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P. Manoj

NEW DELHI, March 22

THE process of selling 26 per cent equity in Indian Petrochemicals Corporation Ltd (IPCL) is back on track with the Government close to settling the row over the pricing of ethane and propane supplied by ONGC to IPCL's plant at Nagothane post-disinvestment.

After several rounds of inter-Ministerial consultations, the Ministry of Disinvestment will approach the Cabinet Committee on Disinvestment (CCD) on March 27 with a proposal to extend the contract signed between IPCL and ONGC for the supply of ethane and propane for a 10-year period till 2012 and the pricing to be based on the existing methodology, Government sources said.

"The existing pricing methodology for ethane and propane approved by the Government is a time-tested one. This pricing formula, having an escalating factor built into it is based on the cost plus method recommended by the Bureau of Industrial Costs and Prices (BICP) on which the Government has made minor modifications. As such, the existing pricing formula should continue till 2012 with the prevailing ceiling of Rs 2,850 per 1,000 SCM for gas," the sources said.

IPCL and ONGC had signed a formal contract for the supply of ethane and propane, which is valid up to March 31, 2006 and the pricing methodology was to be mutually agreed after March 31, 2001.

However, no final conclusion could be reached on the pricing methodology of ethane and propane after March 31, 2001 despite several rounds of discussions between IPCL and ONGC.

During the meetings, ONGC insisted that the pricing should be based on opportunity cost of ONGC, while IPCL reiterated that the existing methodology should be continued with.

"Even at the existing methodology, IPCL is paying around Rs 350 crore per annum (Rs 322.17 crore up to February 2002 during the current fiscal), which can be termed as uneconomical. If the prices are raised further, the Nagothane plant will become uneconomical and has to be shut down," the sources said. Reliance Industries Ltd, Indian Oil Corporation and Nirma Industries Ltd are in the fray to acquire a controlling stake of 26 per cent in IPCL.

During pre-bid meetings, the bidders have sought a long-term gas supply agreement and a firm pricing methodology with ONGC before the Government invited price bids for the deal.

During a high-level meeting held on October 23, 2001, ONGC had said that if IPCL is sold to another PSU or a private party, the price of ethane and propane would be automatically changed to 100 per cent parity with international free-on-board price of fuel oil.

At another meeting held on March 4 at the level of the chief executives, ONGC had informed that from July 1 the pricing of ethane and propane would be market driven.

Accordingly, ethane and lower component would be linked with gas price under public sector companies where ONGC is a joint venture partner, whereas propane plus component shall be based on propane, which is a freely traded commodity.

The Disinvestment Ministry is of the view that the "single seller-single buyer'' feature involved in the supply of ethane and propane would come into play forcing ONGC to continue with the supply of raw materials to IPCL using the existing pricing formula.

"Even if ONGC rescinded the gas supply contract before the validity period of 2006, it will find it difficult to identify a new buyer for ethane and propane. They do not have a choice. Likewise, it would be extremely difficult for IPCL to locate a new supplier of ethane and propane," the sources said.

The Disinvestment Ministry plans to send out letters to the bidders inviting price bids immediately after the CCD clears the proposal to resolve the gas supply row and freeze the transaction documents for IPCL deal.

With the next global petrochemical cycle expected to begin in the second-half of 2002 and peak in the second quarter of 2005, this is the best time to sell as the valuations will improve substantially.

"By April 12, we will announce the strategic partner for IPCL," the sources said.

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