Iran Crude- Strong Signals on Indian Energy Security

Sending a strong signal to the world on its energy independence, India has decided to go the whole nine yards to continue buying crude from Iran. The government has decided to create a Rs 2,000 crore energy insurance pool (EIP), to back two domestic refiners MRPL and Essar Oil, both buyers of Iranian crude. For claims beyond Rs 2,000 crore, the government will extend sovereign guarantee up to Rs 10,000 crore. The move became necessary after international insurance companies refused to provide insurance cover to the refineries.

Re-insurers at Lloyds and other insurance markets are unwilling to cover any business with Iran after the US and EU sanctions. Apart from the refineries, India will also have to find ways to cover the ships and the crude consignments. In January, Essar Oil and MRPL imported roughly 286,000 barrels of crude a day of Iran’s total production of around 1.1 mbpd. The trade would have stopped, after the insurance policy expired. Iran’s total crude oil production fell 50% in 2012 over the previous year.

Though India can easily increase its crude imports from Saudi Arabia, Kuwait and Oman its three biggest suppliers, it has chosen to continue the trade with Iran mainly to diversify its energy supply. ``It’s a bold move and one that makes sure India’s sovereign interests are kept above the politics of international sanctions,’’ says Prabodh Thakker, chairman of the Indian Merchants Chamber’s insurance committee and managing director of Aon Global.

Ironically, the US government, that has been forcing India to boycott Iranian crude, had to make a similar provision for its airlines after the 9/11 attacks. In the uncertainty that followed the attacks, it was difficult (and expensive) to cover the risk for American aircraft. The US government had stepped in and guaranteed a sovereign war-excess cover (which covered third party damages arising from terrorist attacks) for all US airlines.

China and Korea are also actively considering sovereign guarantees for its ships to enable to be able to continue importing Iranian crude after new EU sanctions. China is Iran’s largest customer for crude and its insurers and ship owners are unlikely to take the risk on themselves. Most maritime insurers pool their coverage and tap into the reinsurance market when coverage exceeds $8 million. A typical supertanker - the biggest can ferry up to 2 million barrels of oil - is covered for $1 billion against personal injury and pollution claims. 

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