IOC will be marketing those five products of Reliance in which its imports are high. The products in which there is a tie-up are petrol, diesel, LPG, aviation fuel and kerosene. Reliance had little alternative but to approach IOC, considering the size of both the companies.

The arrangement between the two companies is a take-or-pay type, in which IOC will have to take and sell whatever Reliance will be able to produce. On the other hand, if IOC is not able to sell its product than it has to pay a penalty. The same is also true for Reliance, in the sense that any stoppage of production will result in the penalty clause being evoked. In otherwords both the companies will have to be really efficient at their ends.

There are however, other complications to the arrangement, which are external in nature. Firstly, the current domestic supply of petroleum products is in the range of 66.2 million tonnes while the demand is in the range of 88.5 million tonnes. In other words there is a shortfall of 23.8 million tonnes. Demand is expected to grow by around 5-6 per cent, which means demand will be 93.81 million tonnes by 2000. Even if we make a conservative estimate that production does not grow, the entire shortfall will be filled up by Reliance's output. Reliance, though, will be setting up 27 million tonnes. However, most of the refineries in operation are running at over 100 per cent capacity utilisation. In fact, the newly set up MRPL refinery is running at over 175 per cent capacity utilisation. Newer refineries have the flexibilty of using different types of crude oil and by using lighter fuels they can increase its throughput. Reliance refineryhas been designed for the entire range of Arabian crude oil, which means that it has the capacity of producing more than 27 million tonnes. Thus, just by commissioning of the Reliance plant, there could well be a scenario of excess supply.

This supply demand mismatch will be increased with the number of greenfield capacities as well as expansions that will be commissioned over the next two-three years. These include those of IOC as well. How the arrangement between Reliance and IOC will work in such a scenario will be interesting to watch.

Apart from the arrangement between the two companies, industry sources say that IOC is likely to enter into a similar arrangement with other refineries like Essar. IOC will be in a tight position if it enters into such an arrangement with other refineries, because it will have the penalty clause invoked if it is not able to sell, on the other hand it will have to sell its own production.

One more problem that IOC can face is that currently it is able to control itsimports of petroleum product as per the demand, however, with such an arrangement it will have no such flexibility. The only control it has in its hand is its own production or to pay penalty.

For IOC the obvious benefit is that the company will be earning an enormous fee for marketing the products. It will also be able to avert the forex risks arising out of imports of petroleum products.

As Reliance will be selling its product at import parity price, the company will, because of its size will be earning a good margin which would not only include the margin earned on account of import duty as well as freight charges and insurance. However, the most attractive part of the deal for Reliance will be that it will not have to worry about selling its products.

With India stopping to import around 27 million tonnes from the international market, prices of these products are likely to come down. However, with more supply by domestic refiners, prices within the Indian market of these products are likely to comedown further. But, Reliance will be hedged against such a drop in the domestic market as it will be selling the product at an import parity price.

With such a tie-up between both the players Indian refiners will have to enter the international market. But with the new players having no experience in the domestic market let alone the international market their survival can be at stake. With capacities being commissioned at a time when the industry is being decontrolled and Asian refineries operating between 50 -70 per cent utilisation, and no recovery in sight, the future looks dark for Indian refineries.