July 23, 2011

Iran Repeats Threats to Halt Crude Supplies on Non-Payment, India Eyes Saudi, UAE Sources

Published: 7/22/2011

India has again received threats from Iran to find a quick solution to the payment spat between the countries or face halted supplies, but this time there are signs that Indian refiners are studying other sources, at least to prepare for the eventuality.

IHS World Markets Energy Perspective


Iran is trying to raise the pressure on India to find a solution to the payment problem for crude exported there, with international financial sanctions making it hard to find willing institutions to act as financial conduits between the two states.


India's non-payment does not stem from a dispute over prices or volumes, but from the lack of a conduit for the transactions, with countries such Russia and Turkey now being mentioned, after Germany and the United Arab Emirates proved impossible. While attached to certain costs, India could potentially switch suppliers at a time of rising production in Saudi and the UAE, with the latter sensing an opportunity to take some market shares.


While not straightforward, a downgrade of India's Iranian crude imports would damage Iran far more than India, given its dependence on oil export revenues for its budget; moreover, Iran sells some of its hardest-to-market heavy and sour crude grades to Indian refiners and finding other clients able to process those might prove challenging.

Shipments Under Threat

Iran has issued a new warning to Indian refiners and the Indian government that it could halt its crude shipments to India—averaging 400,000 b/d—from 1 August, should a mechanism for the transfer of more than USD5 billion not be found. "If the Iranian side feels it cannot receive the money for its exported oil punctually and under desirable conditions, it will reconsider", Iranian foreign ministry spokesman Ramin Mehmanparast told Agence France-Presse (AFP). His statement came amid news that the Iranian side had just days earlier communicated this threat to its Indian counterparties in written form. In late June, the National Iranian Oil Company (NIOC) wrote to its main Indian clients saying that supplies would be stopped in August unless they could start paying down their considerable debts to the Iranian side (see "Related Articles"). Mangalore Refinery and Petrochemicals Ltd (MRPL) and Essar Oil were among the refiners that acknowledged having received such threats.

Indian officials meanwhile said funds would be transferred immediately, as soon as the Indian Finance Ministry and the Reserve Bank of India (RBI) found a conduit for the bilateral transaction acceptable to the Iranians. Indian minister of state for petroleum and natural gas R.P.N Singh told Asia Pulse news agency that "the matter is pending with the Department of Economic Affairs and we hope they will be able to find a solution at the earliest".

Iran has barely received any payments for the crude exported to India since very late last year, when the RBI—after years of increasing US pressure—scrapped the decades-old Asian Clearing Union (ACU) that bound together a number of South Asian states in a bilateral trade currency-clearing mechanism. The ACU had made it possible to route payments between countries without the actions of financial institutions involved being particularly visible on an international level. As the scheme was scrapped, Indian banks suddenly stopped wanting to deal with monetary transfers involving Iran for fear of being targeted by US financial sanctions and isolated in the global financial system. This created the need to find another conduit to act as a buffer between the receiving Iranian banks and the Indian institutions. This has proven highly complicated: alternatives in the United Arab Emirates have not worked out and a solution using an Iranian-owned bank in Germany proved very short-lived.

This week it has been reported that the Indian side has been working on solutions that involve routing payments through Russia and/or Turkey, although it is also advocating a deal allowing Iran to be paid in Indian rupees, which could potentially see these transactions cleared with little trace in the international financial system. This solution is not popular with the Iranians, however, who would in effect be restricted to using these rupees in India at a time when they sell far more to the South Asian country (mainly crude) than they import. Already doing much barter-based trade with large Asian consumers of its crude, such as South Korea and China, Iran is starting to feel a real cash crunch that would not be solved by the inflow of Indian products it does not need—indeed, another bartering agreement with one of its largest crude clients would just tie its hands further financially.

Pushing Carefully

Nevertheless, Iran must push India for a solution very diplomatically, as in essence it is Iran that is likely to suffer the most, should it stop its exports to India. Given the problems in setting up a payment mechanism with one of its largest single clients, finding new markets and setting up mechanisms with them would never be a simpler task. Adding to Iran's woes is that a significant portion of the crude supplied to India is of a particular heavy and sour quality—for instance, its Nowruz and Soroush grade—which is always hard to market as very few refineries can deal with it. For India's refiners too, switching supplier would include some costs and logistical challenges, but it would be far less complex—and indeed carry some considerable political benefits for the refiners, as well as for India itself.

Iran's threats should therefore primarily be seen as shots across the bow for the moment, although it is clear that the Iranian government is becoming increasingly desperate, amid a growing governmental cash crunch. If the crisis carries on long enough, it will naturally become pointless to continue shipping the crude to India at all, but the cost of having to market it to new clients must in the meantime look relatively staggering.

Gulf Arabs Eyeing their Chances

In what could be called as a return shot from Indian refiners—or just a prudent development of optional strategies—Indian refiners were reported this week to have sought more crude from Saudi Arabia and the UAE. India's Bharat Petroleum, Hindustan Petroleum and Essar Oil have each asked for an additional one million barrels for August, according to sources quoted by Reuters. It also carried a report that Saudi Arabia's NOC Saudi Aramco has developed a special crude blend suited to match the specification of some of Iran's largest crude grade volumes sold to India—which are not among the most heavy and sour. With Saudi Arabia raising its production unilaterally in the aftermath of the failed OPEC meeting in June, there is some potential scope for Saudi Arabia to try grabbing market shares in India at the cost of Iran, in a narrative that would definitely mesh well with the particular cooling in political relations between the two countries since the outbreak of the Arab Spring protests early this year (see World: 9 June 2011: Formal Inaction at OPEC Meeting; Saudi Arabian Minister Dubs It "One of The Worst" Ever and Saudi Arabia: 14 July 2011: IEA Confirms Saudi Crude Boost, Upgrades 2012 Demand Estimate).

Some of Saudi Arabia's increased production in the past few months found its way to India in any case, with Iranian officials acknowledging that their continued supply of crude to India despite not getting paid was the cost of maintaining its market share. A Reuters report also signalled that some of India's most modern—private—refiners, Essar and Reliance, were looking increasingly to Latin American heavy and sour crudes instead of similar Iranian grades. With Iran already having suffered large and lengthy floating storage build-ups every time the purchase of its harder-to-market grades falls, this last would be an even harder loss to bear.

A report by online Indian business publication Domain-b also indicated that MPRL had entered talks with both Abu Dhabi and Kuwait, which are also raising their oil production. In the meanwhile Sultan Al Mehairi, director of marketing and refining at the Abu Dhabi National Oil Co. (ADNOC), told Bloomberg that the company would remain focused on exporting crude to Asia amid continued demand growth in China and India.

Still—and to some extent enforcing the notion that Iran's cut-off threat is more of a warning so far—Iran's crude exports to India actually rose by 14% in June, to 400,000 b/d, after having fallen to 350,000 b/d in May, Dow Jones reports.

Outlook and Implications

While the payment spat raises some very interesting questions about how long Iran would be willing to continue with its supplies to India in defence of its market share in what looks set to be one of the fastest growing crude markets for some time, and about the possibilities for the US and European Union (EU) to isolate Iran further over its nuclear programme, radical change is unlikely to take place yet.

Firstly, Iran is under financial pressure, but will not be able to solve its financial situation any quicker by abandoning its Indian clients and trying to find new buyers and set up new payment mechanisms. Secondly, the withdrawal of about 400,000 b/d of Iranian volumes—at least momentarily—would not be at all calming for global crude markets, countering Saudi—and US—interests quite significantly. The latter is a factor often forgotten by the political groups most ardently calling for Iranian isolation, in particularly the US, but will not have been lost on the overall US leadership in the current economic climate. It is therefore no surprise that the US signalled it was working with India to find a solution to the problem, nor that Iran fired its warning shot just as the US secretary of state Hillary Clinton was visiting the Indian capital, New Delhi. After all, the international sanctions—as well as the unilateral US sanctions—on Iran are not banning the purchase of Iranian crude, as the cost of that would be felt directly at the pumps by Western consumers.

A solution is hence likely ultimately to be found, although it might pay less heed than Iran would like to attempts not to limit Iran's financial freedom. In any case, it underlines to what an extent Iran is becoming a "last-resort" crude supplier for many, given the logistical and political problems involved in dealing with it, and to what extent its hands are already bound marketing-wise by the international sanctions, even in the crude sphere.

Related Articles

  • World: 7 July 2011: Iran's OPEC Governor Vows to Defend Indian Market Share, Criticises Saudi Arabian Crude Price Cut
  • India: 5 July 2011: Indian Officials Say Solution to Iranian Crude Payment Mechanism Dispute Is "in Sight"
  • India: 4 July 2011: Iran Tries to Pressure India Into Solving Crude Payment Issue
  • Iran: 4 May 2011: India-Iran Oil Payment Spat to Be Resolved by Rupee Mechanism, Consumption Safeguards
  • Iran: 12 April 2011: Iran and India Resolve Crude Payment Spat with German Facilitation
  • India - Iran: 4 March 2011: Indian Payments for Iranian Crude Resume Under New Sanction-Proof Mechanism
  • Iran: 14 January 2011: Iran to Sell Crude to India on Credit This Month, As Payment Spat Continues
  • Iran: 5 January 2011: Crude Payments Spat Between India and Iran Highlights Sanctions Effect

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