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NEW DELHI (Reuters) - Top exporter Saudi Arabia has struck deals to sell 3 million barrels more oil to India in August, stepping into the vacuum created by regional rival Iran after it cut supply to New Delhi.
The sale could stoke simmering tension between Riyadh and Tehran over oil policy. Saudi sources say the kingdom is not actively seeking to wrest market share from the Islamic Republic, but with Brent at over $100 a barrel Riyadh has taken a $300 million slice of Iran's oil sales to India.
"If Iran can't get the [payment] issues resolved with India we will send them supplies and we have already alerted them to that," said a Saudi government advisor.
Iran has already criticised Saudi Arabia for boosting oil supply unilaterally after Tehran-led opposition defeated a Saudi proposal for a coordinated supply increase at an OPEC meeting in June.
Iran told Indian refiners last week it would cut oil shipments amounting to about 400,000 barrels per day (bpd) in August. Tehran aims to pressure the refiners into settling $5 billion in debts for crude already supplied and to find a way around U.S. and UN sanctions that make trade with Iran difficult.
Iranian oil normally meets about 12 percent of India's total demand of 3.46 million bpd.
Saudi Arabia approved the extra sales for August, sources with direct knowledge of the deal said on Tuesday. The amount covers a quarter of what Iran exported on a daily basis to India before the halt.
The sources at Indian refiners Hindustan Petroleum Corp (HPCL), Bharat Petroleum Corp (BPCL) and Essar Oil said that state oil giant Saudi Aramco had confirmed it would supply each of them with an additional 1 million barrels of crude in August.
The crude would be a mix of Arab Light, Arab Heavy and Arab Medium, another source said.
"By purchasing crude from the Saudis, India is sending out a strong message to Iran that it can diversify away from Iran if the need arises," Praveen Kumar at FACTS Global Energy said.
Buyers in Asia's third-largest oil consumer reached out to Aramco last week to request additional crude to plug the gap from Iran. They have also sought more crude from the United Arab Emirates, Kuwait and Iraq.
Iran sent refiners a letter on June 27 threatening to halt supplies and has followed through on its threat. Tehran had previously tolerated unpaid shipments as the price it had to pay to defend its crude market share.
"It is of course a relief to India that the gap can be readily plugged," said Victor Shum, an analyst at Purvin & Gertz. "It also indicates that there are alternative sources. Nobody really can have a monopoly in the oil markets."
India's oil minister S. Jaipal Reddy said last week New Delhi had a back-up plan to cope with a halt in oil supplies, but he did not elaborate.
India and Iran have failed since December to find ways for New Delhi to pay for imports, after India's central bank stopped payments through the Asian Clearing Union (ACU) mechanism. There is no ban against buying Iranian crude, but sanctions have made financing trade with Iran tough.
The central bank's move won praise from Washington and came close on the heels of a visit to India by U.S. President Barack Obama last year. Obama has endorsed India's bid for a permanent seat on the U.N. Security Council.
The U.S. and its allies aim to isolate Iran to halt its nuclear programme, which they say is to develop weapons. Iran says it needs nuclear power supplies.
For Iran, the next step would be to find alternative markets for its oil that it will not sell to India. Analysts expect China to be a possible buyer if the oil is sold at a price attractive to its refiners.
Iran is selling crude to China without any problems, an Iranian government spokesman said on Tuesday, dismissing reports Tehran may not be getting paid by its biggest buyer.
Iran is China's third-largest crude supplier, behind Saudi Arabia and Angola, shipping around 540,000 bpd in the first six months of the year, or more than 10 percent of Beijing's 5.1 million bpd of imports.
Additional reporting by Amena Bakr in DUBAI; Writing by Manash Goswami; Editing by Simon Webb