New Delhi: India plans to set up a special fund to provide insurance to refineries after European re-insurers refused to cover units that process oil imported from Iran.
Insurance companies in the country have refused insurance cover to refineries processing Iranian oil as they could not get reinsurance from their European counterpart. Reinsurance makes up for 90 per cent of the insurance cover provided.
New Delhi fears that next the insurers would seek a certificate that fuel exports out of India are not out of any of Iranian oil.
"We are told that under European law, reinsurance outside Europe is not hit by (US and western) sanctions (against Iran)," Oil Secretary Vivek Rae told reporters here.
The issue is now being examined in consultation with the Ministry of External Affairs, he said adding refineries will get insurance cover if New Delhi's understanding was confirmed by European Union and insurance companies accept it.
"If we get the insurance, it (oil import from Iran) not a problem," he said.
Rae said the Department of Financial Services is working on creation of an insurance pool fund in India to provide insurance cover to refineries. The fund will be created by contributions from both insurance companies and oil industry.
"As per the proposal right now, the national insurance companies would contribute some money. The Oil Industry Development Board will contribute some money. What would be the size of the fund, how much are we required to contribute and whether it is enough to cover the reinsurance risk, this is something the reinsurance companies have to work out," he said.
He said refiners are talking to the reinsurers. "At the moment oil is being imported from Iran. But the problem will arise if the refineries don't have the insurance cover. We can not import crude from Iran in such a scenario."
The move will help all refineries importing crude oil from Iran, particularly Mangalore Refinery & Petrochemicals Ltd, whose current insurance cover is coming to an end in May and has so far not found any insurer willing to hedge its risks.
Presently, Indian general insurers provide cover to oil refiners and then re-insure the risk with global re-insurers. But under US and EU sanctions, the global insurers provide re-insurance with "sanction clause", which limit the amount to be paid in case a claim arises.
India will reduce Iranian crude purchases to less than 13 million tonnes in the current financial year from 18.1 million tonnes last fiscal.
"I don't anticipate stoppage of supply. I am optimist that we will find a solution," Oil Minister M Veerappa Moily said.
US and Europe have introduced tough sanctions last year to cripple Iran of its oil revenues. EU sanctions have blocked European reinsurers from any involvement in Iranian oil.
Since then, the General Insurance Corp of India feels that cover and losses on processing the Iranian crude would not be payable by reinsurers due to existing sanctions.
India, the world's fourth-biggest oil importer, has struggled to get tankers and insurance for transporting supplies from Iran after the US and the European Union imposed sanctions on the Persian Gulf nation to curb its controversial nuclear programme.
The US in December renewed a waiver for India and eight other nations from a law that cuts institutions off from its banking system if they process payments for Iranian oil.
Last month, US tightened its Iranian sanctions barring imports from paying for the oil with dollars and euros.
Under penalty of expulsion from the US banking system, Iranian crude customers such as China and India have been restricted to using their own currencies for the purchases.
Importers are being compelled to keep the payments in escrow accounts that Iran can use only for locally sourced goods and services, in what will amount to barter arrangements.
Since February 6, India too is paying for Iranian imports in rupee.
India had been, since July 2011, been paying in euros to clear 55 per cent of its purchases of Iranian oil through Ankara-based Turkiye Halk Bankasi. Rest of the payments are made in rupees in Kolkata-based UCO Bank.
While the euro payments have stopped, India continues to pay for Iranian imports in rupee, Rae said.
Sources said the new sanctions mean that National Iranian Oil Co (NIOC) will have to essentially keep all the revenue it earns from selling oil to Indian refiners in UCO or any other permitted local bank. These can be used for buying permissible goods and services.
This may sound workable but the problem is that Iran's imports from India are just one-fifth of the revenue it earns from sale of oil. With US sanctions barring sale of any defence or technology intensive equipments, New Delhi has not allowed Iranians to invest in its securities or debt.