Impending US sanctions against vessels engaged in carrying cargo to and from Iran are beginning to pinch India, threatening more than one-tenth of its crude oil imports.
India is finding it difficult to charter ships to carry Iranian crude oil because of the US bid to bar any ship that has visited an Iranian port in the preceding one year for the following six months.
“This is a huge crisis,” said the head of an oil marketing company, requesting anonymity. “Even as we continue to buy Iranian oil, there is a chronic shortage of ships due to this specific provision to bring the crude here. Where will SCI (Shipping Corp. of India Ltd) get the ships from? There are no dedicated ships for the same.”
The US and the European Union (EU) have been seeking to force Iran to abandon its nuclear programme, which they allege is aimed at making atomic weapons. Iran has defended itself, saying the project only has peaceful purposes. India has made it clear that it doesn’t want another nuclear weapon state in the neighbourhood. But the Indian government has also said it will only abide by the United Nations sanctions on Iran, an indication that it does not want to completely cut off oil commerce with Tehran, which is why it has worked out an alternative payment option with the country.
With Transchart, the Indian government’s centralized ship-chartering wing, and SCI unable to find vessels to transport the crude, the country could be faced with supplies from Iran drying up. A Bill on the proposed US sanctions has been passed by the House of Representatives and is now in the US Senate, after which it will go to President Barack Obama for his signature.
Bloomberg reported on 15 March that India’s inability to cut back on purchases of Iranian oil may force Obama to impose penalties on the country as early as 28 June, citing several US government officials it didn’t name. The report added that India had asked its oil marketing companies to seek alternative supplies and gradually reduce their dependence on imports from Iran, citing three unnamed Indian government officials. India imports around 400,000 barrels of crude oil per day, or 12-13% of its needs, from Iran, amounting to about $11 billion (Rs.
55,330 crore today) a year.
Mangalore Refinery and Petrochemicals Ltd (MRPL), which finalizes its crude shipping arrangements through Transchart, is the largest Indian importer at around 10 million tonnes per year. The firm’s annual shipping contract runs between April and March.
Indian oil marketing companies and shipping firms are already having to cope with the EU seeking to prohibit entities belonging to member states from providing insurance and reinsurance cover for Iranian crude and petrochemical shipments starting 1 July. European insurers, therefore, cannot insure Indian ships that carry Iranian oil.
Analysts say the government’s move to buy crude from Iran on cost, insurance and freight (CIF) basis is not a workable idea. Under CIF contracts, the responsibility of shipping the crude cargo lies with the Iranian supplier, which will have to fall back on state-run National Iranian Tanker Co. (NITC) to ship the cargo into India.
NITC itself is covered under sanctions and runs on a guarantee given by the Iranian government. Also, NITC’s fleet is mostly made up of so-called oil super-tankers that can carry 260,000-280,000 tonnes of crude. These ships can’t call at the New Mangalore port carrying a full load of crude for MRPL because the depth isn’t enough to allow them to berth. As a result, MRPL has always hauled crude into Mangalore on so-called Aframax tankers that can carry 80,000-90,000 tonnes of crude. The Iranian supplier will be hard-pressed to find Aframax tankers because shipowners don’t want to risk being blacklisted.
“Getting ships to haul Iranian crude is likely to prove very difficult for Indian importers,” said Mike Roderick, partner at London based Clyde and Co. Llp, an international trade and insurance law firm. “Crude tankers are expensive things and are normally insured with the International Group of P&I Clubs (P&I stands for protection and indemnity).”
The demand by shipping companies that the Indian government provide a sovereign guarantee for those vessels that carry Iranian crude is unlikely to meet with success. The Indian government has, however, said that it’s considering the demand.
Most of the global tanker fleet is insured with P&I Clubs based in Europe, Roderick said. “P&I Clubs cannot insure vessels going to Iran,” he said. “How does an Indian importer solve that problem? Many tanker owners are saying they will not go to Iran.”
In shipping, third-party liabilities arising from operating ships such as oil pollution, wreck removal and damage to port property are commonly covered under P&I. Globally, third-party risk for operating ships is insured with the P&I Clubs, a 13-member group based in London that provides cover for oil pollution and wreck removal for more than 90% of the world’s ocean-going ships by capacity.
“The EU council resolution does not impose any prohibition on Indian shipowners to carry crude to destinations outside the EU,” said Andrew Bardot, secretary and executive officer of International Group of P&I Clubs. “But getting insurance cover would be a problem for Indian shipowners because the International Group of P&I Clubs is based in the EU and, hence, they will have to find an alternative insurance cover.”