OPEC in talks to replace Iranian oil supply to India

OPEC’s biggest oil producers are in talks to supply extra crude to India as the nation prepares to halt purchases from Iran because of global sanctions, four people with knowledge of the matter said.

Indian refiners, which are waiting for an order from the oil ministry on whether to stop buying Iranian cargoes, are discussing annual term contracts with Saudi Arabia, Iraq and Kuwait for the year starting April 1, the people said this week, asking not to be identified because the information is confidential. While the volume hasn’t been set, the Indian companies have been told there is enough supply to cover the loss of Iranian crude, the people said.

The assurances reduce the risk of disruptions to oil supplies for Asia’s third-largest economy as it seeks to cut fuel subsidies and narrow its budget deficit. They are also evidence of how global penalties against Iran because of its nuclear program are squeezing the nation’s revenues. At current prices, Iran stands to lose about $11.5 billion in sales annually if India stops buying its oil.

“This shows how pressure on Iran is increasing, and why Iran’s tone is much more conciliatory in recent times,” said Ehsan Ul-Haq, a senior market consultant at KBC Energy Economics in Walton-on-Thames, England. “Iran might be willing to accept a few more conditions now because otherwise it will find it difficult to meet its budget obligations.”

Good Faith

Prospects for resolving the conflict over Iran’s nuclear program have improved following signs of “good faith” from Western powers, Iranian Foreign Minister Ali Akbar Salehi said March 10. The state-run Iranian Students News Agency on the same day cited an unidentified Iranian diplomat as saying world powers have offered to ease economic sanctions on Iran if it limits the enriched uranium in its possession within six months.

India’s refiners currently have contracts to receive a total of about 300,000 barrels a day of Iranian crude, or 110 million a year. Iran Heavy traded at $104.87 a barrel yesterday, data compiled by Bloomberg show.

R.C. Joshi, a New Delhi-based spokesman for India’s Oil Ministry, didn’t return two calls made to his mobile phone during office hours yesterday. An official who picked up the phone at the office of Ahmad Qalebani, the managing director at National Iranian Oil Co. in Tehran, said no one was available to comment on sales to India.

Seeking Markets

Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries, pumped 9.1 million barrels of oil a day in February, the group said in its monthly oil market report yesterday, citing secondary sources. Daily output was 3.1 million barrels for Iraq and 2.8 million for Kuwait.

“We are always seeking markets which have refineries and that have demand for crude, including the Indian market,” Asim Jihad, spokesman for Iraq’s Oil Ministry, said by telephone from Baghdad today. He declined to provide more details.

Iran produced 2.7 million barrels a day, OPEC data show. The nation’s crude shipments plunged 40 percent in the last nine months of 2012, the state-run Iranian Students News Agency reported Jan. 7. China, India and South Africa buy 70 percent of Iran’s oil exports, or about 910,000 barrels a day, the Fars news agency reported Jan. 14.

“Saudi Arabia pumped 10 million barrels a day last year, and though that’s come down, they can easily increase production again,” Ul-Haq said. “Iraq’s production is also rising. All these can replace Iranian crude, so India shouldn’t face a problem.”

Oil Shipments

Iranian oil shipments advanced 13 percent last month even as the U.S. implemented sanctions that complicate sales from the Persian Gulf country, according to the International Energy Agency. Iranian crude production rose by 70,000 barrels a day to 2.72 million barrels a day in February, with the increased output going to China and India, the Paris-based adviser to 28 oil-consuming nations said in a report today.

India has struggled to get tankers and insurance for transporting supplies from Iran after the U.S. and the European Union imposed sanctions on the Islamic Republic to curb its nuclear program, which they say is designed to develop an atomic weapon. Iran says its program is for civilian purposes including electricity production and medical research.

India may cease buying Iranian crude as local insurers refuse to cover the risks for using the oil, P.P. Upadhya, the managing director at Mangalore Refinery & Petrochemicals Ltd. (MRPL), said March 8.

Insurance Cover

Iran has offered to provide insurance cover to Indian plants if they continue purchasing Iranian crude, two of the people said this week. While the processors have been shipping crude on tankers operated and insured by Iran, they won’t agree to have their plants covered because they aren’t confident the country will be able to pay them if they make a claim, the people said.

The refiners and the Indian government plan to discuss the option of forming a fund to be run by the processors and government-owned insurers to provide cover for the plants in coming weeks, two of the people said.

The U.S. in December renewed a waiver for India and eight other nations from a law that cuts institutions off from its banking system if they process payments for Iranian oil. The the nations “significantly reduced” their purchases of Iranian crude, the State Department said. The exemption is subject to a review every 180 days.

Indian refiners planned to reduce their purchases from Iran by as much as 20 percent in the year starting April 1 to keep the waiver from the U.S., a Bloomberg News survey of five refinery officials last month showed.

India imported 171 million tons of crude in the year ended March 31, 2012, according to data from the Associated Chambers of Commerce and Industry of India. Iraq overtook Iran as the nation’s second-biggest supplier, after Saudi Arabia, during the period, the data show. Kuwait was third-biggest.