The Hindu Business Line : Funding carrier pipelines — Petronet may get oil cos to `comfort' FIs

PETRONET India Ltd (PIL) may rely on "comfort letters'' from oil companies - PIL's joint venture partners - to get financial institutions to fund its common carrier pipeline projects.

PIL is looking at comfort letters as alternatives to take-or-pay contracts as most oil companies have shown resistance to commit to particular volume offtake from PIL pipelines which transport oil products from refineries to deficit regions in the interiors.

PIL, which constructs product pipelines for oil majors, Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum through joint venture subsidiaries, is caught in a bind.

"While financial institutions are insisting on a take-or-pay contract for pipeline projects, oil companies do not see why they should enter such agreements, especially with their strong balance sheets,'' Mr K K Sinha, Managing Director, Petronet India Ltd, told Business Line.

Of the eight on-going and proposed pipeline projects undertaken by PIL, only the Kochi-Karur Pipeline, a joint venture with Bharat Petroleum, has been successful in acquiring a take-or-pay contract.

"We are also trying to explain to our lenders that `take-or-pay' need not be the only way to bind oil companies to product offtake. There are other means. Besides, once a pipeline is in place, it will definitely be used as it is the cheapest way to transport products,'' Mr Sinha said.

According to him, while most FIs are being "very cautious'' while funding pipeline projects, "we are trying to bring to their (FIs) notice that there is no reason why oil companies should not use the pipelines once they are in place. Using a pipeline costs only one-third that of transporting products by road or rail'', he said.

PIL is also exploring options similar to offering comfort letters to satisfy financial institutions insisting on guarantees.

In the long run, PIL plans to establish a pipeline network across the country by connecting all its product pipelines. "The ideal situation would be to connect all regions with pipelines to transport oil products at reasonable cost,'' Mr Sinha said.

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