Indian Oil Corporation (IOC) has bid for the entire crude output of Oil and Natural Gas Corporation (ONGC). This will help to source crude for its refinery capacity that is slated to increase to 88 million tonnes by 2007.
Indiaís crude oil production in FY99 topped 32.8 million tonnes which was marginally higher than IOCís refining capacity of 31.4 million tonnes. ONGC itself produced around 29 million tonnes of the total crude produced.
There will have to be some issues which have to be addressed. At present, ONGC gets paid at 75% of the international rates for its crude. Whether that arrangement will continue remains to be seen. If the companies decide to settle their transaction at international rates, what happens when oil prices drop? Will ONGC settle for lower prices?
Also ONGC currently pays the government a 40% royalty by virtue of its being an agent of the latter. If an exclusive agreement is entered into the ownership of crude will have to be sorted out.
If the agreement clicks it could also form a precursor for the merger of the two companies in the future, once the Administrative Price Mechanism (APM) is abolished.
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