Lack of shipping insurance threatens to halt oil imports
Tuesday, 26 June 2012 | 11:00
For India, crude oil sourced from Iran is among the cheapest. But over last one year, imports from Iran, one of our traditional suppliers, are under scanner following sanctions on the West Asian country. Despite sanctions, India wants to go ahead with crude imports and Iran is more than happy to continue the supply to its old friend. But the lack of insurance cover for ships is set to bring imports to a complete standstill.
Payment to Iran was a big issue for a long time. But now, thanks to a new payment conduit and Iran’s move to accept payments in rupee for 45 per cent of the total bill, and remaining in euro, the issue has almost been sorted out. And that is when the fresh issue on shipping insurance threatens to halt imports.
India, which depends heavily on imports, sources about 80 per cent of our energy needs from countries like Saudi Arabia, Kuwait and Iran. Iran has been the second biggest supplier of crude oil to India after Saudi Arabia, with 14-15 million tonne of crude oil a year. India is the world’s fourth-largest oil importer and a major customer for Iran’s 2.2 million barrels per day of oil exports. On average, Iran generates 10 shipments a month to refineries on India’s west coast.
India, which has been gradually cutting back Iran imports over the last few months, has recently sec-ured a 180-day waiver from tough Iran sanction from Washington, along with a few other importers such as South Korea, Sri Lanka and South Africa. This means that India can continue to import crude oil from Iran for the next 6 months if we can manage an insurance cover for ships.
Indian shipping companies have stopped taking fresh orders for delivery for July as the sanctions begin to take effect from July 1. Lack of insurance cover has forced them to back out from carrying Iranian crude. Tehran has offered help to Indian buyers such as MRPL and BPCL to ship crude, but unfortunately, the state-owned refineries traditionally go for Free-on-Board (FoB) imports as this option works out cheaper and ensures regular charter job for Indian shipping companies. Under FoB, Indian buyers have to organise their ships and insurance, as against CIF (cost, insurance and freight) imports, where the seller organises ship and insurance, and the buyer has to pay ‘landed cost’.
Though the state-run General Insurance Corp (GIC), the only re-insurer in the country, had agreed to provide third-party liability cover of $50 million to Indian flag carriers per Iranian voyage from July, there is no clarity yet. Local shipping companies have made it clear that they would not want to take any undue risk and that they would not undertake any further orders in the absence of proper insurance coverage.
The GIC move followed a strong demand by the Indian National Shipowners’ Association (Insa) to the government for sovereign guarantee to domestic ships for transporting Iran crude. The state-owned Shipping Corporation of India (SCI), India’s largest shipping company, along with Insa had approached the petroleum and shipping ministries to take up the matter of sovereign cover for domestic vessels with the finance ministry soon after the western world began implementing sanctions.
All Indian ships fetching Iranian crude at present have insurance coverage from Protection and Indemnity Clubs (P&I Clubs) but under the proposed EU sanctions against Iran, the International Group of P&I Clubs will no longer be able to provide the cover, beginning July 1. P&I Clubs were offering much higher cover, with $1 billion limit on any individual claim that involves pollution damage. P&I Clubs covered more than 95 per cent of fleets in India. No such insurance covers are available now.
GIC had instructed all four state-run insurance companies – United India Insurance, New India assurance Co, National Insurance and Oriental Insurance - to get their product approved by the insurance regulator. The nod from the insurance regulator would have activated India’s first third-party liability insurance cover for ships. The insurance amount of $50 million promised by GIC is inadequate but shipping companies were counting on it – something is better than having no coverage at all.
But things are looking a bit dicey now. The oil ministry has now requested the government to allow Iranian ships to ferry crude to Indian shores. India can’t afford to ignore crude supply from Iran, especially when the fall in crude price is negated by a steep fall in rupee. We need to find a permanent solution to go ahead with crude imports from Iran.
Source: My DigitalFC