Priya Ganapati

Senior executives at the government-owned oil major, Bharat Petroleum Corporation (BPCL) are a relieved lot.

"Pata nahin yeh sarkar kab gir jaaye (Who knows when this govt may fall). The next minister will take another seven-eight months to clear the files again. Good we pushed the deal while the going was good," they whisper among themselves.

The cause of their jubilation is BPCL's purchase of the entire equity holding of the Government of India in Kochi Refineries. The deal would at a stroke double BPCL's capacity and give it the much-needed toe-hold in the South that it has been seeking for some time now.

BPCL is also buying 18 per cent stake in Numaligarh Refinery from IBP for Rs 1.73 billion. This would take BPCL's stake in Numaligarh Refinery to 51 per cent.

Meanwhile, the Indian Oil Corporation (IOC) on Tuesday acquired the Government of India's equity in Chennai Petroleum Corporation (CPCL) and Bongaigaon Refineries and Petrochemicals (BRPL). The other giant in completing the oil trinity, Hindustan Petroleum Corporation (HPCL) has recently indicated that it would buy out A V Birla group's 26 per cent stake in the joint sector Mangalore Refineries and Petroleum (MRPL).

Suddenly, the oil sector is teeming with activity: acquisitions, mergers, divestment -- the works.

To add to the chaos triggered off by the stake changes taking place in the public sector companies, Reliance Industries announced that it would divest 13 per cent stake in Reliance Petroleum.

So, what does this sudden spurt of activity mean for a sector that is on the threshold of decontrol?

By March next year, the sector is expected to be de-regulated completely and the APM (administered price mechanism) that governs it today would be dismantled.

rediff.com explores the impact that the recent stake changes are likely to have on the oil and gas sector of the country and draws out the picture that will emerge slowly.

Kochi, Madras and Bongaigaon Refineries. Three companies that will cease to exist as independent entities and will merge with the acquirers. It all started when the Sengupta Committee set up by the government to study the viability of stand-alone oil refineries in a deregulated scenario recommended mergers as the answer.

The committee said that stand-alone refineries had to be merged with the refining and marketing companies as in a decontrolled scenario, these companies would face problems due to lack of distribution infrastructure.

While the rationale of the committee is not being disputed, the fact is that neither BPCL nor IOC have a choice in their acquisitions. So, will the companies really benefit from the deal or are they just pandering to the government's wishes?

Analysts approve of the BPCL-KRL deal but are hesitant to endorse IOC's moves. "I see a lot of synergy between BPCL and KRL. I would rate the deal as positive for both. With IOC, I am not sure to what extent acquiring Bongaigaon is going to benefit it. I would actually put a negative tag to IOC's plans," an oil and gas analyst with Merrill Lynch says.

BPCL, a public-sector undertaking with an overall market share of 20 per cent, is expected to benefit from the KRL deal in two ways. The first is increased product security of having a wide range of products. Currently, BPCL has one refinery at Mahul in Maharashtra which processes 9 million metric tonnes. In a deregulated scenario, the company projects sales of 20 million metric tonnes. The KRL refinery with its 7.5 million metric tonne capacity bridges the gap between the projected sales and the current production to a large extent.

"If we have to access products from other oil companies it will hit our margins and lower our negotiating power. Importing such quantities will be a problem. KRL, therefore fits in neatly with our future plans," explains a senior executive at BPCL.

Second, BPCL's major weakness is its poor distribution network in the South. Though the company has a marketing infrastructure comprising 4,489 retail stations, 147 installations/depots, 16 aircraft fuelling stations and 27 LPG bottling plants, it still has a long way to go before it can boast of a strong presence down South.

KRL, it hopes, will rectify this. "For BPCL, the South is a major market. We have a refinery now in Bombay. But post de-regulation it may lead to increased marketing costs to service our customers down South. Hence, KRL has a very convenient location for us," the BPCL executive explained.

"Kochi is the bigger and better valued refinery in the South. Plus, the fact that we get a major marketing terminal at Cochin would help de-bottlenecking a great deal," he added.

Unlike KRL which is making healthy profits, Bongaigaon is trudging along slowly. From a net loss of Rs 256.6 million for the quarter ended June 30, 2000, Bongaigaon achieved a net profit of Rs 248.7 million for the quarter ending December 2000.

But a healthy bottomline is still quite far away and analysts speculate that Bongaigaon may become a drain on IOC's resources.

While it is a foregone conclusion that the government's stake in the refineries will be sold, the price that is paid could be the only redeeming factor in the deals.

In the BPCL-KRL deal, BPCL shelled out Rs 6.59 billion for 55.04 per cent in Kochi Refineries at Rs 86.85 per share.

In a similar kind of agreement, the government is selling its 52.48 per cent in CPCL and 74.46 in BRPL to IOC. While it is buying CPL at a price of Rs 65.92 per share, BRPL is being bought at Rs 10 per share. This translates into Rs 5.09 billion for CPL and Rs 1.48 billion for BRPL.

"Valuations play a critical role in any deal. And the price paid for Kochi Refineries has been 60 per cent greater than what the market values it at. If you are buying a refinery, everything is worth only at what it is valued," says Vinay Jaisingh, an analyst with Morgan Stanley. On March 23, the KRL stock closed at Rs 50.10.

"In India, we are already projecting a surplus in refining in a few years. So, the valuation is probably the most important part of the deal, as it makes one understand whether the deal was worthwhile or not. In BPCL's case the price paid has been much greater than the market price, which is not a very positive indication," he adds.

BPCL pooh-poohs any criticism of the price paid for Kochi Refineries.

"It is easy to say now that the price we paid is 60 per cent greater than what the market values it at. This is because in the last few months, the value of KRL shares in the market has gone down. So we still feel that we have picked it up at a considerable discount," the BPCL official said.

He protests any attempt to link the price paid for KRL to the constantly fluctuating BSE share value.

"Let us look at this in a different way. If Kochi is going to make profits of approximately Rs 2 billion, like it did the last year, at the rate of 30 per cent dividend payout I will still get Rs 600 million. This is just dividend on a one-time investment of Rs 6 billion," the executive explains.

Questions about the price, however, seem to be more due to the timing of the deals. Both the BPCL and IOC acquisitions have been closed in March, which is being interpreted as a sign of the government's desperation to meet its divestment targets for the year. The government is expected to net Rs 13.2 billion from the sale of its stake in the three refineries.

"What does this acquisition project: that BPCL wants to buy Kochi Refineries urgently or that the government wants to sell it desperately?" questions Morgan Stanley's analyst Jaisingh.

BPCL strongly refutes these allegations.

"We have been trying to acquire Kochi Refineries for the last five-six years. It is very important for us. Yes, it is true that the restructuring has been outlined by the ministry, but we have also pushed for it. The mismatch between our marketing and refining capabilities needs to be addressed. At the end of the day, the government has approved the deal because BPCL has been crying hoarse for it," says the BPCL executive.

Jaisingh insists, "Divestment and the need to get the money to meet the target is probably the only explanation for why the deal has been finalised now."

BPCL officials strongly deny the possibility. "We are trying to confuse different issues. The Cabinet approval for this had come last September. Just because the deal was closed in towards the end of March, everyone is raising such questions. If we had this deal in December the same people would have applauded," says the BPCL official.

How will these stake changes affect the market scenario? The answer is: Not much in the short term.

"I really don't see too much of a change. In case of the BPCL-KRL deal, it is one government entity taking over from the other. When a sector is truly opened up and deals are struck between government and private companies, there is a greater scope for re-organisation and restructuring. Here, BPCL does not have the option of merging KRL with it and has to continue the status quo which really doesn't make much sense if a company is buying another," the Merrill Lynch oil and gas analyst explained.

However, one year later, when the market opens up, BPCL and IOC to a certain extent will gain. BPCL will then have increased economies of scale for production, better distribution and increased sales and volume.

And with these moves, it will become very difficult for smaller players to survive. Infrastructure will become a major entry barrier for them.

The restructuring exercises in these government monoliths will result in greater consolidation and fewer players in the market by the time the sector is thrown open completely. Today there are over ten companies in the sector. A year later there might be just three or four left.

"These moves will help push the de-regulated products when the sector is opened up. Then you cannot have two companies with the same set of marketing and products competing with each other because of the immense competition that they will face," the analyst with Merrill Lynch said.

And when the international companies finally come in, they will have to reckon with increased product security and a wider marketing network that the giants are now establishing.

So, is there any downside to the changes that are currently taking place, either for the consumer or the companies?

"No. There is absolutely no downside. Volumes are not going to fall. The oil economy is a growing one and it is a totally cash rich business. There are no bad debts in this business. And the consumer will definitely benefit because companies will now focus on him more," the BPCL executive said.

The fire in the oil sector, however, rages on...

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