India's Essar Group has backed away from development of a new oil refinery in Iran that would violate US sanctions on Tehran, Minnesota Governor Tim Pawlenty said.

Essar, which recently bought a Minnesota steel company, had considered working with Iran to build the refinery and bidding on exploration blocks, Essar Group Americas President Madhu Vuppuluri told Pawlenty in a letter dated Oct 31. But he said Essar Group would abide by laws limiting operations in Iran.

The move came after Pawlenty flew to India to discuss Essar's Iran work and potential conflicts with US law.
 
Pawlenty said Essar Group's unit Essar Global would proceed with development of a planned steel plant in Minnesota.

The governor told a news conference that he and US State Department officials who met with Essar 'wanted to make sure that they were fully aware of the requirements of the Iran Country Sanctions Act, and that they understood that it would have consequences in the US, including for the Minnesota project, if they were to go forward”.

Last week, Washington tightened its long-standing sanctions on Iran in a fresh bid to persuade the country to halt its uranium enrichment activities that could be used to develop a nuclear weapons program.

The US State Department declined to comment specifically on Essar, but a department official, speaking on condition of anonymity, said, 'If this Indian company has decided it's in its best interest to back away from dealings in Iran, that's excellent.'

US companies are prohibited by law from working in Iran, although foreign affiliates of US companies, including one linked to oil services company Halliburton, have conducted business there.

Essar Group closed on the purchase of privately owned Minnesota Steel on Oct 22, two days before Reuters reported that Essar Group and the National Iranian Oil Refining Distribution Company were expected to begin building a 300,000 barrels per day (bpd) refinery in southern Iran early next year.

Pawlenty said that news story called his attention to Essar's work in Iran and the sanctions.

Essar Americas' Vuppuluri said in the letter to the governor that Pawlenty should be ' ... assured that Essar has not taken nor will it take any action including making any investments in the energy sector in Iran, which would in any way be contrary to any applicable US or international laws.'

Pawlenty said the Minnesota state government and local authorities would proceed with a package of $60 million in infrastructure investments to help develop the new plant on the Mesabi iron range in northeast Minnesota.

That plant will include ore mining, ore processing, direct reduction and steelmaking.

Essar is a family-owned holding company, based in Mumbai, with interests from telecom to construction.

Iran, the world's fourth-largest oil exporter, last year launched a multi-billion dollar, five-year plan to expand and upgrade its refineries to 3.0 million bpd, from 1.6 million bpd.

Oil demand in India has rapidly increased as its economy expands at a fast pace.Reuters