily underwrite the $7 billion project. Singh’s statement was, therefore, largely political.

Many cabinet colleagues and alliance partners from the Left, especially the communist parties, push the pipeline more eagerly. Unlike the liquefied natural gas deal, the pipeline via Pakistan would not involve U.S. technology or funding. Both the World Bank and Asian Development Bank have shown interest in funding the project, despite U.S. opposition. To them, such a venture would be a triumph for cooperation between two neighboring countries that have fought four wars in less than sixty years.[23]

Washington could still scuttle the project, though. The Congressional Research Service noted: “Successive administrations have considered pipeline projects that include Iran as meeting the definition of ‘investment’ in ILSA,”[24] a position to which Rice reportedly subscribes.[25] U.S. ambassador to India David Mulford told the Indian media, “We have in a very friendly way notified and reminded the Indian government that the legislation is there—the Iran-Libya Sanctions Act.”[26]

The Farsi offshore exploration and exploitation deal is as bogged down in practice. In March 2007, the consortium discovered huge quantities of gas. By terms of its agreement, though, the group could neither transport the gas to India nor swap on its behalf. Instead, it would accept a 35 percent financial share on its sale by Iran,[27] but given the disputes over liquefied natural gas pricing, there appears to be no certainty over payment in the short term. And while the actual cost of exploration is less than the $20 million ceiling set by ILSA,[28] commercial production would increase Indian investment past the threshold and could invoke ILSA sanctions. U.S. officials appear equally opposed to further Indian involvement in Farsi bloc exploitation.

The coverage in the Indian media on energy deals involving Iran is not only disproportionate to the size of the deals but also to their importance. Contrary to popular perception, until recently Iran has not been a vital source of energy supplies to India (Table 1). Traditionally, India imported more oil from Iraq, Nigeria, Saudi Arabia, and the United Arab Emirates.

Table 1: India’s Import of Oil from Iran (In US$ million)

Year	Imports from Iran	Total imports	Iran’s share in overall imports
1996-97	662.57	11,464	5.7
1997-98	432.21	10,067	4.2
1998-99	264.31	8,043	3.2
1999-00	901.29	14,350	6.2

Source: “Export Import Data Bank,” Director General of Foreign Trade, Ministry of Commerce and Industry, New Delhi.

Iran, therefore, makes news not because it is essential to India but because it is problematic. Difficulty in realizing benefits from Iranian investment is highlighted by the juxtaposition with Indian projects elsewhere in the region. For example, India’s 25-year gas deal with Qatar signed in October 2000 has been so smooth that Qatar agreed to supply an additional 2.5 million tons of liquefied natural gas over and above its 5 million-ton commitment. The state-owned Oil and Natural Gas Commission has invested over $2 billion in the Sakhalin oil and gas fields in Russia. Likewise, Indian companies have invested over $2 billion in Sudan.[29]

And even though the Indian government stopped identifying the source of its energy supplies in 2000, comparing Ministry of External Affairs figures on Iranian energy imports with the data provided by the director general of Foreign Trade suggests that Iran’s share of India’s oil import bill was only about 8 percent in 2005-06.[30]

Indian policymakers are, nonetheless, between a rock and a hard place. New Delhi’s support for Washington’s position on the IAEA should have settled the U.S. policymaking community’s misgivings about Indian relations with Iran. It was a move that was unpopular among many in India. In an editorial reflective of the position of left-wing critics of the government, The Hindu condemned “the Singh government’s shameful willingness to abandon the independence of Indian foreign policy for the sake of strengthening its strategic partnership with the United States.”[31] Other critics pointed out the suddenness with which Indian authorities switched positions toward Tehran despite their lofty rhetoric of civilizational links. Left-of-center parties even sought to censure Singh over the IAEA vote.

At the same time, whether or not Washington spelled out a quid pro quo, Indian officials sought to facilitate the nuclear deal with the United States by accommodating Washington’s concerns vis-à-vis Iran. While Shyam Saran, secretary at the Ministry of External Affairs, equivalent to an under-secretary in the United States, formally argued that there was no link between the vote and the nuclear deal with the United States,[32] India’s former ambassador to Iran highlighted the fallacies of the official justifications. Responding to the Indian vote at IAEA, M. Hamid Ansari, who in August 2007 became India’s vice-president, commented:

Despite the clumsy manner in which it had handled the issue, New Delhi may have been influenced by many other issues in its apparent reconsideration of its policy toward a nuclear Iran. New Delhi shares Western concerns toward nuclear proliferation. On February 17, 2006, Singh told Lok Sabha, the lower house of the Indian parliament, that India’s votes to find Iran in breach and then refer its case to the U.N. Security Council were influenced by “our security concerns arising from proliferation activities in our extended neighborhood.”[34] While critics could argue that the Indian government lacked the moral authority to dissuade other countries from developing nuclear programs given its own investment in both civilian and military nuclear technology, it kept its objections technical and focused upon obligations Iran had assumed when it voluntarily signed the Non-Proliferation Treaty, a treaty to which India has never been a signatory.

Perhaps the domestic critics of the Indian government were too harsh. The Islamic Republic has grown increasingly isolated. Both U.N. Security Council resolutions 1737[35] and 1747,[36] albeit limited in scope, passed unanimously.

Indian policymakers maintain an open mind toward Iran and are always willing to reassess and recalibrate New Delhi’s policy. At present, relations are cooling as the Iranian government pursues a confrontational path toward the outside world. If revolutionary zeal contributed to the hardening of Iranian attitudes in the early 1980s, hydrocarbon resources now play a similar role.

Therein lies the key to the Indian dilemma. On the nuclear question, the choice is not between Tehran and Washington but between a belligerent Iran and its Arab neighbors who are equally important to India. With over 3.5 million expatriates working in the region, relations with oil-rich Arab countries are far more important to India than Iran. While Indian authorities consider U.S. pressure in their formulation of policy, energy security is equally important. Iranian officials here are their own worst enemy. Tehran’s policies, especially over pricing, have made Iran an unreliable partner. Perhaps after the Ahmadinejad era passes, tensions between Iran and its neighbors will ease. On that day, Indian officials will become interested in developing relations as far as their Iranian counterparts will allow.

[1] Harsh V. Pant, “India and Iran: An ‘Axis’ in the Making?,” Asian Survey, May-June 2004, pp. 369-83.
[2] C. Christine Fair, “India and Iran: New Delhi’s Balancing Act,” The Washington Quarterly, Summer 2007, p. 145.
[3] Prime Minister Manmohan Singh, news conference, New York, Sept. 16, 2005, Ministry of External Affairs, New Delhi.
[4] In the first quarter of 2007, it stood at 9.1 percent. BBC Online, May 31, 2007.
[5] Ram Naik, “Oil and Gas in India,” keynote address, “The World Petroleum Congress: Asian Regional Meeting,” Shanghai, Sept. 19, 2001.
[6] Director General of Foreign Trade, Ministry of Commerce and Industry India, New Delhi, accessed on June 13, 2007.
[7] IEA World Energy Outlook, 2005: Middle East and North Africa Insights (Paris: International Energy Agency, 2004), p. 254.
[8] Business Line (Chennai), Aug. 20, 2005.
[9] Keun-Wook Paik, et al., “Trends in Asian NOC Investment Abroad: Working Background Paper,” Chatham House, London, Mar. 2007, p. 18.
[10] Ibid., p. 16.
[11] The Hindustan Times (New Delhi), Dec. 13, 2005.
[12] The Asian Pulse (Rhodes), Apr. 7, 2005.
[13] OutlookIndia.com (New Delhi), May 9, 2007.
[14] K. Alan Kronstadt and Kenneth Katzman, “India-Iran Relations and U.S. Interests,” Congressional Research Service report, RS22486, Aug. 2, 2006, p. 5.
[15] C. Christine Fair, “Indo-Iranian Ties: Thicker than Oil,” Middle East Review of International Affairs (MERIA), Mar. 2007, p. 48.
[16] The Hindu (Chennai), Jan. 24, 2005.
[17] The Tribune (Chandigarh, India), May 2, 2006.
[18] The Hindu, Feb. 5, 2006.
[19] The Hindu, May 21, 2007.
[20] Fair, “India and Iran,” p. 145.
[21] Kronstadt and Katzman, “India-Iran Relations and U.S. Interests,” p. 6.
[22] The Washington Post, July 21, 2005.
[23] S. G. Pandian, “Energy Trade as a Confidence-building Measure between India and Pakistan: A Study of the Indo-Iran Trans-Pakistan Pipeline Project,” Contemporary South Asia, Sept. 2005, pp. 307-20.
[24] Kronstadt and Katzman, “India-Iran Relations and U.S. Interests,” p. 6.
[25] AsiaTimes Online, Mar. 18, 2005.
[26] The Hindu, Aug. 31, 2005.
[27] The Hindu, May 10, 2007.
[28] The Hindu, May 10, 2007.
[29] Alexander’s Gas and Oil Connections (Voorburg, Netherlands), June 22, 2005.
[30] Ministry of External Affairs Annual Report, 2005-06, Ministry of External Affairs, New Delhi, p. 47; Ministry of External Affairs Annual Report, 2006-07, Ministry of External Affairs, p. 46; “Export Import Data Bank,” Director General of Foreign Trade, Ministry of Commerce and Industry India, New Delhi, accessed on June 13, 2007.
[31] The Hindu, Sept. 26, 2005.
[32] Shyam Saran, news briefing, Sept. 26, 2005.
[33] M.H. Ansari, “Et EU, India? Did We Have to Play a Surrogate’s Surrogate?,” OutlookIndia.com, Oct. 10, 2005.
[34] Manmohan Singh, statement to Indian parliament, Feb. 17, 2006, Ministry of External Affairs.
[35] “Non-proliferation,” Dec. 27, 2006.
[36] “Non-proliferation,” Mar. 24, 2007.