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NEW DELHI, March 28

RELIANCE Petroleum Ltd (RPL) today signed individual two-year contracts with Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) to sell around 13.1 million tonnes of products per annum from its Jamnagar refinery beginning April 1.

IOC will purchase 7.5 million tonnes while the other two state-owned companies will offtake the remaining 7.5 million tonnes.

The 13.1 million product offtake level is "subjective" to several adjustments such as product demand, etc., and the offtake by the marketing companies is on a "best endeavour" basis.

This means that in case the companies do not purchase their commitment, they would not be liable to pay damages to RPL. In such a situation, for RPL to press for damages, it will require to prove that the poor offtake was a result of the marketing companies not picking up products on a "best endeavour" basis.

This set of contracts is a result of IOC seeking a review of the terms of the original contract set out in 1999 between IOC and RPL. Under the 1999 contract, IOC was bound by a take-or-pay contract to purchase 8.5 million tonnes with another 6.5 million tonnes to be purchased by a joint venture between RPL and IOC between 2002 and 2009. The contract also had a stipulation that in the event of the joint venture not taking off, IOC would require to pick up the entire 15 million tonnes.

With the joint venture not fructifying, the deal ran into choppy waters. The problem was compounded by the flat-to-negative growth in demand for the single largest product, diesel, over the last three years.

Besides, in the absence of a take-or-pay obligation for IOC, the revised contract tenure is reduced to two years. The revised contract is based on the present levels of offtake of RPL's products by IOC, which it, in turn, sells to HPCL and BPCL. Also, given the absence of, let alone, automatic but also well-defined penalty clauses, HPCL and BPCL have also entered into a direct contract with RPL.

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