The Hindu Business Line : Petronet India board to mull shut-down plan

DEREGULATION of the petro product pipeline business is poised to claim its first victim. Petronet India Ltd (PIL), a financial holding company formed in 1997 to set up pipelines, is all set to close shop.

The board of PIL will be meeting towards the end of this month to consider a proposal to close down the company and work out the modalities in this regard, a senior PIL official told Business Line.

"The opinions of the PIL promoters such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) have been obtained and they have concurred with the proposal to shut down the company," the official said.

Wrecking PIL's fortune has been the freedom to lay pipelines.

Recently, the Government announced a policy, whereby any company could set up long-distance product pipelines as long as it kept spare capacity for use by other interested parties.

This has undermined the very basis of the Petronet model where duplication of pipelines was avoided by getting a single parent company to set up all the pipeline highways across the country.

Hence, no new projects are likely to land its lap, as individual companies have the freedom to set up their own pipeline network.

Under the Petronet model, product pipelines could be set up only after the PIL board approved the project and the promoting company held a minimum 26 per cent equity in the venture.

PIL is a holding company in which IOC, HPCL and BPCL jointly hold 50 per cent of the equity stake. Private sector companies such as Essar Oil Ltd (10 per cent), Reliance Petroleum Ltd (RPL) and other investors, hold the balance equity.

With the existing projects badly off, clearly, the Petronet model did not succeed since there were conflicting viewpoints and interests within the PIL board.

This led to delayed commissioning of the projects, besides other commercial issues. At present, the Petronet pipeline projects are not in a good financial condition.

Some have not even achieved financial closure while another has, in fact, defaulted on its debt servicing. Hence, the stakeholders are not likely to earn even reasonable returns on their investments.

In view of these factors, the PIL board is planning to appoint a consultant to aid in the closure of the company. With regard to PIL's subsidiary companies such as Petronet Mangalore-Hassan-Bangalore (MHB) Ltd, where ONGC owns a 23 per cent equity stake, the promoters will be asked to buy out the stakes of the others and completely take over the pipelines.

The other major pipelines include the Petronet Vadinar Kandla Ltd where IOC is the lead sponsor and Petronet Cochin Coimbatore Karur Ltd where BPCL is the lead sponsor.

The single-door PIL route for setting up pipelines was relevant in the era of the Administered Pricing Mechanism (APM) that was disbanded in April 2002.

Under the APM system, only public sector oil companies could undertake marketing of petro-products and pipeline transportation charges were paid for on a cost-plus basis and then equalised across the pipelines.

Hence, less economical pipelines, owing to lower volume traffic or demand, were cross-subsidised by pipelines enjoying better economies.

Hence, once the asset was created, it was serviced by an `oil pool' account administered by the Government.

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