Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) are exploring the option of jointly participating in the equity of Essar Oil's 12 million tonne refinery.
IOC is India's largest company. It dominates the oil sector with a 45% refining capacity (almost 30.55 million tonnes) and a 55% market share. Its distribution network includes 6,779 petrol pumps, 3423 dealers and 2902 LPG distributors.
BPCL is an integrated oil company with a refining capacity of over 7 million tonnes. Its distribution network includes 4,376 petrol pumps, 967 dealers and around 1150 LPG distributors.
BPCL had reportedly valued the Essar refinery at Rs 70 billion and assuming a 2:1 debt equity, the value of the 26% equity stake would work out to Rs 6 billion. This is a very cost effective opportunity for the company. BPCL has planned two projects in Allahabad and Bina but these will be operational well after 2002-2003.The additional capacities will help feed its northern outlets.
IOC, on its part, has little reason to consider a stake in Essar's project. The company is already working on expansion of its Gujarat refinery from 12 million to 18 million tonnes. This is to be further increased to 25 million tonnes three year's down the line. The only motive perhaps is to ensure that the cost-effective opportunity does not end up in the hands of a competitor, hence the joint effort with BPCL.
It is BPCL that is better placed to capitalise on the opportunity considering the fact that IOC already has enough refining capacity. Besides, the Essar refinery is based on the head of the Hazira-Bijapur-Jagdishpur pipeline. After the takeover of Cochin Refineries or Madras Refineries as per the Sengupta committee recommendations, BPCL would be comfortably placed for servicing its nationwide retail distribution network.
BPCL has been rated as a 'BUY' on account of its strong distribution network, which is its key competitive strength. Moreover, the dismantling of the administered pricing mechanism in the oil sector has also supported the view.
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