Potential oil crisis looms

Fallout of RBI curbs on imports from Iran

The RBI’s sudden move, which would mean that the country will not be able to import 10 million barrels (about 1.60 million tonnes) of crude oil contracted from Iran for January and whose replacement would be difficult to find easily, comes at a time when food inflation has shot up to over 12 per cent. The perilous shortage of crude will have a cascading effect on the prices of all essential commodities with alarmed Oil Ministry officials fearing that a “huge crisis” stared the country.

Ministry officials said the RBI, without putting in place an alternative payment mechanism, suddenly withdrew from a system “that was running fine since 1976”. Oil industry sources said “replacement of such a huge quantity simply cannot be found easily”.

Besides, “once the market becomes aware of “such a huge requirement, the already firm crude prices will shoot through the roof,” he said. But other Oil Ministry officials said there was no cause for panic since the country normally maintains crude oil reserves for five to six weeks (or approximately 20 million tonnes as per industry analysis). Over the past few years, there has been a steady 10 per cent annual growth in India’s crude import requirement and this fiscal (2010-11), the quantum of import requirement is estimated to be 170 to 175 million tonnes.

US pressure?

Although there are no confirmed reports on what prompted the RBI to stop facilitating payments for Iranian crude, there are indications that its move follows American prompting. The US praised the RBI move with American Treasury Department pointsman on Iran sanctions Stuart Levy being quoted in the “The Wall Street Journal” that “this is a significant action by India”.

On December 23, the RBI said oil and other import payments to Iran will have to be settled outside the existing Asian Clearing Union (ACU) mechanism, which involves the central banks of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka.

Under the ACU mechanism, imports by the nine nations are settled every two months with every member paying for imports after netting out its exports among the union.
Till 2008, payments under the ACU mechanism were made in US dollars. But after America imposed sanctions on Iran over its suspected nuclear programme, the currency shifted to euro.

United Nations sanctions do not forbid buying Iranian oil and recently the European Central Bank (ECB) asked the RBI and other ACU central banks to provide certificates that the euro being used to import products are not on the US sanctions list. Sources said while certification for crude oil imports was easy to provide and track, RBI chose to scrap the entire system itself.

In the absence of ACU, Iran and its crude supplier National Iranian Oil Co (NIOC) are jittery over sales without being backed by the sovereign guarantee of the central bank. Also, oil firms will have to find an alternative European bank which can accept payments on behalf of NIOC.

Sources said realising the impact of the move, top RBI officials will meet their Iranian counterparts within two to three days in Mumbai to finalise a panel of banks through which payments can be made.

India imported 21.3 million tons of crude oil from Iran in 2009-10 and this year imports are expected to be around 18 million tons as Reliance Industries has totally stopped using crude oil from the Persian Gulf nation.

The Mangalore Refinery and Petrochemicals Ltd (MRPL) is the biggest importer of Iranian crude oil with 7.1 million tons of contracted quantity. Mumbai-based Essar Oil imports roughly 3 million barrels per month (5-5.5 million tons a year), Indian Oil Corp 3.5 million tons and Hindustan Petroleum Corp about 3 million tonnes.

Government sources said that Indian firms could open letters of credit, which were often required for buyers and sellers of cargo to guarantee payment upon delivery or at an agreed future date.

But the bank where the money has to be transferred to is missing from the chain.
Finding an alternative bank for Iranian oil trade instead of central banks will be difficult as EIH Bank of Germany, which used to act as a facilitator for such transactions for the ACU members, has been brought under US sanctions.

In September, the United States sanctioned Tehran-owned European-Iranian Trade Bank AG, called EIH Bank in Germany, for facilitating billions of dollars of transactions with Iranian banks that the United States and European Union have blacklisted for aiding Iran’s nuclear or missile programmes.

Sources said the Indian ambassador to Iran has been asked to arrange a meeting between Deputy Governor of RBI and his counterpart as soon as possible in Mumbai and a decision to this effect was taken here yesterday at a meeting, which among others, was attended by Finance Secretary Ashok Chawla.

Last Friday, RBI said that Indian firms cannot use the ACU mechanism when making payments for the import of oil or gas.

“In view of the difficulties being experienced by importers/exporters in payments to/receipts from Iran... it has been decided that all eligible current account transactions, including trade transactions with Iran, should be settled in any permitted currency outside the ACU mechanism until further notice,” the Indian central bank said in another statement on Monday.

Meeting put off

A hike in diesel and domestic LPG prices has been deferred for now following an intervention by Oil Minister Murli Deora who felt an increase now would add to already high prices of essential commodities, reports PTI from New Delhi.