Oil marketers look to lease, share pipelines

Written by MG Arun | Mumbai | Updated: Feb 15 2012, 08:29am hrs
For oil marketing companies (OMCs) squeezed by losses from selling fuel below cost, necessity has become the mother of innovation. The companies are planning to outsource pipelines carrying petrol and diesel from refineries to distribution centres by joining hands with private and government-owned infrastructure and logistics companies under build-and-operate schemes.

We are looking at new ideas due to the funds crunch, said RK Singh, chairman and MD, Bharat Petroleum Corporation (BPCL). One thought is to outsource infrastructure, so that our burden is reduced.

BPCL, Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC), which face heavy under-recoveries in selling diesel, cooking gas and kerosene below cost, are looking at infrastructure providers like IOT Infrastructure & Energy Services. IOT, jointly owned by IOC, India's largest oil refiner, and Germanys OilTanking GmbH, will own and operate pipelines under an assurance from the OMCs that they will provide up to 80% of pipeline usage or minimum guarantee throughput in industry parlance.

There are parties who will be willing to spend, says Singh. They will invest on our behalf and we will pay them running or service charges.

BPCL has planned expenditure of Rs 7,000 crore until 2017, which includes laying pipelines and building storage terminals, but is saddled with losses by selling refined products below cost. So far this fiscal, the company has to recover Rs 32,000 crore from the government, which compensates the losses.

High cost of money also pinches the refiner, which pays Rs 1,300 crore interest on a Rs 37,000-crore loan. This has prompted the company to look at ways to mitigate expenses, while ensuring critical infrastructure investments are met.

Infrastructure providers say they are open to outsourcing opportunities. We are very open to all such ideas, said Jayanta Bhuyan, managing director, IOT Infrastructure & Energy Services. In South America, we own pipelines which are used by multiple customers. So do we in Houston.

The concept of shared infrastructure has already come to terminals and jet fuel infrastructure. Pipeline is a natural extension, he added.

Now, oil companies own their pipelines, and in some cases, form special purpose vehicles to lay pipelines, which can be leased out to others. In such cases, each pipeline is set up by one anchor company, and others will be co-users, explains K Ravichandran, senior vice-president and co-head, corporate ratings at ICRA, a ratings agency. Pipelines are a natural monopoly, and it's not feasible to duplicate them. Sometimes, corporate rivalry leads to companies laying pipelines for their own use; but in such cases, capacity utilisation will be hardly 30-40%. Outsourcing can be an innovative model.

HPCL is the main promoter of the Mangalore-Hassan-Bangalore pipeline, which carries products from HPCL's Mangalore refinery.

The Petroleum & Natural Gas Regulatory Board (PNGRB) which regulates laying of pipelines and city gas distribution networks, has been encouraging the use of shared pipelines.

The PNGRB calls for expressions of interest for laying pipelines, says K Murali, director (refineries), HPCL. Infrastructure companies can then come forward to lay pipelines on a chargeable basis.

However, he feels OMCs cannot look to fully outsource such infrastructure. Companies need to strike a balance. They can't totally be dependent on an outsourced model, says HPCL's Murali.

BPCL's Singh agrees: Outsourcing alone will not be a model. We will have to look at a combination of different options, including laying some of our own pipeline.