The two navratnas have identified South Africa, Thailand, Indonesia and other countries in the Far East to kick off the partnership which will go a long way in promoting India's image abroad. The present plan involves IOC and ONGC holding 40 per cent apiece in the joint venture's equity while the balance will be offered to an international oil major.

"It is a rare alliance and will mark a historic beginning in India's oil sector. Never before has anything like this been attempted and the past years have only seen foreign players establish their presence here in exploration, refining and, possibly in the future, marketing also," sources say.

They are quick to point out that thetwo oil giants have only recently begun talks and it would take some time before the dream actually becomes a reality. However, it is reliably learnt that both companies are keen on kicking off the process during the next three years. They are also believed to be going full steam ahead in thrashing out the modalities and identifying regions where this venture could operate successfully.

IOC already has entered into a memorandum of understanding with ONGC Videsh where the two plan to share each other's expertise in upstream and downstream activities abroad. Work has already started in this direction on bidding for exploration blocks in Iraq and possibly Russia also. IOC has also planned upstream efforts both here and abroad with a host of global majors like Premier Oil, Enterprise and Petrotin.

Both IOC and ONGC have acknowledged that there are enormous opportunities abroad, a fact that has been echoed in the R-group report on restructuring the oil sector. The study indicated that it was in theinterests of oil companies to acquire acreage in other countries and, of late, companies like Oil India are going all out to bag some lucrative contracts in Oman and Indonesia with big names like Total and Premier Oil.

However, this process is "relatively routine" compared to the mega proposal that is underway to establish integrated oil operations overseas. It would mean that ONGC's expertise will come in handy for exploration and production while IOC will cater to its basic strengths in refining. The two will then reap a rich harvest in marketing the petroproducts if everything goes according to plan. The investment will be a staggering sum but both the oil majors have huge cash surpluses that will support such funding.

ONGC has been serious about a foray into refining for a while now and has zeroed in on the six-million-tonne Bina project in Madhya Pradesh for a nominal stake. It has, over the last few months, getting feelers from IOC for participating in the equity of the nine million tonne Paradiprefinery and was also, at one point, close to being a co-promoter for Hindustan Petroleum Corporation's Bhatinda refinery.

However, the key reason for ONGC to get a foothold in refining was to eventually branch off into the more lucrative area of marketing. This is where there are still some grey areas though the Nirmal Singh Committee report has specifically stated that marketing would be open to any company which either invests Rs 2,000 crore in a refinery or produces three million tonnes of crude annually, a condition that ONGC fulfils rather effortlessly.

In fact, the restricted activities of Indian oil companies was dealt with at length by former petroleum secretary, Vijay Kelkar (now finance secretary), in the second Vasant Sheth memorial lecture in Mumbai last year. He noted that it was only in India that there was not a single home based fully integrated oil company.

"ONGC, for instance, only deals with the upstream and has no refining capacity while IOC has no equity crude of its own and onlydoes refining and marketing. Equally, there are companies like Cochin Refineries and Madras Refineries which are stand-alone refineries. Gas Authority of India is only a gas transmission company and has no access to equity gas assets. And, then, we have IBP which is only a marketing company," Kelkar had said.

The former petroleum secretary was of the opinion that in an era of free market prices, stand-alone refineries/exploration and production companies would be exposed to greater risks with "excessive uncertainties" regarding their profit margins. Hence, what was required was a reorganisation of all these different entities into fewer companies which were integrated but fiercely competing in the market place.

According to Kelkar, such vertical integration could be done through equity swaps, acquisitions or mergers. "The most interesting possibility for equity swap would be between IOC and ONGC and thus create a vertically integrated oil company whose size and potential capability is equal to some of theinternational majors. Such an organisation would be of crucial importance ti our country's energy policy and energy security," Kelkar had stated.

INSIGHT

There is no doubt that deregulation will need vertically integrated companies which can take on the likes of international majors such as Shell. However, given the small scale of ONGC's operations abroad and the difficulty which Indian Oil will have in building a marketing network abroad, such integration will make more sense in the domestic market. But perhaps Indian Oil is insuring itself for a scenario where domestic refining capacity may outstrip demand, and the agreements which it has tied up with Reliance and Essar under which it will have to market their products. The outlets for the products of other refineries, under these circumstances, may well have to be marketed abroad.