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Tue 24 Feb 2009 07:30 AM

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Indian refiner to buy cheaper crude oil outside ME

India's Reliance Industries to cut crude oil imports from Iran by 25% - industry sources.

India's Reliance Industries will import about 25 percent less crude oil on contract from Iran in 2009 in favour of cheaper oil from outside the Middle East, industry sources said Monday.

India's largest refiner will cut contract purchases from the world's fourth-largest oil exporter this year despite needing more crude to feed its giant new 580,000 barrels per day (bpd) Jamnagar refinery.

Reliance will buy 90,000 barrels bpd of lower quality Iranian crude on a term contract this year, down from 120,000 bpd in 2008, oil industry sources said.

"Reliance is taking less heavier grades because they have more options in the market at the moment and for a better price too," an industry source familiar with Indian refinery operations said.

"At the moment Dubai linked crudes are expensive, it doesn't make sense for a refiner to take this into their system," he added.

Supply cuts from the Organisation of the Petroleum Exporting Countries (OPEC) have tightened the market in Middle East crude priced on regional benchmark Dubai oil and made it cheaper to import crude from other regions.

The swap measuring the relative value of Brent crude versus Dubai placed higher-quality Brent at a discount to the Middle East grade for the first time in January, making Brent-related crude more attractive to Asian refiners.

Brent is the benchmark for European and West African crude, generally better quality than the heavy and acidic Soroush and Nowruz crudes from Iran that Reliance purchases.

"Soroush has very poor qualities which reduces its attractiveness even to complex refiners like Reliance, kitted to process this type of rough material," one Asia-based crude trader said.

Reliance did not respond to Reuters enquiries on the reduction, while Iranian officials declined to comment.

Reliance has kept silent on which crudes it will buy for the new refinery.

The Indian company already buys from across the globe for its nearby existing refinery, with suppliers including Latin American, African, and Middle Eastern oil producers.

Jamnagar could also buy Gulf of Mexico crude output from Chevron, one industry source said.

The reduction may also be a sign that Iran is writing lower supply into its annual contracts due to curbs agreed with the Organization of the Petroleum Exporting Countries, said Victor Shum, analyst with consultancy Purvin & Gertz in Singapore.

"There is simply less oil around, even if Iran may not have fully complied with the intended cuts, but there have been cuts," Shum said.

In January, Iran cut supplies to Asia by 14 percent, the first reduction to its core Asian customers in at least three years. Previously, Iran had cut spot sales of crude rather than reduce contract volumes.

Politics might also have played a role in the decision, some traders said.

US major oil firm Chevron owns 5 percent of the Jamnagar refinery and has an option to take a bigger stake. US refiners are forbidden from buying Iranian crude under sanctions in place.

"Some political pressure could have reached Reliance," Shum said. "Some members of the US Congress have complained about Reliance supplying gasoline to Iran."

In December congressman Brad Sherman, together with a bipartisan group from the US House of Representatives, sent a letter to the head of the U.S. Export-Import Bank urging it to suspend financial aid to Reliance unless the Indian firm agreed to stop selling gasoline to Iran.

The U.S. bank had approved two loan guarantees to Reliance worth $900 million that included a $400 million facility issued in August to help finance the Jamnagar refinery.

The refiner shipped 750,000 barrels of fuel to Tehran in January. (Reuters)

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