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Archana Chaudhary

Financial institutions are becoming wary of `common carriers' and they seem to prefer `take-or-pay' contracts that are popular in foreign countries.

MUMBAI, March 26

INDIAN Oil Corporation's decision to convert its 1,443-km Kandla-Bhatinda product pipeline into a crude oil carrier is making term lenders wary of funding ``common carriers''. Financial institutions and banks are now insisting on `take-or-pay' contracts to finance oil pipeline projects.

``IOC is a stakeholder in Petronet India Ltd's Vadinar-Kandla pipeline, which will be rendered useless by this decision. If the company had given a written guarantee to Petronet VK, would it have gone back on its word? This is exactly the kind of reversal which has given rise to take-or-pay contracts for pipeline projects throughout the world,'' says a senior industry analyst.

In Europe and the US, oil companies have to sign take-or-pay contracts to access product pipelines, which are administered by `independent' companies on a `common carrier' principle.

Petronet India Ltd (PIL) was formed with this principle in mind so that no oil major is allowed monopoly on the infrastructure.

According to Mr Harindran Nair, Executive Director, KPMG, consultants to Central India Pipeline Ltd, ``take-or-pay contracts the world over have ensured that independent pipeline companies, similar to PIL, can attract investors through guaranteed offtake and tariff on such projects.''

But in India, most oil companies, including IOC and Hindustan Petroleum Corporation Ltd have shown resistance to guaranteeing offtake in pipeline projects, much to the chagrin of financial institutions.

FIs have shied away from long-term investments in pipeline projects without guarantees. As a result, most Petronet projects are being financed through short-term loans.

Said a senior ICICI official: ``We have been keen on take-or-pay so that it becomes binding on companies to offtake a certain quantity at a fixed tariff. But there has been a resistance. And with no regulation, we can only watch as these companies tell us they would rather put up their own infrastructure if pushed for guarantees. But from now on (post-IOC), we will insist on take-or-pay guarantees.''

So far, only one of Petronet's projects — the 292-km Kochi-Coimbatore-Karur pipeline — has a take-or-pay from the lead company, Bharat Petroleum Corporation Ltd. The project envisages transporting products from BPCL's Kochi Refineries Ltd to Karur with a tap-off point at Coimbatore.

``The Kochi-Karur pipeline will be commissioned this month-end,'' Mr K.K. Sinha, Managing Director, PIL, told Business Line. ``With BPCL's take-or-pay, we will be able to convert the Rs 200-odd crore short-term loans to long-term. We have been trying to impress the same on other oil majors,'' Mr Sinha said.

Said a senior oil sector analyst, ``the general outlook is, if there is an infrastructure such as a product pipeline, companies will use it. So no guarantees are needed.''

With sector decontrol scheduled next month, control over pipelines, which are generally termed `natural monopolies', will become crucial, say analysts. IOC's decision has not only increased the FIs' discomfort, it has also forced Reliance and Essar refineries to look for other avenues to transport their products.

And if more public sector oil majors take decisions similar to IOC, analysts fear that it will not only lead to unnecessary and expensive duplication of infrastructure — with companies having to make its own offtake arrangements — but will also lead to the end of Petronet India Ltd.

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