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Feeding the white elephant
Fri, 5 Mar Pre-Open

We have all heard of the proverbial white elephant. The animal takes a fortune to maintain. But it earns precious little in return. Anyone looking at it is amazed by its size. What an asset it must be, they think. But only the owner knows how difficult it is to maintain this asset.

India's state owned oil marketing companies (OMCs) are our very own white elephants. They have unmatched physical assets-in-place. Refineries, pipelines and a vast distribution network. But they incur losses every single day that they operate. On the one hand, their inputs costs keep rising with higher crude oil prices. On the other hand, the government forces them to price their final output - auto and cooking fuels- at subsidised rates. As a result, from a shareholder's perspective, all that the wonderful assets succeed in doing is destroy wealth.

In such a situation, shareholders must greet any addition to the white elephant with sadness and not joy. In other words, as long as fuels are being subsidised , any capital expenditure done by the OMCs should bring a frown on the face of the shareholders. Now, would be a good time to start. As per the petroleum minister, the OMCs will invest over Rs 775 bn in adding 44.2 m tonnes of refining capacity by 2012. Indian Oil Corp will invest Rs 298 bn in building a new refinery at Paradip, Orissa with an annual production capacity of 15 m tonnes. BPCL's joint venture will invest Rs 114 bn in a 6 m tonnes unit at Bina, Madhya Pradesh. HPCL will spend Rs 189 bn in building a 9 m tonnes refinery at Bhatinda, Punjab.

There are several brownfield expansions lined up too. Mangalore Refinery will invest Rs 124 bn in expanding its 11.8 m tonnes refinery to 15 m tonnes. Indian Oil's Haldia refinery will be expanded by 1.5 m tonnes to 7.5 m tonnes at a cost of Rs 29 bn and its Panipat unit will be expanded by 3 m tonnes to 15 m tonnes at a cost of Rs 10 bn. HPCL will expand its 5.5 m tonnes Mumbai refinery to 7.9 m tonnes at a cost of Rs 3 bn and its 7.5 m tonnes Vizag unit to 10 m tonnes at a cost of Rs 3 bn. Chennai petro will invest Rs 5 bn in expanding its 9.5 m tonnes Manali unit to 11.1 m tonnes.

So, the OMCs will be doing far more business in the future than they do now. As long as the government intervention in fuel pricing continues, more business equal to more losses. In other words, as the white elephant grows larger, it will place an even greater burden on its owners. At some point the government will have to wake up, bite the bullet and usher in reforms in the petroleum sector. And bring in genuine deregulation of fuel prices.

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