A task force has been constituted by both PSUs to examine this proposal and see if it makes economic sense. It will be later forwarded to the ministry of petroleum and natural gas for approval. IOC has, incidentally, also offered to be the exclusive marketeer of all ONGC's products which include crude, kerosene, naphtha, liquefied petroleum gas, a function that is also carried out by BPCL and HPCL. Effectively, the arrangement will create a virtual monopoly in the product supply chain and could hamper the business of both HPCL and BPCL post-2002.

IOC's offer is a clear indication that it is open to the idea of sharing marketing margins with ONGC on sale of these products and also strengthen its relationship with the upstream major. The natural gas produced by ONGC will, however, continue to be marketed by the Gas Authority of India (Gail).Experts say that it is only natural that IOC and ONGC would think of all possible avenues to strengthen their alliance based on the "most preferred partner" principle. The two companies have decided to team up with each other in crucial areas like exploration and production, refining and marketing, power, petrochemicals and consultancy services.

The eventual goal is to form a strong integrated oil company which can hold its own vis-a-vis multinationals itching to get a foothold in the profitable arena of marketing petro-products. In the process, such an alliance would also be a threat to relatively strong PSUs like BPCL and HPCL which, in the future, will also have to team up in order to survive.

According to observers, IOC has begun preparing itself for the new competitive scenario that will emerge in 2002. "Companies will now have to survive on their own and the only way to do this is through strategic alliances and mergers. They will, otherwise, be prime takeover targets," they say.

Reliance, it may be recalled, recently announced that it was not averse to the idea of buying out the dealerships of BPCL, HPCL and IBP. The group already has a marketing tie-up in place with IOC which will be a full fledged joint venture in 2002 that will cater to sale of products from the Reliance refinery as also infrastructure development.

BPCL has a marketing agreement with MRL to sell the products from its 6.5-million-tonne refinery in Manali near Chennai. It also has a product assistance agreement with IBP. The government is now studying a proposal which would involve sale of its equity in CRL and IBP to BPCL. This is the only way BPCL will have adequate product supply to satiate its vast network of over 4,500 retail outlets.

If this plan is not approved and the government insists on a transparent bidding offer, the Reliance-IOC combine could logically be prime candidates to take over BPCL, HPCL and IBP. Experts say that the only way to thwart this is to ensure a merger of these three companies so that they can retain their identities in a free market. It would then be up to either group to bid for MRL or CRL.

The government would have to eventually chalk out the course of the oil industry three years down the line. There is no way it can continue holding a 51 per cent stake in these PSUs if autonomy and flexibility in operations is the final objective. Observers say that it will also have to decide if one entity can operate in the market (a conglomerate of IOC, Reliance, BPCL, HPCL, IBP, Essar Oil) or have two competing groups.

INSIGHT :

The right step
Even before the oil sector has been completely deregulated, companies are getting into various agreements in order to secure their position.

The move by IOC to be exclusive supplier for ONGC's requirement is one such case. Oil rigs, specially off-shore, run exclusively on generator sets which consume huge quantity of diesel. Apart from this as a number of moving equipments are involved, consumption of lubricants and grease is also high. By being the sole supplier IOC has made a smart move to corner a big market.

-- Shishir Asthana