The international arm of the state-controlled gas explorer Oil and Natural Gas Corp., ONGC Videsh Ltd. (OVL), recently found natural gas in Iran’s Farsi block, with reserves estimated at 10 trillion cubic feet. OVL had previously discovered oil estimated at 1 billion barrels in the Farsi block 90 kilometers from the port at Bushehr, coincidentally the location of Iran’s first nuclear reactor, still under construction. (For more on this, see the Russia section.)

Washington has been pressuring India to refrain from dealing with Iran because of its nuclear aspirations. Having exhausted the military option against Iran due to its involvement in Iraq, the U.S. has been keen to browbeat Tehran via every available diplomatic or economic sanction. Nor has the U.S. been happy about the proposed $7.5-billion pipeline that will carry Iranian gas to Pakistan and India. Further, India has signed a $20-billion deal with Iran to buy liquefied natural gas; price negotiations continue.

The latest gas strike deepens India’s energy connections with Iran. OVL won the bid for the Farsi block in early 2002 and signed a four-year contract with the National Iranian Oil Co. on December 25 of that year. Under the contract, OVL cannot take oil and gas found in the block to India. Iran will pay a 35-percent rate of return on investments during the exploration phase, and the minimum commitment for the exploration phase at Farsi is $27 million. OVL’s contribution will be $10.8 million, with a work program including seismic surveys and four exploration wells.

The political undertones of India’s dealings with Iran are reflected in the ongoing nuclear cooperation negotiations between New Delhi and Washington. The final draft of the nuclear deal has been delayed due to India’s insistence on retaining nuclear testing and reprocessing rights.

Indian Prime Minister Manmohan Singh has been facing vicious political criticism due to a strongly worded letter from several U.S. senators demanding that India “terminate cooperation with Iran in the energy sector and military spheres.”

Perhaps to assuage Washington, New Delhi recently declared its intention to purchase six C-130J Hercules transport aircraft worth more than $1 billion from the U.S. The deal marks the first major sale by U.S. arms makers to the Indian military.

It is clear that India will have to tread carefully in balancing its need for the latest atomic technology from the U.S. with obtaining its hydrocarbon requirements from Iran. Nevertheless, it appears the Iran-Pakistan-India pipeline will go forward. Recent reports indicate that New Delhi is comfortable with Tehran’s gas price of $4.93 per million British thermal units. Reports quoting Indian, Pakistani, and Iranian officials suggest that a tripartite agreement will be signed as early as this month. Iran’s oil minister Kazem Vaziri-Hamaneh recently said negotiations for the pipeline’s final stage are underway and the Iran section is close to 50 percent complete.

Those negotiations continue despite U.S. opposition. In mid-June, Islamabad reacted strongly to a comment by U.S. Assistant Secretary of State for South Asian Affairs, Richard Boucher, who said the U.S. is skeptical about the proposed pipeline and there would be “consequences” for any country that invested in Iran. Islamabad said that Pakistan is determined to implement the project and transfer Iran’s gas to Pakistan and India.

In September 2006, the U.S. expanded its ambit of economic sanctions with the Iran-Libya Sanctions Act, under which foreign companies that invest more than $20 million in one year in Iran’s energy sector will be blacklisted.

Recently, the World Bank described the pipeline as a win-win deal and expressed readiness to fund the project. India, whose economy is growing by about 8 percent per year, clearly needs the gas. But the pipeline will only be part of the equation. India’s petroleum minister, Murli Deora, recently made an unscheduled stop in Tehran to sort out issues related to the supply of LNG.

With both Iran and the U.S. playing important roles in India’s quest for energy security, it’s clear that India’s diplomats have their task cut out for them.