BHEL's expertise in equipment manufacture, especially as regards power plants, will be vital to IOC which has identified this sector as an important focus area for the future. Keeping this in mind, the oil PSU has only recently entered into an alliance with Larsen & Toubro to work on project management and construction.

The two companies will consider working on assignments relating to operations and maintenance as well as training and consultancy. L&T has also zeroed in on power as a vital business operation and will bid for the EPC (engineering, procurement and construction) contracts of IOC's power plants.

BHEL has already been offered equity in IOC's power projects being commissioned in Panipat and Sawli, Gujarat. The other partners in these plans are the Oil and Natural Gas Corporation and Engineers India (EIL). The power projects are intended to be non-government companies and IOC is, therefore, keen on keeping the combined PSU equity to less than 50 per cent.

IOC will hold a 26 per cent stake in both proposals which means the balance 24 per cent will have to be distributed among ONGC, BHEL and EIL. At present, this could end up being slightly complicated in the Panipat plan as ONGC has decided to pick up 20 per cent which means 4 per cent would have to be split between BHEL and EIL. L&T has, incidentally, been offered 26 per cent in the 500 mw Sawli project.

IOC has decided to forge such strategic tieups with strong allies to provide the much needed support when the oil sector opens up. It is already close to buying out 26 per cent of the Centre's stake in EIL and could choose to exercise a similar option for BHEL in the future. With ONGC, IOC has entered into a 10 per cent equity crossholding arrangement and will also work on key petro-related activities both here and abroad.

Interestingly, EIL and L&T have signed a memorandum of understanding to bid jointly for EPC projects in the oil sector. Effectively, this would now mean that IOC will have enormous expertise in construction, engineering, equipment supply as well as the opportunity to get into the upstream sector with ONGC. Experts believe that all this will help the PSU in its endeavour to become India's first integrated oil company.

It may also be recalled that as part of an oil recast proposal, the government is working on selling its equity, either wholly or partially, in Madras Refineries and Bongaigaon Refinery and Petrochemicals to IOC. The marketing agreement with Reliance Petroleum will also be part of this overall build up in IOC's synergy creation in the petroleum sector.

INSIGHT:

A logical tieup

Globally equipment suppliers do not provide suppliers credit, but instead they arrange it. The other options are leasing and equity participation. It is entirely logical that the benefit of IOC's foray into power should go to Indian companies. A classic example of how equity participation helps is Dabhol Power Company where GE, which holds equity in the company, is the equipment supplier. In a tender, it is rarely the lowest price which is the main criterion for awarding the contract.

-- Urmik Chhaya