The pipeline is then proposed to be extended to Ranchi in Bihar once the throughout from the refinery increases. As this shows an upward graph in the subsequent years, the network will go on from Ranchi to Mughalsarai and finally Allahabad. "The final phase could take some time to implement as the throughput will have to be of a considerable quantity," sources say. As per the initial plan, Petronet had planned to link the pipeline from Paradip to Ranchi but later snipped the route to Rourkela as the throughput would not have been sufficient.

The refinery was to have been commissioned under the "East India refinery (EIR)" banner where IOC and Kuwait Petroleum Corporation (KPC) were the promoters. The pipeline would, in that case, have had IOC, Petronet and EIR holding 26 per cent equity each while the balance would have been offered to other strategic/financial investors. However, KPC withdrew from the refinery proposal and IOC has since maintained that it will implement it on its own.

Sources say that Oil India which specialises in exploration and production has shown a lot of interest in Petronet-promoted projects. This could prompt the PSU to consider a stake in the Paradip-Rourkela pipeline. Similarly, the Infrastructure Development Finance Corporation has been extremely bullish on product pipelines and has already subscribed to the equity of the Mangalore-Bangalore and Kochi-Karur networks.

Though the pace of progress in implementing the Petronet pipelines has been relatively slow, much of the delay can be attributed to the issue of "take-or-pay" for which no solution has emerged yet. Despite this, the Rs 400-crore Vadinar-Kandla network was recently flagged off and has begun carrying high speed diesel from the Reliance Petroleum refinery.

Despite this, the pressing problem of finalising the take-or-pay contracts still remains. This applies to two other Petronet projects: Cochin-Karur and Mangalore-Bangalore. The lead oil companies for each of these projects are IOC, Bharat Petroleum Corporation and Hindustan Petroleum Corporation which need to sign these contracts with the feeding refining companies. Lenders for the projects have insisted that funds for these pipelines will only be disbursed after the take-or-pay contracts are finalised.

Sources say that as regards the Vadinar-Kandla pipeline, IOC has indicated that it is ready to sign the offtake contract provided back-to-back commitments are available from BPCL and HPCL. The take-or-pay quantities need commitments on throughputs only to ensure debt servicing which are substantially lower than the projected volumes.

BPCL, it is reliably learnt, finds it difficult to provide a back-to-back undertaking for Vadinar-Kandla unless the company has a comfort on product availability from the Jamnagar refinery. As regards the Cochin-Karur pipeline where it is the lead operator, BPCL has indicated that it is open to signing the take-or-pay contract if there is a back-to-back commitment from both IOC and HPCL. However, observers reiterate that this agreement should not be linked to the Vadinar-Kandla proposal as BPCL still has the option to import products directly at Kandla rather than Jamnagar.

The concept of take-or-pay for the Petronet pipelines was formulated by ICICI nearly two years ago. The contract is necessary because of the limited number of users for pipeline projects, limited financing and also since 50 per cent of the project is accounted for items like interest during construction, laying expenses etc. It was in August 1998 when Petronet India circulated a draft take-or-pay contract to the oil companies and got an assurance from them that these would be signed by March 1999. Till November last year, the draft contracts were discussed with the oil companies and modifications made to take into account their requirements as also of the lenders.

In December, representatives of the three oil companies said that a comfort letter indicating their commitment to offtake minimum quantities should be sufficient. However, this was not acceptable to lenders of the projects who reiterated that they would need the take-or-pay contract or any other document which clearly showed future cash flows of the pipelines through committed tariff and throughput on take-or-pay basis.