How America's Sanctions Against Iran Affected Indian Oil Companies

By Ashim Midha  NOV 04, 2011 12:30 PM

Despite the difficulties in separating oil from politics, harmless companies should be left out of international political feuding.

 


Beneath the news coverage of the debt limit fiasco this summer and the European bailout chaos this fall was another significant debt-related issue. Imagine the following figure in the “Accounts Payable” row of your company’s balance sheet: $5 billion. You might be thinking -- why on earth would I ever let that happen? No idea. I’d be asking myself the same question. Well, this is exactly the dilemma India has been dealing with for the greater part of the last few months.
 
In the world we live in, oil and water certainly do not mix, but politics and petroleum economics are virtually inseparable. At times, however, the effects of this association can be severely harmful to the oil markets and the day-to-day operations of companies as well. In the case of the United States and its attempt to embargo Iran into economic isolation, India and its oil companies were unnecessary victims of major uncertainty regarding trade, operations and cash flow.
 
How exactly does this amount of debt owed come to fruition? Pressured by the United States government, the Reserve Bank of India decided to remove a payment clearing system with Iran. According to the US government, there was the possibility that this arrangement could be used by Tehran for allegedly creating a nuclear weapons program. But for private oil companies in India such as Mangalore Refinery and Petrochemicals (MRPL.NS) and Essar Energy (ESSR.L), this meant that their debts continued to increase as they could not find a viable method of payment despite reportedly attempting to do so through a German bank controlled by Iran, Europäisch-Iranische Handelsbank. Its payment system was also blocked due to similar pressure to cut off Iran’s economy.
 
Iran, with 154.8 billion barrels of oil in proven reserves, contributes a 12% share of India’s oil imports. India’s total consumption of crude is close to 4 million barrels per day. With prices hovering around the $90 to $100/barrel level the past year, that sort of debt adds up quick. For a more tangible understanding, get your calculators out: 140 days x 400,000 barrels/day x $90/barrel -- that’s about $5 billion.
 
In late July, Tehran delivered a striking blow -- they threatened to blockade crude oil exports to India if they were not paid in full in a timely fashion. Short of building new refineries to handle a different type of crude input, it was almost impossible for India to purchase oil from another country; the switching costs were much too high. Through three-party negotiations between India, Iran and Turkey, the decision was made to pay the debt through Halkbank, the Turkish state-owned bank. Similarly, reports spread that Russia’s Gazprombank was another intermediary bank for the payment. Effectively, pressure from Washington was ultimately sidestepped, weakening their attempt to isolate Iran because, in the end, Iran rightfully received the money they were owed.
 
Imagine the United States as a similar “unnecessary victim.” The US imports almost 50% of the crude oil it consumes. With the removal of a payment system but a continuation of imports, companies like ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Shell (RDS-A), just to name a few, would be up to their eyes in debt. A policy of “Not in my backyard” leaves individuals to consider the United States politically hypocritical. What goes around does in fact come around.
 
Not only is this situation a detriment to the credibility of those Indian oil companies, but it's also an example that undermines the effectiveness of embargoes in present-day. As unbelievable as it may be, there are many countries in our world that we cannot live without, especially in a time of significant globalization and ultimate openness across borders. In a domino effect, embargoes beget embargoes; soon enough the benefits that many countries enjoy as a result of free trade are immediately lost. As did occur in Germany, other countries may also be pressured into closing down their payment systems. In the future, before resorting to such extreme measures in order to resolve conflict, harmless parties should, as much as possible, be left out of international political feuding.



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