Shell to bid for PSU oil companies - Views on News from Equitymaster

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Shell to bid for PSU oil companies

Feb 21, 2000

The world’s largest oil company Shell will bid for oil companies as and when they are privatised. The company has also ruled out the possibility of investing Rs 20 bn in a refinery at this stage. The six think tanks working on the Hydrocarbon Vision 2025 had recommended that the

  • the government should bring its stake in the oil public sector units (PSUs) except Indian Oil (IOC), Oil and Natural Gas Commission (ONGC) and Gas Authority (GAIL) down first to 26% and ultimately to nil.
  • Only companies investing Rs 20 bn either refining or oil exploration and production would be allowed marketing rights.
  • Infrastructure status should be granted to oil pipelines and independent investors should be allowed to construct oil pipelines. This is because almost Rs 1350 bn of investment is required in marketing infrastructure over the next two decades in the form of product pipelines, tankages, retail infrastructure and LPG bottling plants

Shell is the erstwhile owner of what is now Bharat Petroleum (BPCL). The company was nationalised in the sixties. With Shell making a re–entry after the economic liberalisation the company tied up with BPCL for the marketing of lubricants in India. However, Shell needs a marketing infrastructure to make headway in the Indian market for the marketing petrol and diesel.

Hence it wants to takeover an existing refining company preferably BPCL itself. Exxon and Reliance are also interested in the takeover of existing PSUs, the former in the takeover of Hindustan Petroleum (HPCL) and the latter, both, BPCL and HPCL.

However, Shell is not interested in investing in a grassroots refinery since it believes that this would only be a license to losses especially after the start of the Reliance Petroleum refinery and another refinery in Taiwan. Shell, however is interested in setting up infrastructure such as pipelines, oil exploration facilities and gas terminals if that could fulfill the criteria for allowing it to bid for the existing PSU oil companies.

Market View:
Both BPCL and HPCL have been rated as buys primarily due to the impending increase in their marketing margins due to their extensive retail networks as and when the Administered Pricing Mechanism is dismantled and/or when the government were to disinvest its stake in these companies. The current year is however likely to be tough for both these companies since the crude prices have almost doubled over the past seven months but they have not been allowed a commensurate rise in the prices of the regulated products such as petrol, diesel and kerosene.

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