How America's Sanctions Against Iran Affected Indian Oil Companies
Despite the difficulties in separating oil from politics, harmless companies should be left out of international political feuding.
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.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter