Singapore/NewDelhi: Iran's state oil refining company is in talks with India's Essar Group to build a new refinery in southern Iran, officials said, part of Tehran's $18 billion drive to meet soaring domestic fuel demand.

The estimated $2 billion-plus investment in a new 300,000 barrel per day (bpd) plant to process Iran's heavy crude would give the Opec member's stagnant refining sector a boost and give Essar a foothold in the oil-rich but politically sensitive country, where it is already in talks over a steel plant.

"We are studying a refinery in Bandar Abbas with Essar of India," Akhbari Shad, Director of International Affairs for the National Iranian Oil Refining and Distribution Company (NIORDC), told Reuters. Bandar Abbas is a port town in the south.

Shad declined to give more details or say when a deal might be struck. Negotiations over Iranian oil investments often take years; some major deals have also collapsed at the 11th hour.

An official with Essar Group told Reuters: "We want to strengthen our relations with Iran. We are talking to Iran for setting up a refinery, based on crude oil to be given by them."

"We are (also) in talks to buy a stake in some exploration and production blocks so that we can get gas for our planned steel plant," said the official, who declined to be named. He said production would be geared primarily to the local market.

Essar, a diversified, family-owned holdings company with interests from telecoms to construction, plans to set up three steel plants in the Middle East, including a joint venture to build a 1.5 million tonnes a year steel plant in Iran.

Its oil refining subsidiary Essar Oil launched India's second private-sector refinery late last year and will ramp it up to 210,000 bpd by mid-year.

Iran is the worlds fourth-largest crude oil producer but is also its second-largest importer of gasoline, due to a lack of refining capacity and rapidly growing demand, fuelled by a young population and the worlds second-cheapest pump prices.

The rising cost of importing an estimated 170,000 bpd of gasoline has taken a toll on Tehrans budget, despite petro-dollar revenues, and stoked fears that the country could be vulnerable to import sanctions.

Officials have also complained about difficulties financing projects in its oil sector where many big fields have peaked or are in decline due to the reluctance of foreign lenders amid Tehrans ongoing dispute over atomic work.

Although the Azadegan oilfield development deal with Japans top explorer fell apart last year, Iran is drawing substantial interest from state oil firms in China and India, both keen to help tap the worlds second-largest reserves of oil and gas.

Tehran has also been enlisting foreign help particularly from China to upgrade and resurrect its refining sector, with a goal of boosting capacity by at least 1 million bpd by 2010. Currently its capacity stands at around 1.347 million bpd.

Last month, the National Iranian Oil Company (NIOC) and a consortium of Iranian firms and Germany's ABB Lummus signed a 400-million euro ($512-million) contract to expand the 350,000-bpd Bandar Abbas refinery.