Exclusive: India’s Top Iranian Oil Buyer Plans To Cut Imports

Iran is the biggest crude supplier to India after Saudi Arabia

India’s largest Iranian oil buyer plans almost to halve daily imports, industry sources said on Monday, becoming the latest Asian refiner to cut supplies from Iran as Western sanctions make trade with OPEC’s second-largest producer difficult.

India, China and Japan buy almost half of Iran’s estimated 2.6 million barrels per day of oil exports, but a raft of U.S. and European sanctions aimed at choking off funding for Iran’s nuclear program are squeezing its oil supply lines. State-run Mangalore Refinery and Petrochemicals Ltd, or MRPL, could reduce imports to as little as 80,000 barrels per day (bpd) for the fiscal year starting on April 1, the sources said. It usually buys 150,000 bpd.

MRPL officials could not immediately be reached for comment.

Like other Asian nations, India appears to be trying to wean itself off Iranian crude before the sanctions take effect on June 28. MRPL is the third Indian refiner planning import cuts. “There will be a drastic reduction in volumes from Iran,” said one source. “For the next fiscal year, MRPL plans to restrict its term deal to 80,000-100,000 bpd.”

Another source said the refiner planned to only import 80,000 bpd, with the option to buy more. Iran is the biggest crude supplier to India after Saudi Arabia.

If refiners go ahead with plans to cut Iranian imports, they would cut crude purchases from the Islamic Republic by more than 20 percent in the 2012/13 fiscal year, according to Reuters’ calculations. That would be more than the at least 10 percent cut the government has unofficially requested refiners should make, sources have told Reuters.

The governments in New Delhi and Beijing have publicly criticized U.S. sanctions demanding punishment for the U.S. operations of companies that fail to reduce Iranian oil imports. In public, New Delhi says it will not comply with the sanctions. But behind the scenes, sources at state-run refineries say the government has instructed them to cut imports. It is unclear whether that is to avoid the political damage of keeping the flow unchanged or simply to avoid the headache and expense of trying to find ways to pay for the oil.

Even with cuts of more than 20 percent, India will remain among the top buyers of Iranian crude and so still has to maintain the $11 billion annual trade with Iran. The two sides have held meetings over the past month to discuss how to bypass the sanctions to ensure both can pay for bilateral trade.

China has used Iran’s growing political isolation to get better terms than Iran wanted to give on annual oil contract negotiations. To force Iran to cut the deal it wanted, China reduced imports from Iran during the first quarter so deeply that even if it returns to the same daily flow as in 2011, the average reduction for the year would be 14 percent.

Japan and the United States are close to a deal on cuts in Iranian crude oil imports, Japanese Foreign Minister Koichiro Gemba told Reuters on Monday. That could amount to a higher-than-expected 20 percent or more a year, a newspaper reported last month, as Tokyo seeks to win waivers from U.S. sanctions.

Japanese refiners are waiting for word from their government on how much they need to cut imports for Japan to garner a waiver from the United States to sanctions. Refiners are negotiating annual contract deals due to take effect from April, so want to ensure those deals are compliant with government direction.

The United States can exempt countries from the sanctions if they have made substantial reductions in imports.

PAYMENT HEADACHE

Payment problems have already reduced the amount of oil MRPL bought from Iran this year: the refiner had a contract to buy 142,000 bpd of oil in 2011/12, but its only imported between 120,000 and 122,000 bpd, the sources said. “As was the case in 2010/11, MRPL was hoping to take 150,000 bpd against a term deal of 7.1 million tones, but supplies were hit due to payment problems,” a source said.

One of the sources said MRPL, in talks with the state-run National Iran Oil Co., was waiting to see how the new payments mechanism would work before deciding on its crude purchases. Indian companies are paying for Iranian oil in euros via a bank in Turkey, after a clearing mechanism was scrapped under pressure from Washington in December 2010.

As an alternative, India and Iran have agreed to use the Indian currency, the rupee, to pay for 45 percent of oil imports. Iran has already started paying Indian exporters in rupees, but refiners are waiting to hear from the government on whether they will have to pay hefty taxes before using rupees to pay for oil.

MORE ARAB CRUDE

India’s state-run Hindustan Petroleum Corp has said it would cut its annual imports of Iranian crude by about 15 percent to 60,000 bpd. State-run refiner Bharat Petroleum is also planning to cut imports from Iran, according to industry sources.

Like other Indian refiners trying to make up for the loss of Iranian crude, MRPL has been seeking additional crude from Saudi Arabia, the world’s top oil exporter, as well as Kuwait and the United Arab Emirates.

The refiner is also planning its first-ever import deal from Iraq, although the amount is likely to be small. India is seeking up to 80,000 bpd oil from Iraq.