According to newspaper reports, the Indian Oil Corporation (IOC) is entering into an agreement with the Oil and Natural Gas Corporation of India (ONGC) whereby the former will have exclusive rights to market all the crude produced by ONGC after 2002. The two companies own a 10% stake in each other.
India's crude oil production in FY99 topped 32.8 m tonnes, which was marginally higher than IOC's refining capacity of 31.4 m tonnes. A major portion of the output was contributed by the ONGC, with the rest coming from Oil India Limited and other private sector companies. It is evident from this that ONGC's crude can be entirely consumed by IOC. Moreover, with IOC having lined up major expansion plans, the tie up will give IOC access to a regular supply of crude. This tie up will help in meeting a significant portion of its future needs and also give it an opportunity to hedge its crude procurement costs in the future.
However, several concerns need to be addressed. ONGC currently pays the government a 40% royalty and cess by virtue of its being an agent of the latter. With IOC entering into an exclusive arrangement, the ownership of the crude will have to be sorted out. The two companies are also planning to invest in each other's petrochemical ventures. There is a possibility of a conflict of interest in the future as their differences in their businesses get more blurred (IOC is planning to bid for a 26% stake in IPCL).
The tie up is likely to have a significant impact on the Indian oil sector. This is so because, ONGC and IOC, the largest companies in the upstream and downstream sectors respectively, will become self-sufficient in a number of ways, thus insulating them from risks that other players will continue to face. These include the risks of volatility in crude prices, irregular supply of crude, inadequate retail distribution network and low levels of integration. Also, companies that were dependent on either the ONGC or the IOC in either procuring or supplying raw materials/products will now have to rework their strategy. The tie up could trigger a consolidation in the Indian energy sector.
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