The Sengupta Committee has recommended the merger of Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL), Cochin Refineries (CRL), Bongaigaon Refineries (BRPL) and Numaligarh Refinery (NRL). The objective is to create a company with considerable refining and marketing skills.
Apart from the doubt that since the earlier Sengupta Committee report recommendations have been rejected and there is no reason why the current one should be accepted, there could be other consequences of the current recommendations.
The suggested merger proposal if it comes through would create a viable giant that could complete internationally. For instance, BPCL has a refining capacity of 7.3 million tonnes per annum in Mumbai (West India) while it sells almost 18 million tonnes through its all India retail network of 4,376 petrol pumps. HPCL has two existing refineries in Mumbai (5.5 million tonnes) Vizag (4.5 million tonnes in East India) and plans to set up one more in Bhatinda (North India). It also possesses a 330,000 tonne lube refinery. The company has a network of almost 4,300 petrol pumps. CRL is a stand-alone refinery based in the South while BRPL and Numaligarh Refineries (where BPCL has a stake) are stand-alone refineries in the North East.
So far BPCL meets its refining requirements through Madras Refineries (South) and Indian Oil Corporation (IOC) for North India but post deregulation this will not happen. Hence the need for an all India refining network.
Reliance Petroleum (RPL) has already entered into an agreement with IOC under which the latter will lift its entire production till deregulation. Post deregulation there will be a joint venture between the two companies for marketing the output. Similar is going to be the case with Madras Refineries which is going to supply IOC since the latter does not have a refinery down South.
However, stand-alone private sector refineries will be at the mercy of the public sector giants who have the distribution network. For Essar Oil, the proposals could spell disaster as the company doesn’t have a marketing agreement in place. The contours of the joint venture between IOC and RPL are not yet clear as regards the shareholding pattern and management control.
If the government were to go through with this proposal, it would be effectively creating an oligopoly in the market - in both the refining and distribution segments. At the one end would be the IOC-RPL combine and on the other would be the BPCL-HPCL combine.
Second it’s not easy to integrate the operations of companies such as HPCL and BPCL, RPL and IOC.
Third, post integration the privatisation of even one of these entities is going be extremely difficult as it would become politically sensitive. It is easier to privatise the existing stand alone companies.
Fourth it is not yet clear as to what is the thinking in the government over the recast of the oil exploration sector and the gas distribution sector. As of now Oil and Natural Gas Commission, the premier oil exploration company which supplies around 45% of the crude requirements of the refining sector is to be retained as a public sector unit. So is the case with the Gas Authority of India, which is the premier gas distributor. Internationally however, the trend is towards having integrated exploration, refining and distribution entities.
All in all extremely uncertain times for the oil sector.