Mangalore Refinery, Essar Fall on Iran Supply Concerns

Bloomberg

January 28, 2011

By Pratish Narayanan

Mangalore Refinery & Petrochemicals Ltd. and Essar Oil Ltd. declined in Mumbai after an Iranian trade official said the Middle Eastern nation may halt crude sales to India in two weeks if a payment impasse isn’t resolved.

State-run Mangalore Refinery, the largest Indian buyer of Iranian crude, fell as much as 4.4 percent to 65.65 rupees and closed at 68.40 rupees. Essar Oil dropped 4 percent to 120.25 rupees and group company Essar Energy Ltd. declined 2.6 percent to 529 pence at 10:55 a.m. in London.

Refiners including Indian Oil Corp., the nation’s largest, need to find a way to pay for Iranian crude after the Reserve Bank of India on Dec. 27 dismantled a mechanism used to settle oil trades in euros and dollars. Indian refiners owe Iran about $900 million for crude oil, Mehdi Fakheri, vice president of international affairs at the Iran Chamber of Commerce, Industries and Mines, said in an interview in Mumbai yesterday.

"If Mangalore Refinery doesn’t get the crude from Iran, then utilization rates could drop and margins could be affected as well,” said Alok Deshpande, an oil and gas analyst at Mumbai-based Elara Securities Ltd., who has a "sell” rating on the stock. "As long as this is not resolved, it’s going to have a major overhang on the shares.”

Mangalore Refinery imports about 7 million metric tons a year (4 million barrels a month) of oil from Iran, Managing Director U.K. Basu said Dec. 30. Essar, the second-biggest buyer of crude from the Persian Gulf state, imports about 3 million barrels a month, Chief Executive Officer Naresh Nayyar said Jan. 17.

India-Iran Trade

Swastayan Roy, a spokesman for Essar, declined to comment when reached on his mobile phone today. Mangalore Refinery’s Basu didn’t return a call to his mobile phone.

Crude oil supplies from Iran won’t be disrupted, Banking Secretary R. Gopalan told reporters in New Delhi today. India is putting in place the last leg of a clearing mechanism to settle oil trades with Iran and is open to making payment in any currency, including the euro, Gopalan said.

The gridlock over payments threatens about $9.5 billion in annual oil trade between the two countries, Fakheri said.

"If there is no payment solution, I am afraid Iran will be selling its oil to other countries,” Fakheri said. "Then our trade exchanges will drop to almost 20 percent” of the current level, he said.

Stoppage of shipments may force Mangalore Refinery, a unit of India’s Oil and Natural Gas Corp., to buy oil at higher prices from the spot market.

Officials from Indian and Iranian central banks are in talks to settle trades in their domestic currencies, Fakheri said. Iran is India’s biggest oil supplier after Saudi Arabia.

India imports about 21 million tons of crude from Iran annually, Oil Secretary S. Sundareshan said on Dec. 30. Refiners currently receive oil shipments from Iran on credit.

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