India Intelligence Report

   Mega LNG Deal with Iran is dead


Visiting Iran’s Deputy Oil Minister Hadi Nejad Hosseinian informed stunned Government officials that the much-publicized and anticipated USD 22 billion-mega deal to bring Liquefied Natural Gas (LNG) from Iran is dead. This move was expected as an earlier business delegation of Gas Authority of India Limited (GAIL) and Bharat Petroleum Corporation Limited (BPCL) was given a waffling message by Iran’s National Iranian Gas Export Corporation (NIGEC) that it needed Government approval.

This was surprising to the Indian companies, which believed that this waffling was because of India’s vote against the Iranian Nuclear Program at the International Atomic Energy Agency (IAEA) in September 2005. Later, NIGEC told their Indian customers that it reserves the right to withdraw from the deal if the price of crude goes beyond USD 80 a barrel. Disappointed and agitated Indian companies said that Iran wanted open-ended contracts when a previous Government already aggressively negotiated the 5 million metric tons per annum (mmtpa) LNG deal. The only condition of that deal was that NIGEC’s parent company National Iranian Oil Company (NIOC) had to ratify it in a month which it never did. It is not clear why the Indian customers or then Petroleum Minister Mani Shankara Aiyar did not raise the issue with NIOC or whether that was done but disregarded by Iran.. 

The Iranian Government believes that its previous Government “undersold” the LNG and Petroleum Minister Murli Deora said, “The main difference was price.” Hosseinian told reporters that Iran has sought legal opinion and thought it was all right for it to walk away from the deal. He refused to say whether they would have to pay damages to India. Deora said that “Iran is a friend” and that India “will continue to engage with them.” He did not say whether India would enforce contractual obligations against Iran. 

The Economic Times quoted unnamed sources saying that India was willing to scrap the deal once Iran started waffling on price. However, the Prime Minister was against that move, as it would not look good politically inside and outside the country. The Times of India said that the deal was signed with a handwritten note into the contract that agreed to a political ratification of the deal. It is not clear who authorized this hand-written note and whether the lawyers from both sides had seen or agreed to the note. It is also not clear whether the note was a politically agreement and if so the Indian official who authorized that insertion. The Indian companies were unaware of this note and their legal opinion said that Iran does not need political ratification.

The whole episode smacks of bad business practice and ethics. It raises serious questions on Iran’s ability to become a dependable vendor of fossil fuel. The interesting derivative is that while proclaiming this deal to be dead, Iran is actively wooing India on the Iran-Pakistan-India (IPI) pipeline project. Is it possible that Iran wants that project to drive a wedge between India and the US? Is it possible that Iran feels that it can leverage the IPI project to restrain India from voting against its nuclear program?

India should question Iran on why it should trust Iran to be a reliable supplier in that deal when it cannot honor a much larger contract. India had publicly said that it would not rush into the IPI deal if the mega LNG deal is not honored. India cannot confuse “friendship” with business. Capitulating to this breach of contract and ethics will seriously undermine India’s capacity to negotiate with other countries.

If necessary, India should pursue a legal recourse to force Iranian compliance.