This move is believed to be a result of Kuwait Petroleum telling Indian Oil of its intention to bring in another partner. To this, Indian Oil has said that it will also be free to exercise a similar option. Sources say that the first choice in this case will be the Oil and Natural Gas Corporation with whom Inidan Oil will work in a range of petro-related activities both here and abroad. The two oil PSUs have also strengthened their relationship by recently entering into a 10 per cent crossholding arrangement.

The east coast refinery, it may be recalled, was planned as a 26:26 joint venture between Indian Oil and Kuwait Petroleum. It was among the three joint-sector projects envisaged by the Government at that time, the other two being the west coast refinery (a joint venture ofHindustan Petroleum Corporation and the Oman Oil Company, now shelved) and the central India refinery co-promoted by Bharat Petroleum Corporation and Oman Oil.

Now, if Kuwait Petroleum decides to bring in another partner, Indian Oil will follow suit and offer ONGC up to 24 per cent in the project. This is keeping in line with the understanding between the two navratnas that the company taking the lead in any project will take at least 26 per cent while giving the other, be it Indian Oil or ONGC, up to 24 per cent of the equity. The idea is to ensure that the joint venture does not become a government company and that the combined stake is confined to 50 per cent.

In the case of the east coast refinery, Indian Oil will be free to up its stake to 50 per cent if ONGC were to turn down the offer of a 24 per cent holding. As for KPC and its other partner, they will be free to fix their combined holding to any level. If there is still a balance in the equity component, it will be offered to other financialinvestors.

Sources have indicated that no final decision has been taken on roping in extra partners for the project. "What is clear is that if KPC were to take the initiative, Indian Oil has reiterated that it will also have the right to bring in another player," they said.

In fact, even when unconfirmed reports were doing the rounds that Kuwait Petroleum was having second thoughts on teaming up with Indian Oil on the east coast refinery, it did not cause undue panic. Apparently, other big names in the world oil business like Petronas of Malaysia, Mobil of the US and Marubeni of Japan were ready to throw their hats into the ring as alternative partners.

Of late, the one factor that has deterred international companies from entering the downstream sector has been the low margins on refining. Marketing of petro-products is, in any case, the more lucrative option and this, in fact, prompted Shell and Aramco to conceive a scheme where all the retail outlets of a single oil PSU -- Indian Oil, BPCL or HPCL --will be transferred to a new joint venture. The Indian company will hold a 50 per cent stake with the balance shared equally between Shell and Aramco.

Likewise, even in the case of Kuwait Petroleum, the company is keen on getting a foothold in marketing and talks have been held with Indian Oil for the last year on this aspect. Whether the Indian company is willing to part with a portion of its retail outlets to accede to Kuwait Petroleum's request remains to be seen. What needs to be borne in mind is that the Nirmal Singh report on oil reforms has stated that to enter marketing, a company must either invest Rs 2,000 crore in the equity of a refinery or produce up to three million tonnes of crude in India annually.

A question of partners

The million dollar question going around is this -- who will KPC bring in as its joint partner for the east coast project? The names doing the rounds are Caltex, Chevron and Saudi Aramco though there has been no basis for this inference. KPC is reportedly of theview that a 26 per cent investment in a Rs 9,000-crore refinery is a lot of money which could be best optimised if another partner is roped in. However, in the case of IOC, the company is categoric that not only will it also enjoy a similar right and offer a stake to ONGC, but it is willing to put in 50 per cent of the equity. A final decision is expected to be taken during the next few weeks.