This means that the buyer, instead of the seller, will have to lift the crude and pay for the cost of shipping the crude to its destination. Starting April, Indian refiners will begin importing crude from Iran on a free on board (FOB) basis instead of a CIF (Cost, Insurance and Freight) basis. Earlier in January, international sanctions against Iran were lifted giving Indiaunrestricted access to its crude oil.
"From April 1, all importers will move to FOB as it is cheaper," said an official from a private refining company. FOB basis means that the buyers charter a vessel to lift the crude from a terminal in the producing country and pay for the cost of shipping the crude to its destination. A CIF model is when the seller pays the costs and freight including insurance to bring the goods to the port of destination.
An official from the Mangalore Refineries and Petrochemicals Limited (MRPL), an ONGC subsidiary said, "We will be importing the Iranian crude based on our month-on-month economics."
Bharat Petroleum Corporation (BPCL) said the company would begin importing Iranian crude in a few months’ time. Indian public sector general insurers, including official reinsurer GIC Re and shipping companies, are planning to set up an exclusive entity known as P&I Club to provide cover to shipping companies in India.
The P&I club from Europe would also provide re-insurance up to $580 million, said insurance industry sources. P&I is a global third-party-liability insurance for ship owners, operators and companies that charter ships. The insurance covers their legal liability in the event of a crew member getting injured or dying in an accident. It also covers collision, wreck removal, marine pollution, stowaways, cargo damage and fines levied by foreign governments or port authorities. In such a club, members contribute to the club’s common risk pool according to the Pooling Agreement rules.
"Cover for cargo will be provided by P&I club and that will kick in whenever there is a higher capacity demand. Once all the players begin Iran crude import, this would come into force," said a senior insurance underwriting executive from a state-owned insurer. Indian insurers used to depend on European companies to re-insure their risks. However, with the sanctions on trade with Iran from both the US and the European Union, they had refused to re-insure. Large sized covers like these are only given if the particular insurer or group of insurers have enough reinsurance capacity to deal with the risk.
Indian insurers typically faced a lot of hurdles in insuring refineries importing Iranian crude. In 2013, Iranian crude-importing refineries had to face problems as insurance firms declined to extend full coverage, citing lack of reinsurance coverage. For this, an Rs 2,000-crore Indian Energy Insurance pool was proposed to cover the refineries that were importing crude oil from Iran. However, this failed to take off due to the differences in opinion between oil companies and the previous UPA government on the size of the cover and pool.
While oil companies were asking for a cover of Rs 9,500-11,000 crore, the government offered only Rs 2,000 crore. Of the Rs 2,000-crore insurance pool, the petroleum ministry was to contribute around Rs 1,000 crore through the Oil Industry Development Board, and the finance ministry another Rs 1,000 crore. State-owned general insurers had also invited their private sector counterparts to be part of this pool but they all decline, citing high associated risks.