What does Iran’s nuclear deal mean for Indo-Iranian energy cooperation?

By Hasan Alhasan

Despite India’s growing energy needs and Iran’s impressive reserves, over the past decade, Indo-Iranian cooperation on energy has all but collapsed under pressure from the United States and the international sanctions regime. Between 2006 and 2015, Iran’s share of India’s crude oil import bill dropped from 14% to 6%, at a time when India’s bill doubled in size from $47 billion in to $116 billion (Figure 1). India’s imports of natural gas from Iran fared even worse as India scarcely imported any natural gas at all from Iran (Damianova, 2015). Although Iran’s nuclear deal may promise to reverse the trend, it allows Iran to look beyond India for investments and export opportunities in the energy sector.newsletter62graphIndia

Figure 1 – India’s Imports of Crude Oil (in Millions of US$). Source: Indian Ministry of Commerce and Industry, Export Import Data Bank (Note: data on Iran’s share between 2000 and 2006 is unavailable)

Indo-Iranian energy ties collapse under US pressure and the international sanctions regime

Iran had maintained warm relations with India since the Iranian Revolution; but, by the turn of the millennium, its geopolitical rivalry with the US began to complicate its relationship with New Delhi. In March 2006, U.S. President Bush and Indian Prime Minister Singh signed a landmark agreement on nuclear cooperation that helped bring an end to India’s isolation from the global non-proliferation regime (Dietl, 2012). The U.S. used its leverage over India by pushing it to vote against Iran at the International Atomic Energy Agency in September 2005 and February 2006. (Damianova, 2015, Raja Mohan, 2009) Because of its need to secure U.S. congressional approval for its nuclear deal with the U.S., India complied.

The U.S. also directed its efforts more specifically towards curbing India’s energy ties with Iran. For example, senior U.S. officials, including former Secretary of State Condoleezza Rice, had expressed concern over the construction of a gas pipeline linking Iran, Pakistan, and India. Originally, the $7 billion pipeline was conceived as a way of bridging India’s growing demand for gas to Iran’s considerable supply, with Pakistan playing a transitory role. Partly because of American pressure, however, in 2007, India pulled out of the project (Katzman, 2009, Kronstadt and Katzman, 2006).

In another instance, members of the U.S. Congress pressed the U.S. Exim Bank to suspend $900 million worth of financial backing for Reliance Industries Ltd, an Indian energy corporation with significant investments in Iran at the time. Fearful of losing the Exim Bank’s financial assistance, Reliance Industries Ltd announced it would no longer supply Iran with shipments of refined gasoline (Katzman, 2009). American pressure had succeeded once again at dissuading India from doing business with Iran.

Beyond US pressure, however, the international sanctions regime had placed formal limitations on New Delhi’s ability to do business with Tehran. The U.S. Iran-Libya Sanctions Act (ILSA), later known as the Iran Sanctions Act (ISA), barred foreign corporations from investing $20 million or more in Iran’s energy sector (Katzman, 2009). The UN Security Council also passed several binding resolutions, including a resolution in 2010 targeting Iran’s financial institutions and central bank (United Nations Security Council, 2010). Combined, these sanctions have had a crippling effect on Indian investments in Iran and on Iran’s access to international finance and trade (Energy Information Administration, 2015).

International sanctions also placed a freeze on Iran’s ability to develop its LNG infrastructure, preventing Iran from realizing its potential of exporting natural gas around the world. To illustrate, in June 2005, India signed a $22 billion contract to acquire 5 million tons of Iranian LNG per year and to construct an LNG plant in Iran. Since the project risked contravening international sanctions and may have required U.S.-sourced components, it failed to materialize (Pant, 2011). By 2012, European and Chinese firms also scrapped similar contracts (Damianova, 2015). These stalled projects became emblematic of Iran’s broader inability to expand its under-developed LNG capacity because of the uncertainties introduced by the international sanctions regime.

The nuclear deal: a panacea for Indo-Iranian energy cooperation?

In 2013, Iran and the U.S. seemed finally ready to negotiate a comprehensive agreement to resolve differences over Iran’s nuclear program and bring an end to international sanctions. Following two years of intensive bargaining, Iran and the P5+1 signed the Joint Comprehensive Plan of Action, simply known as the Iran nuclear deal; the deal outlined certain limitations that Iran agreed to place on its nuclear program for a period of 15 years in exchange for sanctions relief.

To begin with, the nuclear deal lifted all international sanctions imposed on Iran because of its nuclear program; it undid those formal obstacles that had paralyzed Indo-Iranian trade. In the few months following the lifting of international sanctions on 16 January 2016, Iran’s share of India’s crude oil import bill doubled from 6% to 12%, its highest level in the last 6 years (Figure 1).

The lifting of sanctions also means that India’s energy corporations could resume investments in Iran without fear of American retribution. For instance, Indian officials have attempted to revive talks with Iran over the development of Farzad B gas field. Although Western sanctions had led India to suspend plans to develop the field, discovered by an Indian consortium in 2008, Indian officials have recently announced that they expect to finalize a deal with Iran by March 2017 (Verma, 2016).

Nevertheless, some Indian analysts worry that as Iran’s international isolation diminishes and its bargaining power vis-à-vis India grows, its negotiating behaviour may worsen (Dadwal, 2015). Because of the international sanctions regime, Iran was isolated and reliant on a handful of countries, including India and China, for investment and trade. Even then, however, Indian officials reportedly complained of Iran’s difficult negotiating approach (Pant, 2011). As Iran reintegrates into the global energy markets though, Tehran might turn to European firms for investments into its energy sector, leaving Indian energy corporations behind (Dadwal, 2015).

Iran’s improved bargaining position also strengthened its hand at renegotiating certain trade arrangements made under sanctions. Prior to Iran’s nuclear deal, India imported crude oil from Iran under terms rather favourable to its own interests. Under a 2012 memorandum of understanding, Indian payments were partly made in Indian Rupees and were placed in Indian bank accounts. Iran also extended a 90-day credit period to Indian energy firms which accumulated $6.5 billion in unpaid dues. Because shipping corporations declined to ship Iranian oil while sanctions were in place, Iran shipped oil to India at its own expense (Press Trust of India, 2016).

As restrictions were lifted on its ability to export crude oil, however, Iran seems to have adopted a more assertive approach in its trade with India. Iran’s National Oil Company has reportedly informed India that it would no longer accept Indian Rupees or bear the cost of transporting its oil, and has laid out terms for the repayment of its $6.5 billion worth of dues (Press Trust of India, 2016).


Although the nuclear deal has removed many of the obstacles facing Indo-Iranian trade and investment in energy, rising tensions between the US and Iran once again threaten to undermine the Indo-Iranian dynamic. President Trump’s stern approach towards Iran risks undoing the effects of the nuclear deal, even if the US and Iran uphold their ends of the bargain. Although the US has signalled that it would uphold the nuclear deal, the President Trump administration has put ‘Iran on notice’ (White House, 2017a) and has imposed new sanctions related to Iran’s ballistic missiles program (White House, 2017b). Beyond sanctions, the US could once again exercise its leverage over India to curb its energy-related business with Iran. In such a scenario, Indian policymakers would be hard-pressed to insulate India’s energy-related ties with Iran from the effects of U.S.-Iranian tensions.



DADWAL, S.R. (2015). Recalibrating Iran-India Energy Ties. New Delhi: Institute for Defence Studies and Analyses.


DAMIANOVA, K.K., 2015. Iran’s re-emergence on global energy markets: opportunities, challenges & implications. EUCERS.

DIETL, G. (2012). India’s Iran Policy in the Post-Cold War Period. Strategic Analysis, vol. 36 (6), pp. 871-881 ISSN 0970-0161. DOI 10.1080/09700161.2012.728864.

Energy Information Administration. 2015. Iran: International Energy Data and Analysis.

KATZMAN, K., 2009. The Iran Sanctions Act (ISA). LIBRARY OF CONGRESS WASHINGTON DC CONGRESSIONAL RESEARCH SERVICE ed., Washington, D.C.: Congressional Research Service.

KRONSTADT, K.A. and KATZMAN, K., 2006. India-Iran Relations and U.S. Interests. LIBRARY OF CONGRESS WASHINGTON DC CONGRESSIONAL RESEARCH SERVICE ed., Washington, D.C.: Congressional Research Service.

PANT, H.V. (2011). India’s Relations with Iran: Much Ado about Nothing. The Washington Quarterly, vol. 34 (1), pp. 61-74 ISSN 0163-660X. DOI 10.1080/0163660X.2011.534964.

Press Trust of India. 2016, 14 April 2016. Iran ends free oil shipping to India. Indian Express.

RAJA MOHAN, C. (2009). India and the Emerging Non-Proliferation Order: The Second Nuclear Age. In Indian Foreign Policy in a Unipolar World H.V. PANTFirst ed. New Delhi: Routledge, pp. 43-72.

United Nations Security Council. (2010). Resolution 1929 (2010).

VERMA, N. (2016). “India, Iran aim to wrap up Farzad B gas field deal by March”. Reuters. 27 October 2016, Available from: http://in.reuters.com/article/india-iran-idINKCN12Q14L.

White House. (2017a). “Statement by the National Security Advisor”. Available from: https://www.whitehouse.gov/the-press-office/2017/02/01/statement-national-security-advisor.

White House. (2017b). “Statement by the National Security Advisor Michael T. Flynn on Iran”. Available from: https://www.whitehouse.gov/the-press-office/2017/02/03/statement-national-security-advisor-michael-t-flynn-iran.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>