Policy Watch: A Slick Solution

The petroleum ministry is drawing up ambitious plans to help its units survive in a de-regulated market. Will it get the formula right?

In their second-floor offices in New Delhi's Shastri Bhavan, officials of the Ministry of Petroleum and Natural Gas are working overtime. Furiously punching the buttons on their calculators and poring over balance-sheets of two stand-alone public sector oil refineries-Chennai Petroleum Corporation Ltd (CPCL) and Bongaigaon Refinery & Petrochemicals Ltd-they're busy calculating the share prices and enterprise values of these companies.

Who'll get IBP?
Both IOC can BPCL are vying for it. But IBP prefers the open bidding option.

Even as the stand-alone public sector oil marketing company IBP is being readied for disinvestment, an unseemly battle is on for its control. It's understandable too. With 1,400 retail outlets, IBP is a prize catch for both established and new players in the oil sector. The Petroleum Ministry is in favour of Bharat Petroleum Corporation Ltd (BPCL) taking over IBP. But analysts don't agree. Says Pradeep Kumar, 26, Securities Analyst, First Global: ''It doesn't make sense for BPCL to take IBP when there's already a gap between its refining and marketing capacities.''

In any case, BPCL will have to fight it out with the Indian Oil Corporation, which staked its claim to IBP within hours of the disinvestment proposal being announced. Says Subir Raha, 52, Director (Human Resource Development), IOC: ''We have a strong case for IBP.'' IOC officials point out that IBP was carved out of IOC. What's more, IOC was forced to reduce the quantity of its products so that the other oil PSUs could come up. In a deregulated environment, IOC would have to increase production, for which it would need more outlets. Says Raha: ''As this limit on production was forced on us, we should be allowed to take over IBP to meet the marketing needs of our product range.''

That argument doesn't wash with IBP. Says a senior IBP official: ''The company stands to lose from this arrangement. IOC will cannibalise our market share.'' The company wants the privatisation to proceed through open bidding, with both domestic and foreign players being allowed to bid. This will be an interesting battle to watch.

If the Union Cabinet okays a proposal drawn up by the ministry to restructure the state-run oil sector (See Synergising for Strength), these two refineries will either be merged with the public sector refining and marketing company Indian Oil Corporation (IOC) or become its subsidiaries.

Next, ministry officials will begin a similar exercise for two other stand-alone refineries-Kochi Refineries Ltd (KRL) and Numaligarh Refineries Ltd (NRL)-which are to be integrated with the other public sector oil major, Bharat Petroleum Corporation Ltd (BPCL). The ministry is also thinking of merging the stand-alone marketing company IBP, with BPCL-something that makes IOC see red (See Who'll get IBP?).

If all goes well, the new alignments will be in place by year-end. ''It will be our endeavour to restructure the public sector undertakings (PSUs) and concretise the alliances by the end of this year,'' Union Petroleum Minister Ram Naik told BT in an earlier interview.

The restructuring plan is meant to make IOC and BPCL-where the government wants to reduce its stake to under 51 per cent-attractive buys. Says Naik, reiterating a point made by the government's Hydrocarbon Vision 2025 Report: ''The intrinsic value of the marketing firms will increase substantially when the stand-alone refineries are merged with them.''

Privatisation of oil PSUs may be difficult, given Naik's stiff opposition to the idea, but the proposed integration has a logic of its own. In the oil sector, big is not only beautiful, but is also the only way to survive. Globally, oil companies are integrated energy giants that are involved in activities ranging from exploration and production, to the marketing of products. The Indian oil PSUs pale in comparison. Even IOC,