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Murali Gopalan
Mumbai, Dec 13: The Indian Oil Corporation and the Oil and Natural Gas Corporation are exploring the options of working together in all petro-related activities both here and abroad. This would translate into a formidable duo operating in vital areas like exploration, production, refining, petrochemicals, power and marketing.
Top industry sources said that talks were still at an initial stage and it would take time to thrash out the modalities of such a partnership. However, it is all too clear that the two biggest oil giants in India are serious about a "long term marriage" which, in turn, would mean evolution of a very strong entity at par with the best in the world.
It may be recalled that a beginning in this direction was made over a year ago when IOC and ONGC Videsh (the overseas arm of ONGC) entered into a memorandum of understanding to work together in upstream activities abroad. The two are tipped to team up for a project in Iraq and Russia which, of late, has emerged as a key point for ONGCVidesh. ONGC is also close to picking up a 20 per cent stake in the 300 mw power project at Panipat where the co-promoters are IOC and Marubeni of Japan. Sources had, at that time, hinted that the two could work in more power plants in the future. This makes sense given that the recent budget has granted a five year tax holiday on power plants (and refineries) commissioned between October 1, 1998 and September 30, 2003. The more recent development has been the intention of IOC and ONGC to enter into a joint venture for an integrated oil company abroad.
IOC, ONGC mull tie-up for local, global activities Continued from Page 1 Countries identified for this activity include South Africa, Mauritius, Vietnam and Thailand.
Though the idea is merely at a preliminary stage, it would eventually involve IOC and ONGC participating in the entire procedure of exploration, production, refining and marketing.
The current thinking is that the two would hold 40 per cent each in the equity of the venture with thebalance 20 per cent offered to an international player of repute. In the opinion of experts in the oil sector, this move is a clear indication that the two oil majors are clear about their intentions to make a mark not only in India but also abroad.
This view has now been strengthened with talks now on to work together in practically all operations related to the petroleum sector both here and in other countries. IOC has identified petrochemicals as a key area of activity which would mean that ONGC would be a partner here. Likewise, if the talks do end up favourably, the two would work together in an array of power projects in India and all over the world.
In exploration and production, the combine would be a force to reckon with and, in the days to come, will go all out to scout for oil. With ONGC's expertise coming in handy, there really would not be too much to worry about. And this crude would come in as a ready supply source for IOC's refineries (where ONGC will, logically, have a stake) and wouldstrengthen its efforts to simultaneously improve its already strong marketing network.Significantly, the partnership would also imply that ONGC would now participate in the equity of the new refineries being planned by IOC. These include the nine million tonne east coast project in Paradip, Orissa, where Kuwait Petroleum Corporation is the co-promoter and, again, another nine million facility in Nagapattinam, Tamil Nadu, promoted jointly by IOC and Madras Refineries.
If this were to finally happen, sources say ONGC would then not be inclined to consider a stake in the six million tonne Bina refinery jointly planned by Bharat Petroleum Corporation and the Oman Oil Company. ONGC has, over the last two years, made it known that if it has to consider an entry into refining, it would mean taking a stake of around 20 per cent in the Bina project. This proposal may be dropped if the IOC partnership fructifies as investments would then need to be spread out evenly.
Talks may culminate in equity swap
Theongoing talks between IOC and ONGC could pave the way for an equity swap between the two navratnas. This would go in line with what former petroleum secretary Vijay Kelkar had to say in the second Vasant Sheth memorial lecture in Mumbai last year. To quote: "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 the international majors. Such an organisation would be of crucial importance to our country's energy policy and security."
During the course of this speech focusing on ONGC, Kelkar said: "ONGC will have to be involved in marketing so that they are closer to the customers. Here "equity" based alliance with a marketing company like IOC becomes important. In a market economy, customers are the major driving force to stimulate innovation and ONGC must have a force acting upon them to push them to the limits."
INSIGHT
Short-term risk position unlikely tochange
If an equity swap were to happen between IOC and ONGC, it would not significantly alter the short term risk-return position of the shareholders of these companies. Under the present APM structure, the bulk of earnings of both PSUs are quite immune to that of market forces.
But today advances in technology have reduced production cost in the North Sea to $4 per barrel from $16 per barrel. The newer methods of production systems allow oil to be pumped directly into pipelines without bringing it to the surface which cuts production cost. This has boosted output from previously untapped oil fields at far lower cost. Companies can also reduce costs through economies of scale which could prompt IOC and ONGC to consider working together.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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