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Raghuvir Srinivasan

CHENNAI, May 28

INDIAN Oil Corporation (IOC) is understood to be evaluating the option of independently implementing the Rs 520-crore Chennai-Tiruchi-Madurai (CTM) pipeline project, originally conceived by Petronet India Ltd. This follows the insistence of Petronet on including a "take-or-pay" clause in the agreement with IOC.

The internal thinking in IOC appears to be against signing any agreement with a "take-or-pay" clause as the oil major would then be compelled to either use the pipeline for a committed quantity or pay up the transportation costs any way.

With expertise from construction and management of about 6,500 km of pipelines on its own, IOC appears to be confident about its capacity to take on the project and implement it on its own. The capital commitment of Rs 520 crore is not too big any way for the oil major.

Petronet's insistence on a "take-or-pay" clause appears to have been prompted by its experience with the Rs 400-crore Vadinar-Kandla pipeline implemented by it. The decision of IOC to convert the Kandla-Bhatinda pipeline from a product to a crude oil carrier has rendered the Vadinar-Kandla product pipeline unviable.

This pipeline was supposed to link up with the Kandla-Bhatinda pipeline for moving products from the existing Reliance Petroleum and the upcoming Essar Oil refinery in Jamnagar, to the markets in the North, including Delhi. With IOC now deciding to convert the Kandla-Bhatinda pipeline into a crude oil carrier, the investment in the Vadina-Kandla pipeline could go waste. There were also reports recently that financial institutions have decided not to fund pipeline projects unless they are backed by a "take-or-pay" clause.

IOC's decision could be a trendsetter for other similar projects, analysts say. In theory at least, the oil refining and marketing companies can now adopt a similar strategy to circumvent the "take-or-pay" clause that Petronet may insist on in future.

The CTM product pipeline was originally proposed to be implemented by Petronet CTM Ltd, a joint venture between Petronet India and IOC, with each holding 26 per cent stake in the company. The balance 48 per cent equity stake was proposed to be offered to financial/strategic investors. The pipeline was meant to evacuate products such as petrol, kerosene and diesel from the seven million tonne refinery of Chennai Petroleum Corporation at Chennai to the demand centres in Neyveli, Tiruchi, Madurai and Thanjavur. It was to have been implemented in two phases - the first one involving a pipeline with a capacity of two million tonnes per annum and the second one increasing it to 2.5 million tonnes per annum. The implementation period was set at 24 months from the date of financial closure.

Meanwhile, in an interesting development, the Indian Railways is understood to have offered IOC a 25 per cent discount on its tariff for all oil cargo on the Chennai-Tiruchi-Madurai route. The Railways will be the biggest loser if the pipeline is implemented, as product movement would then shift to the pipeline. However, IOC does not appear in the mood to accept the offer simply because there is no assurance that the Railways will not renege on its offer at a future date after the pipeline project is shelved.

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