OREANDA-NEWS. July 26, 2011. Essar Oil, India’s second largest buyer of crude oil from Iran, has contracted new oil supplies from Saudi Arabia and Kuwait. This has come in the wake of Iran’s decision to stop oil supplies to India beginning next month.

The Ruia group company has been importing three million barrels every month from Iran. “New contracts for the entire volume from two new sources have been sealed. These are term contracts with nearly 90 days of credit,” said an official privy to the development. Officially, Essar declined comment.

Other refiners such as MRPL, HPCL and IOC are yet to contract new supplies that would substitute crude from Iran. On June 27, National Iranian Oil Company wrote to its buyers in India that it would stop supplies from August if pending payments were not cleared.

“There is no communication from the Iranian company after the June letter. We presume that supply will stop. It has supplied so far,” said the official. Iran supplies 400,000 barrels a day to India, 12 per cent of the country’s total requirement. India consumes around 3.46 million barrels per day.

Essar sensed the possibility of supply disruption from Iran much earlier. According to Reuters’ data, the company raised oil imports from Iraq fivefold in the first six months of 2011 and from the UAE by about 70 per cent. It runs a 14 million tonnes per annum refinery at Vadinar in Gujarat.

Iran’s foreign minister Ali Akbar Salehi is expected to visit India in the next few weeks. The oil payment row is expected to take centre-stage of his talks with his Indian counterpart SM Krishna. Oil minister S Jaipal Reddy said on Friday that India was working on alternative sources of crude in case imports from Iran stopped completely.

“We have not received any formal letter from Iran (on stopping supplies from August). But they are feeling desperate as payments have not been made for several months now,” Reddy told reporters here last week.

India owes nearly USD 5 billion to Iran for crude supplies. Saudi Arabia, a US ally, is taking the opportunity to supply crude to Indian refiners. India is Asia’s third largest crude consumer. India is unable to find an alternative route to make payments to Iran after the Reserve Bank of India said in December that Indian companies would have to settle payments outside the Asian Clearing Union (ACU).

Iran is under pressure from western countries to curb its nuclear programme. Washington praised India’s move for not continuing with ACU. It will reduce what US sees as misuse of funds by Iran to support its nuclear programme. UN sanctions on Iran do not cover crude sales. But trading and making payments to Iran have become tough in recent years.

India made attempts to transfer payments via EIH Bank in Hamburg. National Iranian Oil Company has a euro account with the bank through which crude payments were to be made. However, payments didn’t get credited in Bank of Tehran as EIH Bank is under surveillance of international security agencies.