IOC divestment likely in September

As per the restructuring suggested by the Petroleum Ministry stand-alone Bongaigon Refinery and Madras Refinery would be made subsidiary companies of IOC. The government has more than 82 per cent stake in IOC. The Department of Disinvetment had proposed to disinvest 10 per cent of government equity.

Asked whether the disinvestment target of Rs 10,000 crore set for the current fiscal would be achieved, sources said if all the 33 companies cleared for disinvestment were completed as per schedule the proceeds would be between Rs 25,000 to 30,000 crore.

The decision to take up oil sector restructuring before IOC’s disinvestment was taken up due to various queries raised by global investors about the strengths and weaknesses of the Fortune 500 company.

At the recent investors-analysts meet, IOC officials were asked as to how the investors would be able to get their best returns in case the refining margins came down and also talked about IOC’s weakness in South India.

Petroleum Ministry had therefore circulated a cabinet note in which MRL would go to IOC and also increase the marketing company’s presence in the South. Meanwhile, IOC sources said that they had already requested the government that during disinvestment corporate bodies and entities should not be allowed to pick up equity in the company.

Meanwhile, IOC is examining the option of buying out the Centre’s stake in Engineers India (EIL). The Fortune 500 company is evaluating the merits of the proposal, which is still to be discussed among the board of directors.

Top sources in the petroleum ministry say IOC will first look at picking up 26 per cent in EIL, which means the Government will continue to be an active co-promoter. The ministry was keen on selling EIL to IOC as part of its own restructuring proposal two years ago.

This was, however, blocked by the finance ministry, which reiterated that such a sale would have to go through an open-bidding process. This would not only ensure greater transparency but also rake in more revenue if multinationals threw their hats into the ring. This made sense given that the disinvestment target was a stiff Rs 10,000 crore.

Strangely enough, EIL was dropped in the final recast proposals, which confined themselves to the three stand-alone refining companies — Madras Refineries (MRL), Cochin Refineries (CRL), and Bongaigaon Refinery and Petrochemicals (BRPL) — and IBP, the oil-marketing PSU. As per the recommendations of the ministry, BRPL and MRL would be sold to IOC, and CRL to Bharat Petroleum Corporation (BPCL). IBP is, of course, up for open bidding, though all indications are that IOC will emerge the eventual owner.

Even before the finance ministry’s rejection of the EIL proposal, IOC was apparently of the view that it made more sense to consider a buyout only if the Centre was going to make a complete exit. The reasoning was that this would ensure greater flexibility in working. IOC was also believed to be open to the idea of offering a stake in EIL at a later date to players like Larsen & Toubro. Interestingly, both IOC and EIL have separate agreements with L&T to work together in specific areas where their skills can be pooled together.

There were reports doing the rounds at one point that Reliance Petroleum was as keen on buying out EIL given the synergies involved in engineering and construction. These stories gradually stopped circulating when attention shifted to the stand-alone refiners and IBP. It is only now that IOC has revived an interest in EIL though it is too premature to say if this will get the unanimous approval of its board.

EIL has been referred to the annual report of the petroleum ministry as "the leading engineering & consultancy company in India" which as been serving the process industry including refineries, petrochemicals, oil & gas processing projects, pipelines, offshore platforms, fertilisers etc for over three decades.

The company, with a manpower strength of around 4,000, caters to a complete range of project services in these fields including process design, engineering, construction management and commissioning & plant start-up. It has played a key role in the setting up of a large number of process plants both here and abroad.

EIL helps the client conceptualise the project, select environment-friendly technologies, carry out feasibility studies and obtain project clearance with high-quality environment impact assessment studies. The company ensures that the design and engineering is safe by carrying out hazard and operability studies. EIL’s risk analysis and disaster management plans ensure long term safety and operation of these plants.

The PSU’s clientele list is long and includes not only the big three in the downstream sector — IOC, HPCL and BPCL — but others like Mangalore Refinery and Petrochemicals, Essar Oil, Haldia Petrochemicals, National Aluminium Company, Gas Authority of India, Oil and Natural Gas Corporation etc.

International players who have availed themselves of EIL’s services include top names like Kuwait National Petroleum Company, Petronas of Malaysia, Aker Engineering of Norway and many others. The company has worked on a range of consultancy and engineering assignments in Algeria, Bahrain, Iran and Qatar.

In this backdrop, i only seems logical for IOC to keep EIL within its fold except that the oil PSU has lately been focusing on a series of strategic alliances and acquisitions which have not exactly kept investors happy. Some believe that it is a case of "biting more than one can chew" though IOC has held the view that the spinoffs will be apparent only in the medium term.