Partnerships will benefit downstream oil companies, which are now grappling with wobbly balance sheets.

Hindustan Petroleum Corporation was in the news recently for a proposed refinery in Rajasthan. The nine-million-tonne project, with the Oil and Natural Gas Corporation as its ally, will involve an investment of Rs 20,000 crore.

All this is still in the planning stages and it could take quite a while before this eventually becomes a reality. It will be the best piece of news to Rajasthan, which has been keen on housing a refinery for many years now. Equally interesting is the fact that HPCL is now going flat out with new refinery projects after years of near-somnambulism.

Since the time it ceded control of Mangalore Refinery & Petrochemicals to ONGC nearly a decade ago, a move which a section of its senior management terms a ‘monumental blunder’, HPCL just decided to take a long break even while it wooed potential suitors such as Exxon and Saudi Aramco for the Bathinda refinery.

Nothing concrete emerged beyond a point, and it seemed as if the project would be consigned to the archives.

Foothold in north

It was only in mid-2007 that the Bathinda refinery suddenly got a lifeline of sorts when Mr Lakshmi Mittal, the steel magnate, entered the picture and teamed up with HPCL. A joint-venture agreement was sewn up in no time and work started in right earnest thereafter.

The Bathinda refinery’s commissioning earlier this year will give HPCL a much stronger foothold in the northern region, which is the bastion of IndianOil. More importantly, it is the best bet going forward in meeting Pakistan’s requirement of petro-products, since all it takes is building a 100-km pipeline from the refinery to Lahore.

Over the next three to five years, HPCL is also planning to set up a nine-million-tonne facility in Maharashtra’s Ratnagiri district, which will involve an outlay of Rs 20,000 crore. Does this still make sense in the context of the Rajasthan refinery which is guaranteed support from the State government?

Years ago, HPCL had planned to set up a project on the west coast with Oman Oil, but it was shelved largely due to delays associated with environmental clearances. This could well happen this time around if the green lobby objects to the idea of a refinery in Ratnagiri.

MRPL stake

The better option for HPCL is to consolidate its stake in MRPL, instead, where ONGC is the majority shareholder with a 72 per cent stake. The two have already decided to join hands for the Rajasthan refinery and the bonding could strengthen with a greater play for HPCL in MRPL, where it can look at a 26 per cent stake.

Years ago, I had posed this question to a top gun at ONGC and he dismissed the idea outright. His reasoning was that HPCL had been in the driver’s seat at MRPL (with the AV Birla group) for many years but frittered away the opportunity to grow further. Why then seek a re-entry at this point, he asked.

The answer is simple. ONGC acquired MRPL to play a far more active role in the oil marketing business but was categorically told by the Petroleum Ministry to focus on its core skills of exploration and production instead.

It had commissioned a handful of retail outlets (branded OvaL) in Karnataka but has not make much headway since then. To that extent, it has not quite managed to optimise the benefits of the MRPL acquisition.

This can change if ONGC chooses to team up with an experienced downstream player such as HPCL and set up exclusively branded outlets to retail products from MRPL and the new Rajasthan refinery. A joint effort will also ensure better planning in identifying the right locations to strike the balance between adequate fuel supplies and profits.

Only one site feasible

While this could be the ideal script, there are a host of issues to contend with. HPCL has already entered into an agreement with Oil India to jointly explore opportunities in the upstream and downstream sectors. How will ONGC, the more formidable rival, then fit into this scheme of things? Will Oil India also seek a role in the Rajasthan project to extend its presence in the downstream business?

It already has a 26 per cent in Assam’s Numaligarh Refinery, where Bharat Petroleum Corporation is the majority partner with a 62 per cent stake.

There is no question that HPCL will have to choose between Ratnagiri and Rajasthan for its next refinery. Spending money on both may not be viable, since it will involve a staggering Rs 40,000 crore at a time when the company (and its downstream counterparts, IOC and BPCL) is already burdened with debt.

If there is a way HPCL and ONGC can end up playing proactive roles in both MRPL and the Rajasthan project, it will be the best bet going forward.

Interestingly, ONGC has always been keen on entering the downstream sector in its endeavour to become an integrated oil company. Over 15 years ago, it had indicated its intent to invest up to 15 per cent in BPCL’s Bina refinery, where Oman Oil was the co-promoter. The delay in commissioning the project caused ONGC to drop out.

The next big thing happened in the late 1990s when the company decided to team up with IOC and jointly pursue opportunities in refining and marketing, exploration, petrochemicals, and power. It was seen as the mega marriage where two giants would pool their skills and create an energy powerhouse.

However, nothing of the kind happened and both IOC and ONGC went their own ways eventually.

changed times

The landscape has changed significantly since then. The downstream oil companies, which were financially strong at one point, are now grappling with the challenge of high crude oil prices, subsidies and wobbly balance sheets.

Each fiscal is turning out to be a nightmare, thanks to losses incurred on selling subsidised fuels and waiting for eternity to be compensated by the Government. Against this grim background, partnerships will help, especially when it means joint investments in common facilities. HPCL and ONGC could take the initiative and show the way ahead.

(This article was published on July 5, 2012)
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