It has been an action-packed two decades for India’s downstream oil sector.

In the early 1990s, all roads virtually led to the Indian Oil Corporation, which was the monarch of all it surveyed with half a dozen refineries in its portfolio. In contrast, Hindustan Petroleum Corporation and Bharat Petroleum Corporation had only one facility each in Mumbai (HPCL was also co-promoter of the three million tonne Mangalore Refinery & Petrochemicals).

Madras Refineries, Cochin Refineries and the smaller Bongaigaon Refinery & Petrochemicals were standalone entities processing petrol, diesel and LPG, but did not have exclusive retail outlets. They depended on the Big Three to sell their products. On the other hand, IBP was a standalone marketing entity whose job was to sell petrol and diesel produced by these refiners.

No level playing field

It wasn’t exactly a level playing field which prompted Arthur D Little, a consultancy firm, to suggest that IOC’s huge market share be reduced to ensure that other players in the PSU space get a fair share of the pie.

The international consultant had prepared an exhaustive report of India’s downstream industry and mooted a merger of Madras Refineries and Cochin Refineries. A portion of IOC’s market share (equivalent to the volumes it retailed on behalf of MRL and CRL), could be set aside for this merged entity. This would include its retail outlets as well as terminals and bottling plants.

Arthur D Little then proposed that IBP take over the marketing of BRPL’s products (which was being done by IOC), akin to the MRL-CRL model, and get its share of retail assets in the process. The report created quite a flutter in oil industry circles and, perhaps, paved the way for a restructuring exercise some years later.

By this time, the Government had given its go-ahead to new refineries which its public sector units would commission jointly with global players. While Oman Oil would team up with HPCL and BPCL for two separate projects in Maharashtra and Madhya Pradesh, Kuwait Petroleum Corporation would join hands with IOC for a coastal refinery in Orissa.

Nobody reckoned with the delays that would accompany these ambitious projects. HPCL called off its venture with Oman Oil because there were environmental concerns in Ratnagiri — the proposed location for the refinery.

BPCL also faced similar issues in Bina which had attracted the attention of exploration giant, Oil & Natural Gas Corporation keen on entering the fuels marketing arena. The delays prompted Oman Oil to exit the project while a determined BPCL hung on.

Kuwait Petroleum’s participation in Paradip with IOC continued to be uncertain, and the latter decided to go on its own. HPCL had in the meantimeopted for a new refinery in Punjab in which big names such as Saudi Aramco and Exxon were keen to participate.

Expert committees

It was also around this time in the mid to late-1990s that the Government set up expert committees to look into the issue of freeing petrol, diesel and LPG prices which were part of the subsidy basket. A panel headed by BPCL Chairman & Managing Director U. Sundararajan submitted its report in 1995 and advocated complete deregulation of prices.

It was quite a radical suggestion for a system where subsidies were the order the day. The Government, of course, was in no hurry to implement these recommendations because any dramatic price hikes would hit a section of society really hard. Yet, it was beginning to realise that it made little sense not to revise prices when global prices were heading upwards. The first signs of trouble were evident in 1997-98 when refiners were strapped for cash and some like IOC resorted to short-term borrowings from the wealthier ONGC.

There were other interesting dynamics panning out in the downstream space. The Government decided that BPCL would now take charge of CRL while MRL and BRPL would go to IOC (which would eventually add IBP to its portfolio). This move put an end to the problem of these standalone entities while ensuring additional capacity for BPCL.

Private players had also entered the landscape with Reliance commissioning its gigantic refinery in Jamnagar, Gujarat. Essar Oil was also on course to getting its own facility ready in the same State. The other big news concerned HPCL which refused to buy out the stake of its partner, the AV Birla group keen on exiting MRPL. It was a costly decision, something that the top management regrets even today because it resulted in ONGC getting majority control of the refinery. HPCL’s stake was down to less than 20 per cent when it could have easily tilted the scales otherwise by paying virtually nothing to take charge of a coastal facility.

ONGC could not have asked for a more cushy entry into the downstream space except that its bosses in the Petroleum Ministry were categorical that it focused on its core activity of exploration. It still has not been able to realise its vision of setting up a host of retail outlets (under its brand name) across the country.

IOC and ONGC had, also around this time, explored the idea of coming together and pooling their expertise in refining, marketing and exploration as well as getting into new areas like power and petrochemicals. It was an ambitious partnership that promised to deliver the moon except that practical realities were quite different. The mega dream fell apart in some years with each company choosing to go on its own.

However, HPCL and BPCL had cause for cheer when their long overdue projects in Punjab and Madhya Pradesh finally saw the light of day. The former got a strong partner in the Lakshmi Mittal group, while Oman Oil wasted little time in heading back to the Bina project with BPCL.

What was particularly impressive was that both refineries were commissioned at a time when HPCL and BPCL were in the midst of a severe liquidity crunch. This was the time crude prices had spiralled out of control and the oil companies had their backs to the wall. Yet, they continued to invest because these refineries were critical to their growth going forward especially in North India where their presence was little to write home about.

IOC’s Paradip refinery is still some months away. It continues to be the largest player but competition has become more intense. Private players like Reliance and Essar have realised that marketing of fuels is a tough task when prices continue to be subsidised. However, with petrol out of the administered pricing net and diesel rapidly following suit, these companies are expected to be back in the local arena with a bang. Their public sector rivals — IOC, BPCL and HPCL — are also gearing up for the challenge in what promises to be a high voltage script in the coming years.

Refining capacity

From a little over 50 million tonnes in 1993, India’s refining capacity is now nearly 220 million tonnes. IOC leads the fray with 55 million tonnes with BPCL at 30 mt and HPCL at 24 mt. Reliance has the single largest refining capacity of 62 mt with Essar at 20 mt.

The next three years will see HPCL increase capacity at Vizag and Bhatinda by nine mt and BPCL following suit in Mumbai, Numaligarh, Bina and Kochi (14 mt). IOC will add 20 mt which will include a new refinery at Paradip, Orissa. Essar will see its capacity increase by 18 mt, while MRPL will be up a tad at three mt. The 6 mt Nagarjuna Oil refinery is also expected to be commissioned which means the country’s overall refining capacity will be comfortably over 300 million tonnes by 2016.

murali.gopalan@thehindu.co.in

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