Lowering of crude oil prices the likely outcome of the Iran nuclear deal will contribute positively to the India economy, across the oil and gas value chain barring domestic upstream players, says India Ratings and Research (Ind-Ra). A decline in oil prices could lower LNG prices as the two are linked and this is likely to benefit end-consumer industries such as fertiliser and petrochemicals.
The agreement reached between Iran on its nuclear programme and the five permanent members of the National Security Council (the US, UK, France, Russia and China) is likely to result in the resumption of oil supplies of nearly 1 million barrels per day. The supply will rise gradually over the next one year from Iran to an already oversupplied crude market. The supply however would be contingent on Iran satisfying the requirements outlined by the United Nations Security Council.
Oil refiners will benefit by way of lower crude oil prices as imports from Iran will be more cost effective than imports from Africa, Latin America and Venezuela among others. This is because of the lower lead time and better credit terms (90 days) available from Iran than the 30-day credit period offered by others, thus improving the working capital cycle for refiners.
Post the agreement and lifting of sanctions on Iran, lower insurance and transportation costs are likely to reduce the overall landed cost of Iranian oil in India. The EU and US had imposed sanctions on the insurance and transportation of Iran’s oil in July 2012, which lowered crude imports from Iran to 11mmt in FY14 from 21.2mt in FY10 and its share in Indian imports declined to 5.81% from 13.3%. For some refiners, it would also lead to the payment of outstanding dues towards oil imports of nearly USD6.5bn from Iran as payment channels might open up post lifting of the sanctions.
Domestic public sector upstream players may benefit from a lower subsidy burden if the quantum of under-recovery and hence subsidy declines. However, the benefit of lower subsidy could be offset by lower realisations that public sector units would face because of a decline in crude prices. Gross under-recoveries have more than halved since FY13 on falling crude prices, de-regulation of diesel and petrol and the implementation of direct benefits transfer scheme. Under-recoveries in FY16 would be only on account of kerosene and LPG.
Ind-Ra envisages a fresh impetus to activities at projects such as Chabahar Port, Farzad-B gas field and the Iran-India gas pipeline. Chabahar Port will provide India sea and land access to Afghanistan and thus will improve the trade between Central Asia and India. It will also aid in saving of transportation costs compared with shipping from Bandar Abbas which is a port 830km to the west. Chabahar Port can handle larger sized vessels than Bandar Abbas which can only handle smaller vessels which increases shipping costs. Ind-Ra estimates the opening of Chabahar port could lead to a distance reduction by nearly 600km-700km, thus savings on transportation costs and turnaround times by at least a third.
The lifting of sanctions could also help revive investments by ONGC Videsh Limited in Farzad-B gas field, which could entail investments of nearly USD7bn. Additionally at some stage, talks on the USD4bn Iran-India gas pipeline could restart. Successful execution of the pipeline could lead to a healthy supply of gas from Iran, which could be priced competitively given transportation costs through pipelines are far lower. India also had plans of buying 5mt of natural gas per year under a deal signed in 2005, between National Iranian Gas Export Company and India’s Gas Authority of India Limited (‘IND AAA’/Stable), Indian Oil Ltd (‘IND AAA’) and Bharat Petroleum Corporation Limited. The resumption of these projects and deals will lead to higher supplies and lower prices which will benefit Indian corporates which rely on oil and natural gas.