US, EU sanctions on Iran put oil PSUs' Farsi gas field plan in a limbo
New Delhi   10-Sep-2010

Recently imposed stringent US and EU sanctions against Iran have jeopardised the $8-billion plan of three Indian state-run oil companies to jointly develop the Farsi gas field, as their consortium is finding it difficult to access technology and funding to execute the project.

An official of one of the companies said no US or European company will provide liquefaction technology for a gas project in Iran, making it a non-starter. Liquefaction technology converts natural gas into liquefied natural gas (LNG), which can be imported into energy deficit India and it is the desire for LNG which makes the project attractive for Indian oil companies.

The official said funding the project will also be a constraint. “Foreign banks won’t support the project. Dealing in local currency is impractical,” he added.

The consortium, which consists of ONGC, IOC, and Oil India, is in a dilemma about whether it should try to go ahead and execute the project or abandon it, officials representing three partners told ET. “We (the consortium) have sought the government’s direction in this regard and expects a decision soon,” one of them said.

Petroleum secretary S Sundareshan said the consortium is free to act in its commercial interest. “We have asked them to take legal advice and act accordingly in their commercial interest,” he told ET.

The discovered area of the Farsi field is stated to have over 12.5 trillion cubic feet (tcf) recoverable reserves, about 25% more than India’s largest gas producing field KG-D6 in south India. India’s largest energy explorer ONGC and the country’s largest oil marketing firm IOC are equal partners in the project with 40% interest each. Oil India (OIL) the third partner has a 20% stake in the project.

All the three consortium partners declined to formally reply to ET’s email queries. Legal opinion taken by the consortium suggested that US and EU sanctions can not prevent Indian companies from engaging in Iran.

“Legal experts have opined that we are within our rights to execute the project as India follows the UN sanction,” the official said. But without technology and banking support it is not practical to undertake the project, he added.

The UN Security Council Resolution, adopted on June 9, imposes a ban on sales of heavy weapons to Iran and sanctions Iranian entities affiliated with its Revolutionary Guard. But it does not restrict investments in Iran’s energy sector.

The US sanctions, however, provides for sanctions against persons, including foreign firms, who invest more than $20 million in Iran’s energy sector in any 12-month period. A legislation enacted on July 1 expands the scope of violations under the Iran Sanctions Act (ISA) to include selling refined gasoline to Iran, providing shipping insurance or other services to deliver gasoline to Iran, supplying equipment to or constructing oil refineries in Iran.

The EU sanction imposed on July 27 is by and large aligned to the US position. It also prohibits its member countries from being involved in Iran’s energy sector.

The consortium bagged the Farsi block in 2002 under operatorship of ONGC’s foreign arm ONGC Videsh (OVL). During the exploration phase, the consortium had a service contract that would ensure refund of its $90 million investments with a 35% return.

In the field development phase, the trio has to invest about $5.5 billion in producing natural gas from Farzad-B area of the field and it would be paid a 15% rate of return over-and-above its investments. An additional $2.5 billion is required for setting up a liquefaction plant.