Bold India Move To Assure Energy Sovereignty

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 cover to the two refineries.

Re-insurers in Lloyds and other 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 this month-end, but is now likely to sustain. Iran has been finding it more and more difficult to sell its oil. Its total crude oil production fell 50 percent in 2012 over the previous year.

Though India can easily increase imports from Saudi Arabia, Kuwait and Oman, its three biggest crude suppliers, it has chosen to continue the trade with Iran mainly to diversify its energy supply.

Though India can easily increase imports from Saudi Arabia, Kuwait and Oman, its three biggest crude suppliers, it has chosen to continue the trade with Iran mainly to diversify its energy supply.

India imports about 70 percent of its oil requirements, and dependence on one region can be like putting all eggs in one basket.

“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 to provide cover to 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.

Insurance company sources said GIC will lead the Indian pool, with the Oil Industry Development Board (OIDB) chipping in with Rs 1,000 crore.