Avoiding a scam in petroleum

Briefly, the proposal envisages HPCL and Shell-Aramco set up a joint venture, and that HPCL transfer at least one of its refineries and around a thousand retail outlets to this joint venture as its share of the equity capital.

WhileHPCL is to be allowed to retain its own identity, with its refineries and top retail outlets transferred to the joint venture with its own separate identity and logo, it appears certain that HPCL will continue to exist only in name. For all practical purposes, the new entity 8212; HP-Shell-Aramco 8212; will be the one which will be competing with existing players such as Indian Oil and Bharat Petroleum in the Indian market.

Even that8217;s all right, for companies do merge with one another to survive, or better their prospects. And if the government can sell other companies to foreigners, there8217;s no reason why an oil company cannot be sold off even if it is a navratna one 8212; one proposal doing the rounds is to sell the government8217;s stake in Maruti Udyog to General Motors and the Disinvestment Commission has recommended that a significant chunk of Air India8217;s equity be sold to a strategic investor such as a huge foreign airline. So if this joint venture benefits HPCL, it should clearly be welcomed.

The biggestadvantage that HPCL will get is the several billion dollars of cash balances that Shell-Aramco will bring in as their share of equity in the proposed joint venture. This could be used by the joint venture to either build or enhance the capacity of existing refineries as well as more retail outlets.

The fact that Shell-Aramco are also large producers of oil globally, and also have deep pockets, will also be something that should help HP. More so at a time when it is evident that HP would have a tough time competing with market leader Indian Oil after the oil sector is completely deregulated in the year 2002. Apart from its own refineries, IOC has also sewn up, on an exclusive basis for a period of ten years, the rights to market products from Reliance8217;s mammoth refinery at Jamnagar.

So what8217;s the problem? The biggest problem, and the likely source for embarrassment and accusations of crony capitalism, of course, is the fact that the government has not, formally or informally, floated any bid or tenderinviting global oil majors to seek an alliance with Hindustan Petroleum. Which means that if the current proposal goes through, we8217;ll have scores of allegations, that other global majors such as BP-Amoco would have offered a better deal.

Not surprisingly, it was perhaps for this very reason that Shell-Aramco8217;s proposal to buy an existing refinery and a related distribution/marketing network was rejected the first time around when it was proposed a little under two years ago.

The logic given at that time was that the government had not evinced any interest in selling off any of its existing refineries, nor had any global bids been called for. A related allegation that is certain to crop up is that the joint venture will give Shell-Aramco a head-start over all existing as well as potential private players in the sector. While any private investor wishing to enter into marketing would have to wait for several years and incur massive losses to set up a sustainable marketing network, Shell-Aramco will get areadymade network, with outlets in the most lucrative spots.

In fact, in cities such as Delhi and Mumbai, there8217;s very little land actually available in centrally-located or densely-populated areas to set up new petrol pumps even if a new entrant had the money to spend. This, incidentally, is one of the reasons why even a cash-rich corporate like Reliance has tied up with Indian Oil for marketing the products from its Jamnagar refinery.

Interestingly, HPCL has had a chequered history as far as Aramco is concerned. It had wooed Aramco as a possible partner for its Bhatinda refinery, talks had reached an advanced stage, when Aramco decided it wanted out. Now it does seem curious that HPCL should now seek to join hands with the same company, even though Aramco has now, in turn, tied up with Shell.

Following the breakdown of talks with Aramco, HPCL began discussions with Exxon, but these too broke down after a few months of hectic parleys 8212; HPCL is now preparing to go ahead with the Bhatinda refinery onits own. Clearly events such as this, with HPCL moving from one potential partner to another, indicate that little serious effort has been made so far to even examine whether or not HPCL and Shell-Aramco have any significant level of synergy, especially in view of their sad history. Not insisting on a global bid before pushing a mega-alliance of this nature is bad enough, to do so without even doing enough homework on its feasibility is criminal.