The key question is this: Will India get a special waiver from the US, as some other Asian buyers are expecting, or will the country defy the Trump diktat? Last week, Petroleum Minister Dharmendra Pradhan stated that India would follow its national interest, but that is easier said than done. At any rate, Indian importers, like Mangalore Refinery and Petrochemicals (MRPL), Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL), and private sector players, like Nayara Energy (earlier Essar Oil), have been in a state of panic. Forty per cent of Nayara Energy's crude oil requirement comes from Iran.
With the snap-back sanctions on Iran likely to kick in from November 4, oil companies are stocking up. In September, India reportedly shipped in about 528,000 barrels per day (bpd) oil from Iran, a 27 per cent increase over the same month last year and one per cent more than August.
"We don't know if a waiver will be given to us. However, two oil companies have made nominations to purchase Iranian oil in November,' Pradhan said. The two companies, IOC and MRPL, have together placed orders of around 1.25 million tonnes for November. India is of the view that it will go ahead with its purchase commitment for December too.
According to multiple sources close to the developments, though India has lined up its concerns before the US, they are yet to get any positive response. "We told them that it may affect our current account and fiscal deficit as sweet-grade Brent crude has around 28 per cent representation in the Indian import basket," said a person close to the development.
Experts think a US waiver for some Asian players can be expected by November 4. Debasish Mishra, a partner at Deloitte Touche Tohmatsu in India, said there are some indications that the US would provide a selective and time-bound waiver to certain producers such as BP and Serica and some key Asian buyers who would need more time to find alternate sources.
Signs of sanctions-related problems were in evidence as early as September. Much of the crude that came in that month was actually an August consignment that had been stuck after international insurers backed out of insuring Iranian crude. It was released after Iran provided the insurance.
Payment and insurance will remain the sticking points going forward. During the previous sanctions, the two countries struck a rupee-payment deal through the state-owned UCO Bank, made possible because the Kolkata-based bank had no dealings with the US. This route is now closed because UCO has since acquired some US exposure. Another option that the government is contemplating is to pay in rupees through the Iranian private lender Bank Pasargad, which already has a branch in Mumbai.
Indeed, Iran has been accepting a portion of its payments in rupees, said IOC Chairman Sanjiv Singh, though he did not specify the proportion. "Let us see how it evolves," he added.
If imports from Iran are to continue in the sanctions era, India may have to revert to the cost, insurance and freight (cif) model as opposed to the free-on-board (fob) mode. Under cif, the seller -- in this case, an Iranian entity -- incurs the costs and pays freight, including insurance charges, against the fob mode, which involves the buyer chartering the vessel and paying the cost of shipping and so on.
Based on the agreement between India and Iran, local refiners were expected to lift more than 21 million tonnes of oil from Iran during the current financial year. If India is forced to follow the US imposition, it may have to lift crude oil from the spot market or look for additional supplies from other West Asian buyers. Either way, the choice will be expensive.
If the US Congress cancels, as it is threatening to, a mega-arms deal with Saudi Arabia in retaliation for the alleged assassination of Washington Post columnist and US resident Jamal Khashoggi, the consequences for India will be dire. Saudi Arabia, which accounts for about 10 per cent of global crude demand, has vowed to push oil prices to three digits should this happen.
The need to fuel India's growing economy is one key reason for maintaining the Iranian relationship. Crude oil imports of $9 billion per year form the bulk of the $13-billion bilateral trade between India and Iran. But there are strong historical ties, too. Iran played a key role in India's journey towards becoming the refining giant it is today. In 1947, none of the western oil giants -- Burmah Shell, Standard Vacuum or Caltex -- heeded the Indian government's demand to consider setting up refineries in India. That only happened in the 1960s when Iran became the first foreign company to join hands with India to build Madras Refineries (now known as Chennai Petroleum Corporation).
That relationship with a "good old friend" and near neighbour now depends on the whims of the occupant of 1600 Pennsylvania Avenue in Washington.