Merge the fuel majors

In unity lies strength. Should this mantra now be extended to the downstream oil sector where IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are facing their worst crisis in recent times?

A friend of mine in the oil sector believes this is the best bet going forward for these companies. “Clearly, there is no short-term solution in sight to their mounting fuel losses. It is better for the trio to join hands in creating infrastructure for the future instead of blowing up big money in replicating facilities,” he told me.

It is a common sight to see retail outlets or terminals of IOC, HPCL and BPCL literally next to one another in many parts of the country. When the eventual goal is to provide fuel supply, it may just be a better option to create a new company within whose fold the three refiners can jointly function. Why not go in for pooling of skills instead, to keep costs in check, argues my oil industry friend.

SURVIVAL

There is, doubtless, some merit in this argument. The three oil navaratnas have one owner, the Government of India. All are gasping for survival and, of late, have just managed to scrape through each fiscal with minuscule profits. During this long wait for the compensation package (to make up for losses incurred on selling subsidised diesel, cooking gas and kerosene), they borrow heavily and actually end up writing off the interest burden. During the next five years, they have projected a staggering expenditure of Rs 200,000 crore on refineries, pipelines, tankages, bottling plants, retail outlets and what have you.

It is all very well for the Government to proclaim that it will ‘bite the bullet' when it comes to hiking fuel prices, but the reality is quite something else. Inflation continues to be the biggest bugbear across households, and to contemplate paying more for diesel or cooking gas would be the proverbial last straw.

Along with kerosene, the projected fuel losses this fiscal are more than Rs 200,000 crore, and the three oil companies have just no clue how this massive sum will be compensated to them. During the years, they have taken in more than 10 per cent of these losses with their upstream counterparts (led by the Oil and Natural Gas Corporation) and the Government making up a large part of the balance.

The picture is turning bleaker with every passing year, thanks to rising global crude and product prices. In this background, you have HPCL planning a new refinery on the West Coast, BPCL keen to start one in Uttar Pradesh and IOC, likewise, eager to establish its presence in the western region too! These projects, which are expected to be commissioned post-2015, will involve a combined expenditure of at least Rs 60,000 crore on joint capacities of nearly 30 million tonnes.

JOINT EFFORT

Is it inconceivable, instead, for the three oil majors to come together and set up one refinery with an initial capacity of 15-20 million tonnes? This could then be enhanced with time to three times this figure, which will then put it at par with the capacities of private sector companies like Reliance and Essar. This principle could then apply to creation of allied infrastructure like pipelines, tankages etc.

The cynics will rightly argue that this is easier said than done. After all, it wasn't too long ago when Petronet India was created to promote the ‘common carrier' concept for product pipelines in the downstream space. The idea was to provide easy and affordable access to all participating oil companies. However, there were reports that some of them weren't prepared to be part of this initiative, since it would mean sharing their infrastructure. Some others decided to commission their own projects outside the common carrier space, and with the Government doing little to help the cause, the Petronet India concept fizzled out.

When there were such ego conflicts then, where is the assurance that these oil companies can come together this time around? For one thing, the scenario has dramatically changed, especially from the viewpoint of their financial muscle. IOC, for instance, continues to be the market leader, but is clearly a shadow of its former self, thanks largely to the fuel subsidy issue which has left its balance sheet battered. HPCL and BPCL, likewise, were much better off some years ago, before the crude price spiral hit them.

RESTRUCTURING

Ironically, the Government had got these companies to take care of their struggling standalone refining counterparts in a restructuring exercise some years ago. As a result, Kochi Refineries became part of the BPCL kitty, while IOC took charge of Chennai Petroleum Corporation and Bongaigaon Refinery and Petrochemicals. This was the best bet to guarantee the wellbeing of these standalone entities, while IOC and BPCL got additional refining capacity in the bargain.

A lot of water has flowed under the bridge since then, and the time has now come to make sure that the three refining giants continue to stay financially strong, while fulfilling their basic goal of providing fuel supplies across the vast Indian terrain. It doesn't make sense to compete any longer when their survival could be at stake in the future for want of adequate liquidity.

In the recent past, experts have mooted a merger between IOC and ONGC to create a mega entity in the upstream and downstream space. In fact, the two companies had also come together in the late-1990s to combine their skills in areas like refining, exploration, power and petrochemicals, but the script didn't go according to plan.

Prior to this, ONGC had even contemplated picking up a stake in BPCL's Bina refinery and, eventually, got a bigger foothold in the marketing arena through its acquisition of Mangalore Refinery and Petrochemicals. However, it has had to confine its focus to the exploration arena, given that the country imports a lion's share of its crude requirements and increasing domestic availability is, naturally, top priority.

India's public sector oil refining companies are going through some of their biggest tribulations in recent times. There is little point competing amongst themselves, when their common owner, the Government of India, just cannot throw them a stronger lifeline for support. The only way out during these times of adversity is to come together and take the story forward. This could well pave the way for a merger between IOC, HPCL and BPCL in the coming years.

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