(MENAFN - Arab Times) Iran said on Friday it had no plans yet to cut oil exports to India over a payment dispute, the semi-official Mehr news agency quoted an oil official as saying. Iran warned India on Monday that it would stop exporting oil to India from August 1 if the financial dispute over payment was not resolved. "No decision has been made yet... the caretaker oil minister Mohammad Aliabadi will make the final decision on it if the dispute is resolved in the next few days," said Mohsen Ghamsari, the head of the international affairs office at the Nastional Iranian Oil Co. NIOC, the state oil firm that supplies around 12 percent of India's oil imports, set the deadline in a letter dated June 27 to Indian refiners, sources told Reuters in early July.
Iran, facing increased isolation internationally, and energy-hungry India have been looking to resolve an impasse triggered in December when the Reserve Bank of India ended a regional clearing mechanism under US pressure. Iran has not formally told India it was halting oil supplies, the Indian oil minister said on Friday, adding New Delhi was making arrangements to meet any "serious situation" following a row over how to pay for the Iranian imports. Since December, India and Iran have struggled to find ways for New Delhi to pay for imports of 400,000 barrels per day, 12 percent of its oil demand, after the Reserve Bank of India halted a clearing mechanism under US pressure. That move won praise from Washington, which is using sanctions in a bid to get Tehran to halt its nuclear programme.
Indian firms Mangalore Refinery and Petrochemicals Ltd , Iran's biggest Indian client, BPCL , IOC , HPCL and Essar buy crude from the Islamic Republic, and their collective debt to Iran since the crisis broke out has risen to more than 5 billion. None of the five refiners has received a crude supply plan from Iran for August loading cargoes, officials and executives at the companies have said on condition of anonymity.
"We have not received a formal letter, but they are feeling desperate. We are also doing our best to see that the first tranche (of payment) is delivered," Indian Oil Minister S. Jaipal Reddy told reporters. "While we are making every possible effort to make a payment to Iran ... we are also making alternative supply arrangements. We need to be prepared for a serious situation. Therefore there is no need to worry about the oil supply situation."
India's immediate strategy to deal with the loss of crude from Iran in August is to buy more from Saudi Arabia and Iraq, while inventories and plant maintenance give refiners breathing space as they seek to establish new supply lines.
Iran has cut supply as it tries to put pressure on Indian refiners to settle 5 billion in debt for oil supplied, and to find a way to pay for future shipments.
The halt has given regional rival and US ally Saudi Arabia an opportunity to grab a bigger share of the market in Asia's third-largest oil consumer. If Saudi Arabia fills the gap, tension on oil policy between Riyadh and Tehran could worsen.
"For meeting immediate needs and even longer term, Saudi Arabia would be the main source," said Paul Tossetti , senior advisor for oil markets at PFC Energy.
"They have offered to supply extra crude to Asian refiners... Looking beyond 2011, Iraq production should see a major increase in late 2012 and that would be another opportunity."
Iran-led opposition defeated a Saudi proposal for a coordinated supply rise at an OPEC meeting in June. Saudi Arabia said it would boost supply anyway, a move Iran has criticised.
Iran has cut sales of 400,000 barrels per day (bpd) of crude to India, near 12 percent of the nation's demand of 3.46 million bpd, because New Delhi has failed to find a way around US sanctions that make paying Tehran for oil difficult.
Indian refiners Bharat Petroleum , Hindustan Petroleum and Essar have contacted state oil firm Saudi Aramco to secure supplies to plug the gap in supply from Iran, an Aramco source said on Wednesday.
Additional cargoes from Kuwait, the United Arab Emirates and possibly further afield, as well as inventories held by refiners in India should prevent any supply squeeze, analysts said.
"I don't think that the availability of crude is an issue." said Sushant Gupta, an analyst with Wood Mackenzie. "There will be alternatives from the Middle East and West Africa. They have the flexibility to reschedule crude cargoes and have some inventories as well."
Most Indian refiners can process regional Middle East and West African grades, said Gupta. MRPL, HPCL, IOC, BPCL and Essar between them buy already about two-thirds of their oil from the Middle East.
Mangalore Refinery and Petrochemicals Ltd. , Iran's biggest Indian buyer with around 150,000 bpd, was already in talks to boost supply from Saudi Arabia and Gulf ally the UAE.
The company had started looking for alternative suppliers even before Iran halted shipments to India this week as the dispute that rose in December over payment between New Delhi and Iran dragged on. MPRL struck its first ever supply deal with Kuwait earlier this year to buy 20,000 bpd.
HPCL plans to open talks to boost supply from Saudi Arabia, Kuwait, the UAE and Iraq, K. Murali, the company's head of refining, said on Wednesday.
Essar, too, has been busy bringing in supplies from other sources. It raised oil imports from Iraq five fold in the first six months of the year and from the UAE by about 70 percent, according to refining data obtained by Reuters.
India and Iran have struggled since December to find ways for New Delhi to pay for imports, after India's central bank stopped payments through the Asian Clearing Union (ACU) mechanism. There is no ban against buying Iranian crude, but sanctions have made financing the deals difficult.
The central bank's move won praise from Washington and came close on the heels of a visit to India by US President Barack Obama last year. Obama has endorsed India's bid for a permanent seat on the UN Security Council.
Indian refiners have some breathing space to seek more oil supply as they undertake planned maintenance at plants.
Essar, Iran's second-largest buyer in India, plans to shut its 280,000 bpd Vadinar refinery in September. Indian Oil Corp plans to take down its 160,000 bpd Mathura plant in August, when MPRL will also shut a crude unit at its sole refinery.
That should limit any need for Indian refiners to seek prompt cargoes.
"I don't think there will be an immediate need to tap spot markets," an Asian oil trader said.
Indian refineries on average keep crude stocks equivalent to about 10 days' throughput, an oil ministry source said. Ships en route to India at any time hold about another 8-10 days of refinery needs, the source added. Refineries also have around 30 days of stocks of oil products such as diesel and gasoline stocks to cushion any supply disruption, he said.
Refiners could pool import needs together to hire the largest crude carriers to bring oil shipments, he said.
In the longer term, India's smaller refiners could follow the trail blazed by Reliance Industries in Latin America.
Reliance, which runs the world's biggest refining complex, raised imports from mainly Venezuela and Colombia after it stopped buying from Iran in 2010, under US pressure. Brazil, too, is a potential source of future supplies as it ramps up output from its massive deep sea reserves.
Indian Oil is considering importing oil from Africa and South America for its 300,000 bpd Paradip refinery in eastern India, due to start up next year. MRPL plans to lift 110,000 bpd from Venezuela by 2017. Selling to India fits into Venezuela's strategy to divert cargoes from the United States.
"There is growing production from Latin America and in some cases like Venezuela they want to divert supply away from the US - that's a political decision," said Victor Shum, an analyst at Purvin and Gertz.
Reaching out to Latin America even though freight costs could add to expenses for refiners that already incur billion of dollars of losses selling fuel at government controlled prices highlights the desire of India's refiners to diversify supply.
There are other challenges aside from distance for India in switching to Latin American grades. Only the country's newer and more complex refineries have the units needed to refine the oil.
"Much of the Latin American oil is lower quality - heavy and with high sulphur. But as Indian refiners become more sophisticated with installation of crackers and cokers, more of this oil can be refined," said Tossetti.