UPDATE 2-India says sees Iran oil payment row solution by Feb

Fri Jan 7, 2011 9:24am GMT

* Issue attended to at highest levels-Indian foreign sec

* State Bank of India (SBI) stops issuing LCs - source

* No immediate solution - SBI source

* Indian delegation to visit Iran in next few days

(Recasts with comment, detail, bylines)

By C.J. Kuncheria and Nidhi Verma

NEW DELHI, Jan 7 (Reuters) - India hopes to resolve an oil payments dispute with Iran before February, the foreign secretary said on Friday, as the South Asian giant strives to satisfy energy needs without upsetting the United States.

Indian Finance Ministry officials were discussing possible solutions with bankers and oil executives ahead of a ministerial visit to Tehran. But one participant warned of a "long haul" as Indian bankers stopped issuing letters of credit for the trade.

The Reserve Bank of India (RBI) said last month that payments to Iran could no longer be settled using a long-standing clearinghouse system run by regional central banks.

The decision came weeks after a visit to New Delhi by U.S. President Barack Obama. Washington praised the move, saying it would reduce what it sees as misuse of funds by Iran to support nuclear activity, which the West suspects has military aims.

Iran initially refused to sell oil outside the old setup but later agreed to ensure oil shipments for January.

Talks last week between central bankers of the countries failed to find a way out that would enable India to continue imports of oil from its second largest supplier while boosting the transparency of deals as sought by the United States.

The negotiations underscore the balance India has to strike between meeting rising energy demand and satisfying increasingly key allies such the United States and Arab nations wary of Iran's nuclear ambitions.

"We want a solution as soon as possible, the soonest possible," Foreign Secretary Nirupamam Rao told Reuters. When asked if a solution would be found before February, she said: "Even before February".

"It is receiving attention at the highest level of the government," she said, adding a ministerial delegation would be travelling to Iran in the next few days.

"AT A LOSS"

Rao said India would find a solution compatible with its international commitments.

"We want to resolve it in keeping with U.N. sanctions."

The United Nations has not imposed sanctions on oil trade with Iran, but there are indications Washington may push new steps against Tehran's energy sector in the Security Council, which India joined as a member on Saturday. [ID:nN31118354]

India's largest lender, State Bank of India , which oil companies use to handle their trade payments, has stopped issuing letters of credit in the absence of a payments mechanism, an offical present at Friday's meeting said.

"If you don't know how to carry out the promise how will you open LCs (letter of credits). We have not been able to make spot payments. It's a long haul. The issue is complicated, so don't expect an immediate solution," said the official, who declined to be identified.

"They (Reserve Bank of India) are equally at a loss because they say payments through ACU are not getting settled," the official said, referring to the Asian Clearing Union which was used until last month to settle payments.

He said even if RBI and the federal government suggest a route for payment, it has to be accepted by Iran.

India is scrambling to secure alternate supplies to guard against a supply disruption. The top local buyer of Iranian crude has sought as much as 2.6 million barrels from the spot market, despite a long-term contact with Iran. [ID:nSGE70500Q]

Iran sells 400,000 barrels of oil a day to India, accounting for about 13 percent of its crude imports. [ID:nSGE6850GU] (Additional reporting by Vipul Tripathi and Manoj Kumar; Editing by Alistair Scrutton and Robeert Birsel)