The Indian energy sector is witnessing a surge in competitive pressures. Companies are entering into exclusive long term supply contracts with suppliers of their choice. Suppliers are competing for long term contracts. Just a few years ago the scenario was very different. This change is mainly a fallout of the dilution or potential dilution of monopolies in various segments of the sector over the next few years.
The latest in a series of recent announcements is the deal between Oil and Natural Gas Corporation (ONGC) and BSES, wherein the former will supply gas directly to the latter's 495 MW power plant. Earlier, Reliance Petroleum, jointly with Enron (US), had bid to supply gas to the various power sector units of the National Thermal Power Corporation (NTPC).
The exclusive contracts come in the wake of the opening up of India's energy sector to private participation. ONGC, which usually sells gas to Gas Authority of India (Gail), is marketing gas for the first time. This suggests that the company maybe looking at vertically integrating its gas operations.
ONGC benefits from having to do away with a middleman. It can thus earn the retail margin, which could be substantial. On the flip side, the company will now have to develop expertise in the setting up and maintenance of pipelines, servicing customers et cetera. Moreover, a possible straining of relationship between ONGC and GAIL may result as there will now be a conflict of interest between the two.
BSES will benefit in case it is able to negotiate a better rate in the absence of a middleman. The situation could be beneficial to both.
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