The government has decided to extend to private refiners the special insurance cover it provides to state-run companies that import crude oil from Iran, a measure it hopes will increase imports from the country and thereby help save foreign exchange.
The measures is part of the plan outlined recently by oil minister Veerappa Moily to the Prime Minister to cut India’s oil import bill by $20 billion.
High oil and gold imports are seen as the primary cause of India’s record high current account deficit that has contributed significantly to the rapid rupee depreciation.
Higher crude imports from Iran can help save precious foreign exchange as India can pay for part of the purchases in rupees according to an the arrangement worked out between the two countries after US & EU led sanctions on Iran made it difficult for New Delhi to settle payments in dollars through foreign banks.
India wants to import of 13 million tonnes of crude oil from Iran in the current financial year, but oil firms could import only 2 million tonnes of Iranian crude in first five months of current fiscal year mainly because of insurance problems.
Indian general insurance companies provide cover to oil refineries and then re-insure that risk with global re-insurers by paying a premium thus reducing the risk on their books.
But after sanctions against Iran, global insurers provide re-insurance to crude shipments from the country with a “sanction clause,” which limits the amount they would pay should a claim arise.
This has forced the government to set up a special pool to provide insurance cover to ships ferrying Iranian crude.
This “Energy Insurance Pool” set up to facilitate insurance cover for crude buys from Iran was meant primarily for PSU oil firms. It is administered by a governing body comprising bureaucrats of oil and finance ministries.
“The cover to the special pool will now be available to other domestic petroleum companies if they wish to be a part of the pool,” a government official told ET. Insurance to private operators will be provided through the state-run General Insurance Corporation.
The proposed pool will kick off with Rs 1,000 crore contribution from the Oil Industry Development Board (OIDB) and similar amount will be jointly contributed by state run general insurers and GIC. “The first 500 crore from OIDB will come immediately and the rest will flow in by April 2014,” another official said.
Under the arrangement, all premiums paid by the companies will be credited into the pool and so will be the interest earned on the corpus. “This will enable the pool to grow and make it a more robust mechanism,” the official said. The finance ministry had proposed to relax Section 25 of the GIBNA Act 1972 to facilitate this pool and permit private sector participation.
However, the pool size will be too small if India is looking to raise its oil imports from Iran, a senior GIC executive said. “As of now the fund is very small. So, from that point it is better if more companies join but what is paramount that OIDB releases the full amount so the process can be kick started at the earliest,” the official said, requesting anonymity.
Source: The Economic Times
Date: 23rd September 2013