A logical step

THE UNION CABINET'S decision to sell four stand-alone refineries to two of the public sector oil companies fits into the evolution of the oil industry in the final lap of its consolidation phase. With complete deregulation of the sector slated for 2001, the Centre had to make the right moves now and follow it up with major decisions before next April. Indian Oil (IOC) will take over the Chennai and Bongaigaon refineries, while Bharat Petroleum (BP) will take over the Kochi and Numaligarh refineries. This process could take up to a year and the Centre will realise something like Rs. 1,800 crores by giving up its stake in these refineries. This arrangement will have a mutually beneficial impact on both the refineries and the oil companies. The refineries will have a reliable marketing arrangement with the takeover, while the oil companies can consolidate sourcing and market share, at least in the pre-deregulation era. IOC holds a 55 per cent share in the products market, but depends to a large extent on external sourcing for some key projects. BP's operations have almost reached a saturation point in the Mumbai region and the addition of refineries in Kerala and Assam could provide a new dimension to marketing strategy in the future.

This is obviously a period of consolidation for the public sector oil companies in the country. They are not only on the line for disinvestment, but getting ready for deregulation and intense competition from the global oil majors who must be able to set their foot here sometime in 2001. The takeover of the refineries will surely add value to IOC and BP and enable the Centre to command a better price at the time of their disinvestment. Without dragging its feet on this controversial exercise, the Ministry of Disinvestment and the Petroleum Ministry must finalise the road map for both disinvestment in the oil companies and for deregulation of the sector. By delaying the price decontrol plan, the Centre has added to the confusion and raised doubts about its commitment to keep to the deregulation schedule. Speculation on an impending Cabinet reshuffle after the Prime Minister's return from his U.S. trip has added fuel to these fears. It may be end-September when things fall into place and the inter-Ministerial panel picks up the thread of disinvestment once more. Because of intense political lobbying by some partners of the ruling National Democratic Alliance (NDA) and the anti- reforms policy of some Union Ministers, doubts linger about the Centre's promises on the disinvestment front.

Before time runs out, the Petroleum Ministry and the oil companies must evolve a concrete plan for the future. The refineries must be tailored and restructured to take the crude that is needed and turn out the right mix of products so that they can remain market leaders in the short term at least. In the process of disinvestment, some key decisions have to be taken. The PSUs such as IOC or BP will have to choose strategic partners who can enable them to stand up to the fierce competition that lies ahead from the global players. Many imported petroleum products have already hit the market. The refineries too must be able to finalise their future plans - should they diversify into downstream areas or confine themselves to the chosen products. Unless the Centre and the oil companies take these critical decisions early on and complete the takeover process swiftly, they will be overtaken by competition. Instead of getting mired in bureaucratic processes, the oil companies and the refineries must decide on the road map, product mix, potential for export and full utilisation of capacity as the deadline for deregulation approaches. The Centre must keep its word on the deregulation schedule to avoid sending a wrong signal.

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