India's Chennai Petroleum will stop processing Iranian crude oil from October to keep its insurance coverage once new sanctions by the United States against Iran go into effect, three sources familiar with the issue said.

Iran's Naftiran Intertrade Co Ltd, a trading arm for state-owned National Iranian Oil Co, owns a 15.4 per cent stake in Chennai Petroleum, which has two refineries with a total combined capacity of 230,000 barrels of oil per day (bpd).

In May, US President Donald Trump pulled out of an international nuclear deal with Iran and announced new sanctions against the country, the third-largest producer among the Organization of the Petroleum Exporting Countries (OPEC). Washington is pushing allies to cut Iranian oil imports to zero once the sanctions on the petroleum sector start up on Nov 4.

United India Insurance has informed Chennai Petroleum that its new annual policy that is set to take effect from October will not cover any liability related to processing crude from Iran, the three sources said. This has forced the refiner to cancel a scheduled loading of 1 million barrels in October, they said.

Indian insurers do not fall directly under the sanctions, but need to hedge their own risk on the Western reinsurance market, which will not accept Iranian exposure. “It is quite complicated.. reinsurers are quite apprehensive about extending cover for Chennai Petroleum,” said one of the sources, who asked not to be identified because of the sensitivity of the issue.

Chennai Petroleum's reduced demand will further cut India's imports from Iran to about 10 million tonnes in October, lower than previous estimates reported by Reuters . “Reinsurers have said they can not provide full 100 percent cover. They have agreed to provide support for only 85 percent cover,” said a second source, who also declined to be identified.

Chennai Petroleum, a subsidiary of the country's biggest refiner Indian Oil Corp (IOC), has a deal to buy up to 2 million tonnes, or 40,000 bpd, of oil from Iran in the fiscal year 2018/19. IOC imports oil on behalf of Chennai Petroleum.

Chennai Petroleum and United India Insurance did not respond to requests for comment.

With Chennai's absence, Iran is left with just two Indian clients, Managalore Refinery and Petrochemicals Ltd, and IOC. State-owned refiner Hindustan Petroleum Corp has already halted purchases due to insurance problems, while Bharat Petroleum Corp boosted Iranian purchases earlier this year and expects to sharply cut Iranian flows once the sanctions take effect.

Nayara Energy is also preparing to halt Iranian imports from November, while Reliance Industries and HPCL-Mittal Energy Ltd have already stopped buying Iranian oil.

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