India and Iran share a long-term economic complementarity that has formed the basis of close bilateral ties.  India’s large and growing energy demand and Iran’s pool of energy resources make the two nations natural economic partners.  India’s search for energy security in a rather volatile energy market makes Iran, with the world's fourth-largest reserve of oil and second-largest reserves of natural gas, highly attractive.  Iran needs substantial investments in its oil and gas industry despite having the world’s second-largest gas reserves after Russia.  The sanctions imposed by the West have made it difficult for Iran to emerge as a major exporter of oil and gas.  Though economic and commercial links between India and Iran are at present dominated by the purchase of oil from Iran by India, the two nations can complement each other also in various other fields such as agriculture, information technology, and petrochemicals.  Iran desperately needs not only industrial goods but also investments and technology from India to shore up its economy.  Iran can also use India’s experience in the building of infrastructure like in the construction of roads and railways.  As India and Iran try to boost their rates of economic growth, sound infrastructure is something that both need to give a priority focus.

It is the energy relationship between India and Iran that remains at the heart of a long-term partnership between the two countries, even as Indo-Iranian relations have significantly diversified across various sectors in recent years.  It is in this context that the building of a  natural gas pipeline between India and Iran has assumed great importance.  Various options, such as offshore and overland routes, have been under consideration for quite some time now.  Both these options have their problems, especially the problem of relying on Pakistan for the security of these pipelines.  While India has indicated that the gas pipeline from Iran remains a foreign policy priority despite US opposition, the proposal has been stuck because of differences between India and Iran on pricing and on methods to supply the gas.  There are also differences between the national oil companies of Iran and India over the legal interpretation of the contract for the export of 5 million tons of liquefied natural gas (LNG) to India.  Both India and Pakistan contend that Tehran offer a price for gas in line with global practices for long-term contracts and have rejected Iran’s gas pricing formula wherein the gas price is linked to Brent crude oil with a fixed escalating cost component.  The three states then decided to get a realistic appraisal of gas prices through an independent consultant, although Iran has maintained that the consultant’s opinion would not be binding.

India indeed would like to make its presence grow in the Iranian energy sector.  Not only has Pakistan signed the pipeline deal with Iran, but China is starting to make its presence felt in Iran in a big way.  China is now Iran’s largest trading partner and is undertaking massive investments in Iran, rapidly occupying the space vacated by Western firms.  India is right to feel restless about its own marginalization in Iran despite its historic ties with the country.  Where Beijing’s economic engagement with Iran is growing, New Delhi’s presence is shrinking, with Indian firms such as the Reliance Industries having withdrawn from Iran and others shelving their plans.  There is little evidence, so far, that Iran would be a reliable partner in India's search for energy security.  A number of important projects have either been rejected by Iran or have yet to be finalized due to its changing of terms and conditions.

For all the hype, Iran is responsible merely for about 8 percent of Indian oil imports.  Moreover, both the major energy deals signed with great fanfare by the two sides are in limbo as of now.  India’s 25-year $22 billion agreement with Iran for the supply of LNG has not moved an inch since signed in 2005, as it requires India to build a LNG plant in Iran that would need American components.  This might end up violating the US Iran-Libya Sanctions Act.  The other project involving the construction of 1700 mile $7 billion pipeline to carry natural gas from Iran to India via Pakistan is also stuck for a number of reasons.  The Indian government initially viewed the pipeline project as a confidence building measure between India and Pakistan, but when pressure started mounting, the Indian Prime Minister went so far as saying that he didn’t know if any international consortium of bankers would underwrite the project given the uncertainties in Iran.  The Indian strategic community has never been in favor of this proposal, as in their opinion it ends up giving Pakistan too great a leverage over India’s energy security.  The price Pakistan has been demanding for security and transit is another reason the project has not moved forward.

Both these projects have also brought home to Indians the unreliability of Iran as a trade partner.  There are differences between the national oil companies of Iran and India over the legal interpretation of the contract for the export of LNG to India.  This deal was signed before Mahmoud Ahmadinejad was elected President of Iran and was tied to a relatively low market price for crude oil.  India considers the deal final and binding while Iran has argued that it is not binding because it has not been ratified.  The Iranian Supreme Economic Council has refused to ratify the 2005 agreement, demanding an upward revision in price.  Amid the growing global isolation of Iran, sectors of the Indian government have suggested that India’s participation in the gas pipeline deal might not give any strategic advantage to India, given the very low quantity (30 million standard cubic meters per day) of gas involved.  Buying gas at the Pakistan-India border is being advocated as a better alternative.  Moreover, it appears that the Iranian gas is not the lowest priced option at the current price structure for India.  India has made it clear that while it remains interested in the pipeline project, it would pay for the gas only after it is received at the Pakistan-India border, it would not pay a penalty in case of a delay, and it remains opposed to Iran’s demand for revision in gas prices every three years.  The conclusion of the US-India nuclear agreement and a relative decline in the price of crude oil seem to have given India the diplomatic leverage it did not have before.

The pipeline project had attracted a lot of attention in Washington, where there has been strong opposition to India proceeding with the deal, especially at a time when India has been trying to build a strategic partnership with the US.  There has been bewilderment in India concerning US insistence that India not to move forward with this project.  Given geographical realities, the India section of the pipeline would materialize after Iran and Pakistan have completed their part.  If the US did not object to Pakistan going ahead with the project, then it implied that it had no objections to the deal per se.  However, if the US decided to put pressure on Pakistan which then dragged its feet on the project, there was no issue as far as India was concerned.  It was not New Delhi but Islamabad that was central to the finalization of the deal, and so pressure on India to pull back from the pact seemed unwarranted.  Rejecting Washington’s demand to scrap the project because of Tehran’s nuclear ambitions, Pakistan has recently finalized the gas pipeline deal with Iran, connecting Iran’s South Pars gas field and Pakistan’s Balochistan and Sindh provinces.  The pipeline is expected to start operating from 2014, exporting more than 21 million cubic meters of natural gas daily to Pakistan.  However, the deal remains a controversial one even in Pakistan because of the high price that Iran is charging.  India has kept its options open to join the project at a later date even as China has demonstrated a keen interest in joining the project.

Until 1995 China was a net exporter of oil; today the country has emerged as the world’s second-largest oil market after the US.  China’s rapidly growing economy is dependent on imports of oil and oil products, around 58 percent of which originate in the Middle East.  It has been estimated that by 2015, 70 percent of China’s imported oil will come from the Middle East.  China’s burgeoning appetite for oil is only going to grow in the coming years, and its dependence on Middle Eastern sources of energy will only increase further.  Saudi Arabia and Iran between themselves account for around 30 percent of China’s oil imports, so they have emerged as the pivot of China’s Middle East policy.  Energy security for China is crucial to sustain its present rates of economic growth, indeed as many in China worry about their country being potentially vulnerable to a US blockade of oil shipment from the Persian Gulf to China.  China’s exports to the Middle Eastern states have also been systematically increasing in the last few years, and China is rapidly buying equity stakes in Middle Eastern development projects.

Energy is driving China’s relationship with Iran, with the two countries collaborating on a number of major energy projects.  However, the Sino-Iranian relationship dates back to the 1980s when China started supplying Tehran military weaponry, the list of which has expanded from cruise missiles to long range ballistic missiles to assisting Iran’s chemical and nuclear weapons program.  Iran hopes to defeat its global isolation by courting China, and China can make use of Iran’s energy resources without any real competition.  Iran was the third largest exporter of crude oil to China last year, accounting for about 11 percent of China’s total crude imports.  Chinese firms are key suppliers of ballistic and cruise missile related technologies to Iran, as Iran is China’s main customer for arms sales, both conventional and WMD, in the region.  China is also helping Iran in pursuing the development of a nuclear fuel cycle for civil and nuclear weapon purposes, despite Beijing’s 1997 bilateral commitment to the US to forgo any new nuclear cooperation with Iran.  China has made sure that the West is unable to tale any effective coercive measures against Iran on the issue of its nuclear program, even as Iran has continued to ignore the Security Council resolutions.

Ever since the United Nations Security Council began imposing sanctions on Iran, India has enforced all UN measures against Tehran.  But there is a growing realization in the corridors of power in New Delhi that while its energy interests in Iran have suffered as a result, China, a member of the Security Council, has been able to pursue its energy interests in Iran without much difficulty.  This is happening at a time when energy and economic competition between China and India is heating up across the globe.  China’s growing naval presence in and around the Indian Ocean region is troubling for India as it restricts India’s freedom to maneuver in the region.  Of particular note is what has been termed as China’s “string of pearls” strategy that has significantly expanded China’s strategic depth in India’s backyard. 

The “string of pearls” strategy of bases and diplomatic ties includes the Gwadar port in Pakistan, naval bases in Burma, electronic intelligence gathering facilities on islands in the Bay of Bengal, funding construction of a canal across the Kra Isthmus in Thailand, a military agreement with Cambodia and building up of forces in the South China Sea.   Given that almost 80 percent of China’s oil passes through the Strait of Malacca, it is reluctant to rely on US naval power for unhindered access to energy.  Therefore, it has decided to build up its naval power at choke points along the sea routes from the Persian Gulf to the South China Sea.

China is also courting other states in South Asia by building container ports in Bangladesh at Chittagong and in Sri Lanka at Hambantota.  Consolidating its access to the Indian Ocean, China has signed an agreement with Sri Lanka to finance the development of the Hambantota Development Zone, which includes a container port, a bunker system and an oil refinery.  China’s activities at Marao in the Maldives have also generated apprehension in New Delhi.  It is possible that the construction of these ports and facilities by China can be explained away on purely economic and commercial grounds, but for regional powers like the US, Japan and India, these activities seem to be aimed at them.  China’s diplomatic and military efforts in the Indian Ocean seem to exhibit a desire to project power vis-à-vis competing powers in the region.

India will be reluctant to lose Iran to China and so has galvanized its outreach to Tehran in recent months.  The latest meeting of the India-Iran joint commission in New Delhi resulted in the signing of several important pacts, including an air services agreement, memorandum of understanding (MoU) in new and renewable energy, an agreement on expanding counter-terror cooperation, and an agreement on the transfer of sentenced persons.  Infrastructure, oil, gas, petrochemicals, chemicals, pharmaceuticals, and agriculture were identified as priority areas of cooperation so as to boost bilateral trade from $30 billion to $51 billion.  The two sides also agreed to cooperate on the evolving situation in Afghanistan as the debate has intensified on the withdrawal of American forces from the country.  The Indian government has been keen in recent months to underline that it favors dialogue and diplomacy as means of resolving the Iranian nuclear crisis.  India has underlined that unilateral sanctions on Iran will hurt India, expressing its disapproval of sanctions by individual countries that restrict investments by third countries in Iran's energy sector.  As the Indian Foreign Secretary, Nirupama Rao, recently made clear, India is “justifiably concerned that the extra-territorial nature of certain unilateral sanctions recently imposed by individual countries, with their restrictions on investment by third countries in Iran's energy sector, can have a direct and adverse impact on Indian companies and more importantly, on our [India’s] energy security and our attempts to meet the development needs of our people.”

India is trying to maintain a balance between pursuing its vital energy interests in Iran and adhering to its global obligations.  But New Delhi’s strategic room to maneuver in Tehran will remain limited so long as Tehran does not find a modus-vivendi with the West on the nuclear question.