India again looks to Iran as Iraq trouble sends oil prices soaring

After five years of cutting its oil imports from Iran under US-led sanctions against that country, India, now Asia's second-largest energy user, needs the sanctions to be eased as fighting threatens its supply from Iraq.

Tough US sanctions on Iran oil meant India was obliged to gradually reduce its purchases to half from the Persian Gulf nation from 2009. Indian refiners, which get 85 per cent of their crude from overseas, say they expect the restrictions to soften, according to a Bloomberg report.

''We may be exempted from cutting imports from Iran this year,'' P P Upadhya, managing director of Mangalore Refinery and Petrochemicals Ltd, the second-biggest Indian buyer of Iranian crude, said. ''We expect the US will be softer on Iran as the conflict deepens in Iraq.''

Benchmark crude prices are trading at a nine-month high as Islamic militants battle government forces in Iraq, which is now India's second-biggest oil supplier. That is boosting costs for importers and taking a toll on India's currency.

Iran was the second-biggest supplier to India until three years ago, when it was displaced by Iraq. India cut purchases from Iran to 11 million metric tons in the year ended March 31, compared with a peak of 21.8 million tons in 2008-09, according to data from the oil ministry. The nation's refiners bought about 25 million tons from Iraq.

According to experts, Indian refiners have had a long-standing relationship with National Iranian Oil Co. and can take more Iranian crude.

Indian refiners owe Iran $4.2 billion for crude, 39 per cent of which will be paid off by next month, an oil ministry official said on Thursday. The payments, held up by US sanctions on Iran, will be made in dollars and transferred through the United Arab Emirates' central bank, the official said (See: India to pay $1.65 billion of Iran oil dues via UAE central bank).

Indian refiners have been asked to prepare for any supply disruptions from Iraq and diversify their crude purchase sources, the oil ministry said in a statement. State-run refiners plan to import 19.4 million tons of crude, or 20 per cent of their requirement, from Iraq in the year ending 31 March 2015, compared with 13 per cent a year earlier, according to the statement. There have been no supply disruptions so far, the ministry said.

The territorial advances by the Islamic State in Iraq and the Levant has raised the specter of civil war in OPEC's second-biggest oil producer. ISIL, a breakaway group from al-Qaeda, is fighting government forces near Baghdad, away from the southern part of the country where most of the oil fields are located.

Iran shipped about 28 per cent more crude oil and condensate this year after reaching an interim accord over its nuclear programme with world powers, customs data and estimates from the International Energy Agency show. Diplomats are meeting again this week to reach a long-term agreement before the existing pact expires July 20.

The entire impact of  disruptions of oil supplies due to the Iraq crisis will be nullified for India if the US eases sanctions on Iran, according to experts.