Sources said that IPCL was, at one point, exploring the option of picking a stake in Essar Oil's 10.5 million tonne refinery but shelved the proposal. The two companies are, however, still open to the idea of cooperation on naphtha supplies or even striking an alliance for a separate downstream venture.

A favourable development last year for IPCL has been an arrangement for importing propylene at the Nagothane plant via Piprau (a port near Mumbai). Previously, the requirement was met from BPCL but the absence of a return stream pipeline from IPCL-Nagothane to BPCL meant that the residual feedstock could not be returned. Consequently, IPCL had to bear additional losses.

Essar Oil, itmay be recalled, had sought the counsel of an investment banker to rope in a strategic partner for its refinery. While the recommendations to this effect are not known, the industry grapevine has it that several oil companies in the Middle East have expressed an interest in picking up a stake of up to 20 per cent. There have also been unconfirmed reports that some PSU oil refiners are as keen though there has not been much progress in this direction.

To IPCL, it makes little sense to participate in the equity of a refinery as its basic objective is to ensure feedstock supply for its plants. This explains why it was so keen at one point to strike a strategic alliance of its Baroda complex with the Indian Oil Corporation's Koyali refinery. The idea was to ensure naphtha supply to the Baroda plant but this idea did not find favour with the government at that time.

Ironically enough, following the Disinvestment Commission's recommendations on privatising IPCL, the idea of the IOC tie-up resurfaced. TheFortune 500 company has recently signed a 10-year pact with IPCL to undertake naphtha imports on its own. This could translate into savings of over Rs 1,000 per tonne of naphtha imported by IPCL directly.

As part of its efforts to source feedstock, IPCL had also considered picking a stake of around 10 per cent in either the six million tonne Bina refinery promoted by Bharat Petroleum Corporation and the Oman Oil Company or the nine million tonne Paradip project being set up by IOC and Kuwait Petroleum Corporation. Both proposals have now been put on the backburner.

The agreement with Essar Oil makes tremendous sense, experts say, and IPCL could look at similar options in the future as there is rapid refining capacity planned during the next two years both by private players (Reliance Petroleum with 21 million tonnes) and oil PSUs. Supply pacts for feedstock could be sewn up this way as these refineries will also be looking for consumers like petrochemicals, power and fertilisers to buy selectproducts.

A recent research report on IPCL states that polypropylene production is expected to increase by 10 per cent this calendar over last year's level of 226,000 tonnes. Imports which totalled 2,67,000 tonnes in 1997 are now coming down drastically.

The turn of the century will see the next bout of capacity expansion as Reliance Petroleum and Haldia Petrochemical go on stream effectively doubling capacity. Despite this, the report adds, given the current scale of imports, the surplus capacity by 2002-03 is expected to be the order of five to 10 per cent of sales.

According to the report, polypropylene producers appear to be cutting down inventory levels in anticipation of further price weakness in the near term. Japanese producers have reduced operating rates from 100 to 80 per cent while South Korean capacity utilisation rates are also expected to decline as many cracker operators have failed to secure feedstock supplies on account of suppliers demanding cash payment in hard currency.