India joins China in saying it will not reduce oil exports from Iran, despite new U.S., European sanctions over Iran's nuclear program

Cindy Allen

LOS ANGELES , January 31, 2012 (Industry Intelligence) – India has joined China in saying it will not cut back on oil imports from Iran, despite stiff new U.S. and European sanctions designed to pressure Tehran over its nuclear program.

"It is not possible for India to take any decision to reduce the import from Iran drastically because, after all, the countries which can provide the requirement of the emerging economy, Iran is an important country among them," India's finance minister Pranab Mukherjee told reporters Sunday in Chicago.

India and China together accounted for 34 percent of Iran's oil exports from January to September of 2011 — slightly more than Europe, according to International Energy Agency data.

The move is likely to be seen as a political victory in Iran, but it's unclear how Chinese and Indian companies will actually be able to pay for Iranian oil without running afoul of the sanctions, analysts said.

"It's a blow," said David Hartwell, senior Middle East analyst at IHS Jane's, adding that Iran may have discounted prices to keep the Chinese and Indians on their side. "If you have two major countries like India and China saying they will not abide by the sanctions, that's going to keep a vital line open for the Iranians to continue to sidestep the sanctions and get foreign capital."

He said India and China could just be trying to buy time to diversify their oil supplies and may steer away from Iran, especially if Saudi Arabia — India's largest source of oil imports — were to ramp up production and offer an attractively priced alternative.

The European Union last week imposed an oil embargo against Iran and froze the assets of its central bank. In December, the U.S. said it would bar financial institutions from the U.S. market if they do business with Iran's central bank.

India and China are ravenous energy consumers and rely heavily on imported oil. Iranian oil accounts for 9 percent of India's oil consumption and 6 percent of China's, according to the latest data from the IEA.

Iran exports 2.5 million barrels of oil per day, about 3 percent of world supplies. About 500,000 barrels go to Europe and most of the rest goes to China, India, Japan and South Korea.

China has called for negotiations over Iran's nuclear program. South Korea has been noncommittal about the sanctions, and Japan is seeking an exemption, saying its Iranian oil imports have steadily declined and probably will continue to do so.

Kyodo News agency reported that senior Japanese and U.S. officials on Thursday will hold their second meeting on the sanctions this month.

"I believe it may not be easy to come to a conclusion on this matter in the upcoming discussions," Foreign Minister Koichiro Gemba said.

Western sanctions could make it harder for India to pay for the oil it gets from Iran. Past sanctions have already delayed payments by Indian oil importers, who have had to scramble to find banks willing to handle transactions with Iran.

India's central bank governor D. Subbarao said last week that the current payment mechanism was "working fine," though India was also "exploring other options," which he declined to discuss.

Indian companies now reportedly route payments through Turkey's Turkiye Halk Bankasi AS, after EU pressure forced German-based Europaisch-Iranische Handelsbank AG to stop handling the payments last year.

IHS Jane's energy analyst Catherine Hunter said Turkey is unlikely to shut down that route immediately, noting that Turkish oil refiner Tupras also uses this payment mechanism.

"But this route remains susceptible to external pressure," she added by email. "India is now discussing rupee based payments and direct trade — however that has a number of drawbacks for Iran given the trade imbalance and restrictions on use. China isn't publicly discussing options but I imagine other currency payments are also on the cards there."

The U.S. and its allies believe Iran is using oil revenues to develop nuclear weapons, but Tehran insists its nuclear program is purely for peaceful purposes.

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