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BW Businessworld

Iran Halts August Oil Supply

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India has a back-up plan to cope with a halt to crude supplies from Iran, Oil Minister S. Jaipal Reddy said, as the Islamic republic upped the ante in an oil payments row and Indian refiners rushed to secure alternative supplies, including from Saudi Arabia.

Since December, India and Iran have struggled to find ways for New Delhi to pay for imports of 400,000 barrels per day or 12 percent of its oil demand after the Reserve Bank of India halted a clearing mechanism under U.S. pressure.

That move won praise from Washington, which is using sanctions in a bid to get Tehran to halt its nuclear programme.

Indian firms Mangalore Refinery and Petrochemicals Ltd, Iran's biggest Indian client, BPCL, IOC, HPCL and Essar buy crude from the Islamic Republic, and their collective debt to Iran since the crisis broke out has risen to more than $5 billion.

None of the five refiners have received a crude supply plan from Iran for August loading cargoes, officials and executives at the companies said on condition of anonymity.

But Reddy said on Thursday no oil shortages would result from Iran's halting supplies in August.

"No. There will not be any shortage or problem. We have a back-up plan," Reddy told Reuters when asked if Asia's third-largest oil consumer would face problems now that Tehran has decided against supplying oil in August.

Iran has told BPCL, HPCL and Essar that they will receive no supply in August, said a source at Saudi Aramco, which has been approached by these companies for extra volumes.

IOC and MRPL have so far not asked for additional Saudi oil. MRPL is still hopeful it will get a late allocation from Iran, a company source said.

Saudi Volumes
"BPCL, HPCL and Essar have told us that they have not received allocation (from Iran for August). They did not get a response from Iran and they want to secure supplies," said an executive with Saudi Aramco, who declined to be named.

Iran sent refiners a letter on June 27 threatening to halt supplies and has followed through on its threat. Iran refused to sell crude to India's second-largest refiner BPCL in August, because it could not pay, a BPCL source said. BPCL has secured oil from Saudi Arabia instead, the source added.

"So there will be no supplies from Iran in August, but we have arranged volumes from Saudi Arabia," the source said.

Iran is India's second-biggest supplier. Refiners had already turned to top world exporter Saudi Arabia and other Middle East producers the United Arab Emirates, Kuwait and Iraq for extra barrels to replace those at stake.

Saudi Arabia said it would boost supply unilaterally to meet rising global demand after an OPEC meeting in June failed to agree to raise output, with opposition led by Iran.

MRPL had already flagged that Tehran supplies were vulnerable in the long term.

"Considering the enhanced level of sanctions against Iran in future, (and) the non-resolution of the current payment crisis, the availability of Iranian crude may be difficult," MRPL said in its annual report, adding supply may not continue indefinitely.

Ample Alternatives Available
Tehran had previously tolerated unpaid shipments as the price it had to pay to defend its crude market share.

Tehran has already given an August crude supply plan to refiners in China, two Chinese buyers of Iranian crude said. Iran has so far not offered them additional August volumes.

U.S. Treasury officials are working with India to end the impasse, and a solution is in sight, a U.S. official said on Wednesday as Secretary of State Hillary Clinton visited India.

But Indian firms can ill afford drawn-out uncertainty over supplies, analysts said.

"They have to resolve it. If not this month, at least in the next month," Sushant Gupta of consultant Wood Mackenzie said.

"I don't think that the availability of crude is an issue. There will be alternatives from the Middle East and West Africa. They have the flexibility to reschedule crude cargoes and have some inventories as well."