Essar Oil buys around 15-20 per cent of its crude oil requirement from Iran. This was the first payment for refiners this year as international sanctions on the Persian Gulf nation are set to be eased.
An equal amount is expected to be paid next month by refiners. The companies -including state-owned Mangalore Refinery and Petrochemicals (MRPL), Indian Oil (IOC), Hindustan Petroleum Corp (HPCL) and Essar Oil - owe around $6.4 billion to Iran.
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In November last year, the refiners had paid $400 million of dues that had been accumulating since 2013. Western sanctions against Iran, which had crippled its oil revenues, are widely expected to end in 2016 if Tehran complies with terms of the deal agreed on July 14 this year.
As part of the deal, the US Treasury's Office of Foreign Assets Control (OFAC) had approved the banking mechanism for payment of $1.4 billion by Indian refiners in two equal instalments to Tehran.
Under the arrangement, the refiners will deposit rupee equivalent of $700 million in Kolkata-based UCO Bank which will then transmit the money to the Reserve Bank of India (RBI). The central bank will then make arrangements for its onward remittance to Iran.
Since February 2013, refiners like MRPL and Essar Oil have been paying 45 per cent of dues on purchase of crude oil from Iran in rupees through UCO Bank, Kolkata. The remaining has been accumulating, pending finalisation of a payment route and mechanism.
Since EU and US sanctions disallowed transactions with Iranian entities, India and Iran had put in place a payments mechanism through Turkish Halk Bank and its own UCO Bank. Currently, Iran makes rupee payments to India for its purchases entirely through UCO Bank, which are set off against what India owes to Iran for crude oil. Low-value export items such as rice and pharmaceuticals limit the scope to set off rupee payments against India's dues to Iran.