India balances energy relationship with the Middle East

India balances energy relationship with the Middle East
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As India’s demand for energy and investment continues to increase, the Republic must strike a careful balance in its relationships with its many Middle Eastern trading partners.

With over 1.2 billion people and the largest rural-urban migration rate in the world, India has seen historic growth as both an economic powerhouse and an influential voice on the international stage.

India is now home to globally recognized companies and a sizeable middle class that is only expected grow in the coming years. While India’s economy stands to benefit from new investments and a larger workforce, the nation finds itself in a constant race to fuel demand for energy.

Located close to the Persian Gulf, India relies heavily on Middle Eastern nations for crude oil, which makes up nearly one-fourth of Indian energy consumption. While the majority of India’s imported oil comes from Saudi Arabia and Kuwait, imports from Iran have steadily grown this year as a deal easing sanctions over Iran’s nuclear program took effect.

But India’s ties to the Middle East go far beyond oil and energy. India houses 10 percent of the world’s Shi’a Muslim population, and close to 12 percent of the Sunni population. This makes the Indian government extremely sensitive to Sunni-Shi’a tension that could spill over into India or threaten its investments and expatriate workers living in the Middle East.

Tensions among Gulf countries have mounted recently following the deal curbing Iran’s nuclear program. Gulf Cooperation Council members have forged closer partnerships with Iran much to the objection of Saudi Arabia, which views Iran as a threat to its economic and military dominance over the Gulf.

As tensions continue to rise, India finds itself in a balancing act to secure energy and investments from trading partners on either end of a potential regional conflict.

Energy and investments from GCC members

India is currently in talks with Gulf Cooperation Council (GCC) members Saudi Arabia and Kuwait for more favorable terms on oil contracts, as surging U.S. output frees up many of the oil-rich nations’ supplies. Saudi Arabia and Kuwait hope that by offering better terms, they can lock India into longer-term contracts as the easing of sanctions on Iran brings more oil into the market.

Saudi Arabia is India’s fourth-largest trading partner, with a total trade volume of $43.8 billion in 2013. And while imports of crude by India composed the majority of this trade, the two nations are seeking to transform their buyer-seller relationship.

Following a visit by Saudi Arabia’s Crown Prince Salman bin Abdulaziz Al Saud, India and Saudi Arabia agreed to set up a $750 million joint fund to facilitate investments in Indian infrastructure and hydrocarbon production. The two nations also signed a defense agreement, citing the close to 2 million Indian nationals living and working in Saudi Arabia.

But India’s reliance on the GCC for energy and investment stretches far beyond Saudi oil. The Abu Dhabi National Energy Company recently bought two Indian hydroelectric power plants in a deal worth $1.6 billion. The deal brings the state-run company’s combined energy capacity in India to 1,741 megawatts, giving the UAE significant control over India’s growing hydropower sector.

India has carefully and strategically maintained its focus on deepening energy and strategic partnerships with GCC nations. Iran’s reemergence, however, gives India the challenge of diversifying its energy supply while remaining neutral in the face of rising tensions.

Balancing with Iran

Before the 2012 sanctions, Iran was India’s second-largest crude oil supplier, providing between 350,000 and 400,000 barrels per day (bpd). The sanctions targeting Iran’s oil exports drastically cut down imports of Iranian oil to as low as 190,000 bpd.

Following the easing of sanctions late last year, however, Iranian oil exports to India have begun to rise. This gives India yet another source for energy it desperately needs to fuel its growing cities and maintain the stability of its power grid.

Although negotiations over further sanctions relief are ongoing, Iranian Foreign Minister Javad Zarif recently traveled to New Delhi to revive ties with India and “open a new chapter in the relationship.” India recently announced that it is prepared to pay $1.5 billion to Iran to clear a backlog of payments for oil shipments.

Gulf nations, however, have kept a watchful eye on the renewed relationship between India and Iran. It is no coincidence that in the ten days before Zarif’s trip, Delhi saw visits from the Saudi crown prince, the King of Bahrain, the Omani foreign minister, and the Chairman of Kuwait’s national security apparatus.

Until India can lessen its reliance on imported energy, it must continue to balance its partnerships with both Iran and GCC member states. India has taken steps to diversify its domestic energy access, but it is not likely to slow the tide of its Middle Eastern oil consumption.

Investors should take note, as this balancing act will largely drive India’s access to energy over the coming years.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.