The Hindu : Merger will usher in sea change

Online edition of India's National Newspaper
Monday, Mar 04, 2002

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National

Merger will usher in sea change

By Sushma Ramachandran

NEW DELHI MARCH. 3. The petroleum sector is set for a sea change as competition to the monolithic public sector oil system has arisen with the merger of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL). The Reliance oil refinery is already the largest in Asia but the company has now signalled that it means business in the hydrocarbons sector as it becomes a giant straddling petroleum, petrochemicals and textiles industries.

The RIL-RPL merger comes on the heels of the announcement that the administered pricing mechanism (APM) for the oil sector is being dismantled with effect from April 1. It also gives private companies the freedom to enter the lucrative marketing sector for petroleum products, which has been eyed for a decade by patient international oil majors which have been closely monitoring liberalisation in the Indian petroleum industry. With a huge market awaiting any new entrant, the RIL-RPL corporate entity will not be the only one posing competition to the hitherto complacent public sector oil companies — the Indian Oil Corporation (IOC), the Bharat Petroleum Corporation Limited (BPCL) and the Hindustan Petroleum Corporation Limited (HPCL).

Much will also depend on the sale of BPCL and HPCL which are now on the disinvestment calendar for the year. IOC has been ruled out of the bidding but other public sector oil giants like the Oil and Natural Gas Corporation (ONGC) are likely to seek a stake in these two oil refining and marketing companies. It must be noted that IOC and ONGC already have a strategic alliance through a ten per cent equity share in both companies. Thus, IOC retains a ten per cent shareholding in ONGC and this would have to be kept in mind during any sale of HPCL or BPCL's equity to the latter company. The disinvestment process should not end up in perpetuating the existing public sector monopoly of the petroleum exploration, refining and marketing sector.

This is essential as the aim of APM dismantling is to inject a competitive edge and efficiency to this sector while ensuring that strategic considerations such as having sufficient oil inventories are taken into account.

Another major objective of the deregulation is to improve the bottomline of the oil companies which have till now been bearing the burden of Government-administered subsidies on kerosene and LPG. The oil pool accounts have been transferred to the general exchequer but the deficit of Rs. 13,000 crores is being dealt with by issuing bonds to the oil companies. These would be redeemed over a period of seven years, would be transferable and carry the coupon rate of government securities. As for ONGC and Oil India Limited, the oil exploration and production companies, the price for their crude oil will now be market-determined which would be higher than the price of Rs. 5570 per tonne now being paid. Even after the increase in the levy of cess on indigenous crude oil, it is expected that revenues of ONGC and OIL would be higher than the present level.

Despite all these changes in the hydrocarbons sector, there is no doubt that the public sector will continue to play a major role in both upstream and downstream areas.

For instance, ONGC will remain a premium player in exploration and production as private sector entrants have failed to meet expectations and questions are still being raised over the fate of developed fields handed over for production to companies like Reliance and Enron.

Similarly, IOC with its battalion of refineries and innumerable retail outlets will lead the field in refining and marketing and the scenario will only change gradually over the next two to three years.

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