Search the Internet          Tips  Sites: Finance, Investment

India oil sale offers big market to investors

Government's plan to privatise two big downstream oil companies offers foreign investors a bite at 40 per cent of a lucrative market long dominated by state players -- but they may have to dig deep.

When it named state-run Indian Oil Corporation as the winning bidder for a controlling stake in retailer IBP Co on Tuesday, the government also announced that it would sell two other refining and retailing giants.

Its plans to sell Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd will reshape the heavily-controlled industry and could challenge IOC's dominance of the $15 billion market.

The timing and details of the sales will be announced in July, three months after the oil and gas sector is deregulated to allow the private sector to run retail stations.

IOC had 54 per cent of India's 100 million-tonnes-a-year petroleum products market before the IBP acquisition, and will be barred from bidding for either of the other two firms to increase competition in the industry.

"The sale of HPCL and BPCL will bring true competition in the oil sector. It will change the dynamics of the market," said Ardhendu Sen, senior fellow at Tata Energy Research Institute.

The four government firms are the only companies currently allowed to retail petrol and diesel.

AGGRESSIVE BID SETS BENCHMARK

IOC, which has 40 per cent of India's refining capacity of 2.3 million barrels a day, paid Rs 11.54 billion ($240 million) for 33.6 per cent of IBP.

The price was almost double the Rs 5.95 billion offered by the next highest bidder, Royal Dutch/Shell, and 3.5 times the reserve price of Rs 3.4 billion, setting an aggressive benchmark for the future sales.

"It's a good reflection of the potential valuation for other oil companies," said P K Basu, Southeast Asia economist for Credit Suisse First Boston in Singapore.

"If indeed HPCL and BPCL are brought to the market, the competition for them will be just as frenetic."

IOC officials said they knew the company would be allowed to acquire only one of BPCL, HPCL or IBP, hence the strong bid.

IBP, with 1,500 petrol stations mostly in northern and eastern India and no refinery, was a good buy for IOC, facing weak demand in its 7,700 stations and surplus refining capacity.

Mumbai-based HPCL and BPCL together have a 40 per cent market share and operate about 4,500 petrol stations apiece across the country, but they also have refineries which IOC does not need.

HPCL has two refineries, processing 260,000 barrels a day, and BPCL has one refinery with about half that capacity.

"We had to get IBP at any cost. So we bid aggressively," said a senior IOC official, who did not want to be named.

HPCL and BPCL offer the last chance at a ready made retail network for Indian and foreign firms, which would otherwise need years to secure dozens of government clearances and buy property to set up their own outlets.

STIFF COMPETITION

Leading Indian conglomerate Reliance Petroleum, which has a 540,000 barrels-a-day refinery, was a keen bidder for IBP.

"Reliance and Shell will have to bid aggressively. You can't afford to miss out on HPCL and BPCL," said Karthik Ramakrishnan, an analyst at Sunidhi Consultancy.

IBP attracted only a few bids as contenders had to pledge to invest Rs 20 billion in India's oil and gas sector on top of the cost of the purchase.

"This condition will not be applicable for HPCL and BPCL," Petroleum Secretary V N Kaul, the top oil sector bureaucrat, told Reuters.

After deregulation, IOC, which previously had a guaranteed return of 12 per cent on capital in its marketing operations, will face stiff competition from a privatised HPCL and BPCL.

"HPCL and BPCL are well-managed companies with a far superior corporate profile. The implications of their sale will be much more on the large player like IOC than anybody else," Sen said.

ALSO READ:
The Divestment Development