India has upper hand in Iran oil wrangle

India seems to hold the upper-hand over Iran in a dispute over payments for crude oil shipments that has been rumbling for over six months.

Iran supplies India with 12-14 per cent of its total imports, making it India’s second biggest provider after Saudi Arabia. But a payments dispute has left India owing debts estimated at anywhere between $2-6 billion. In effect, this means India has been importing Iranian oil on credit since December 2010.

The National Iranian Oil Company (NIOC) “seriously warned” of the possibility of halting all exports if the dispute was not resolved by the end of this month. Jaipal Reddy, India’s oil minister, responded by claiming that he was “optimistic” about finding a solution.

Realistically, Iranian threats are hollow. India imports 400,000 barrels per day and is the second-biggest buyer of Iranian crude after China. Iran made $12 billion dollars from selling oil to India last year. New Delhi clearly holds the bargaining power in any negotiations.

Mohammad Aliabadi, Iran’s caretaker oil minister, distanced himself from NIOC’s warning. “Exporting oil to India, one of our traditional and long-term customers, will continue” he told an Iranian state news agency. “India will solve the problems about the payments for oil exports within the next one or two months”.

Iran is the world’s fourth-largest oil exporter but international sanctions complicate the payments procedure. US opposition to India’s close economic ties with Iran has also damaged the possibility of finding a resolution. India is Asia’s third largest oil importer and, without its custom, only China, Japan and South Korea would remain as significant buyers of Iranian oil.

By contrast, India has other options. Saudi Arabia is the country’s largest provider and Indian refiners bought 3 million extra barrels from the kingdom last month. Last year one of India’s largest private refiners, Reliance Industries, ended their contracts with Iran altogether.

On the surface, New Delhi seems determined not to let the issue damage wider relations with President Mahmoud Ahmadinejad’s government. Nirupama Rao, India’s most senior foreign ministry official, was in Tehran yesterday in talks that focussed on “combating global terrorism, energy security, developments in Afghanistan and regional stability”.

Despite Aliabadi’s urgency, India seems in no hurry to solve the dispute. Iran is in no position to make demands on India as it so heavily relies on its custom. New Delhi holds all the cards.