Essar Oil operates rigs in the Middle-East but this would be of no relevance to BPCL, industry sources say. The oil public-sector unit (PSU) will, instead, examine an option that would involve spinning off the refining assets of Essar Oil into a separate company where it could hold a controlling stake. Both BPCL and Essar Oil officials could not be contacted for their comments on the issue.

Essar's 10.5-million-tonne refinery is scheduled to go on stream in 2001 but this would, to a large extent, depend on timely induction of a strategic partner. There have been unconfirmed reports that the group is in talks with Oman Oil Company for a stake in the refinery. Oman Oil isincidentally BPCL's partner in the six-million-tonne Bina refinery whose progress has been thwarted due to environmental hurdles.

Experts believe that if things go according to plan, Oman Oil and BPCL could end up sharing the equity in Essar Oil along with the Ruias. A crude supply arrangement with Oman could also be worked out in such an arrangement though the current pace of progress does not indicate any such proposal being contemplated. A distinct advantage accruing to BPCL would be a stake in the Rs 4,400-crore Central India pipeline (connecting Jamnagar to Gwalior) where a tentative 11 per cent has been earmarked for Essar Oil without any provision for the oil PSUs.

It may be recalled that Essar and BPCL have hired PriceWaterhouseCoopers and SBI Caps to independently evaluate the Ruias-promoted refinery and expedite the process of the latter buying an equity stake in the company.

"The entire valuation exercise will take time and nothing is expected to happen for the next six months at least. Andeven if BPCL decides to participate in the equity of the project, the final approval will need to come from the petroleum ministry," sources said. Reports in financial circles suggest that the oil PSU is adopting a cautious attitude and will take its time before it decides to pick a stake in the refinery.

The key to the deal will be the price of the stake and that explains why independent opinions have been sought on the issue. Observers say that it would be to BPCL's advantage to participate in the equity of the project as it at present has only one refinery in Mumbai which cannot satiate its vast network of over 4,500 retail outlets.

The location of the Essar Oil refinery is ideal as it would help BPCL target the northern market once a product pipeline is in place. This could either be through Indian Oil Corporation's (IOC's) Kandla-Bhatinda pipeline or even the mega Central India pipeline. This network could transport the products from the refineries of Essar Oil, Reliance Petroleum and IOC's at Koyali-- all in Gujarat.

To Essar Oil, a strategic partner would be the best bet especially one with enormous experience in the oil sector. Given that the project is scheduled to be commissioned only by the end of next year, BPCL's presence would be a great level of comfort in situations where there are cost-overruns. The oil PSU's retail strength is also expected to be a value-added input for Essar Oil though it already has a marketing pact with IOC in place.

The Ruias, it may be recalled, had roped in Morgan Stanley over two years ago to suggest the possibilities of a strategic partner for the refinery. At that time, sources say, the group was merely examining the option as there really was no urgent need to go in for an equity tieup. However, with reforms having kicked off in the oil sector and multinationals keen on entering the profitable area of marketing petro-products, it makes sense for stand-alone refiners like Essar Oil to forge an alliance with a strong PSU ally.

Marathon may pick stake inEssar Oil operations

An interesting theory doing the rounds is a possibility of Marathon picking up a stake in the upstream operations of Essar Oil. The UK-based oil company has only recently agreed to buy out Essar Power and sources say that it is now as keen on acquiring the group's oil rigs which operate in the Middle-East. This would happen if Essar Oil were to hive off its refining assets to BPCL in a joint venture and do an encore with its upstream portion. Marathon, incidentally, has not renewed its memorandum of understanding with the Indian Oil Corporation for exploration and production (E&P) activities, lending strength to the reports that an alliance with Essar Oil could be in the offing. While officials of these companies were not available for comment, experts say that Marathon's interest in E&P could stem from the fact that it would qualify for direct marketing of petro-products (which is the more lucrative alternative to refining) if it produces three million tonnes of crude annually.