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Photo Bloomberg

Photo Bloomberg

Shipowners running out of options ahead of Iran oil ban

Shipowners running out of options ahead of Iran oil ban

Bangalore : Indian shipowners looking to continue hauling crude from sanctions-bound Iran by changing the insurance provider to overcome a European Union ban that kicks in from 1 July run the risk of their tankers being seized by lenders.

Photo Bloomberg

Efforts by Indian refiners to get alternative cover for the crude cargo itself will also be hampered because those extending insurance for the cargo will have to take reinsurance from the London market.

The EU ban covers the purchase, transportation, financing and insuring of Iranian oil.

India is the world’s fourth-largest oil importer and a major customer for Iran’s 1.7 million barrels per day of oil exports.

India buys about 14-15 million tonnes (mt) of crude oil a year from Iran, of which state-run MRPL Ltd alone imports about 9-10 mt a year.

Loans to buy ships require insurance against risks such as oil spills, collisions and wreck removal and lenders typically accept cover provided by members of the London-based International Group of Protection and Indemnity Clubs (IG Clubs), a 13-member group that among themselves insure about 95% of the global tanker fleet and follow European Union law.

Many Indian fleet owners have taken loans from European banks to buy ships and many Indian ships are covered by IG Clubs.

The sanctions coming into effect on 1 July will prohibit European Union insurers from covering transportation of oil from Iran.

Consequently, IG Clubs will no longer be able to provide this cover to ships that haul Iranian oil from 1 July.

Local fleet owners have asked the government to put in place alternative cover to continue transporting crude from the Persian Gulf nation. Consequently, state-run reinsurer General Insurance Corp. of India has agreed to provide third-party liability cover of up to $50 million to ships engaged in transporting crude from Iran. This is just 5% of the $1 billion liability cover provided by IG Clubs.

However, changing the insurance provider would require the approval of lenders.

“Most European loan covenants require shipowners to continue their liability cover with the International Group Clubs," said Andrew Bardot, secretary and executive officer of IG Clubs. “It’s peace of mind for the lenders".

If the alternative cover is not acceptable to the lenders, it becomes an event of default and the banks have the right to foreclose the loan, he added.

Great Eastern Shipping Co. Ltd, India’s largest ocean carrier, is contractually mandated to haul a minimum of six shipments of crude a month from Iran for MRPL on tankers with a capacity to load as much as 85,000 tonnes of the fuel. The shipping contract started in April and will run through March 2013.

Great Eastern Shipping Co. declined to comment.

India’s oil refiners sourcing crude from Iran have now incorporated a clause into their shipping contracts saying that fleet owners can refuse to call at Iranian ports to load crude if they are not able to get cover due to European Union sanctions, according to a Mumbai-based shipping company executive, who declined to be named because of the sensitive nature of the issue.

“If we don’t get cover, we will not ply that route. We don’t want to take undue risks," said the executive, whose company ships crude from Iran for state-run oil refiners. “Leave aside ship transportation insurance, what is more important is the cargo insurance. Where is that going to come from."

“It’s a huge risk which will have to be reinsured and nobody has the capability to do that except those insurers based in the EU," said T.V. Shanbhag, a Mumbai-based independent shipping adviser and maritime arbitrator.

MRPL declined to comment.

The crisis has already affected India’s crude purchases from Iran. Shanbhag said that Iran has already slipped to the No.5 slot from No.3 as a supplier of crude to India. “Now Iraq has overtaken Iran," he said.

p.manoj@livemint.com

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