IOCL, the next in line

Print edition : October 24, 2003

The government's move to sell off the highly profitable oil major IOCL will open its vast marketing network to the plunder of private monopolies and multinationals.

BELLIGERENCE is often the reaction of someone forced into a corner. This is exactly how the government chose to react on the disinvestment issue after the Supreme Court recently struck down its move to disinvest its stake in the two oil majors, Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL). Aware that it is unlikely to get the parliamentary approval mandated by the court any time in the near future, the government instead chose to bare its fist. On October 3, speaking to the media after a crucial meeting of the Cabinet Committee on Disinvestment (CCD) convened to discuss the options before the government, Union Minister of Disinvestment Arun Shourie announced that the government was considering breaking up the Indian Oil Corporation Ltd. (IOCL). The announcement of the planned dismantling of the Indian oil major, the bluest of Indian blue chip companies - the only Indian company figuring in the Fortune 500 list - poured oil on the already raging controversy over the disinvestment of highly profitable publicly owned companies.

Disinvestment Minister Arun Shourie.-KAMAL NARANG

The credibility of the government suffered serious damage when Ram Naik, the Union Minister for Petroleum and Natural Gas, ruled out on October 5 any strategic sale of IOCL to private interests. It may be recalled that Ram Naik had announced, soon after the Supreme Court judgment was delivered, that IOCL, the Oil and Natural Gas Corporation (ONGC) and Gas Authority of India Ltd. (GAIL) would remain public sector companies. Maintaining that IOCL was a "flag-ship company" of the government in the oil sector, Ram Naik claimed that the CCD merely considered the various "options" but did not "finalise" anything on the matter. The Petroleum Ministry is said to have made a counter offer, that 15-20 per cent of the government stake be sold to private investors. It is said to have argued that this extent of dilution will fetch the government about Rs.8,000 crores. But this is unlikely to satisfy the Disinvestment Ministry, which is interested in playing a high stakes game whereby companies are sold outright to private interests.

In the wake of the Supreme Court order, there was intense speculation in the media about how the Ministry for Disinvestment would get over the "hurdles" imposed by the court. Reports suggested that the government was considering the option of issuing an ordinance to enable it to go ahead with its disinvestment in BPCL and HPCL; two other variants of this option were meant to overcome the court's interpretation that the executive would have to get parliamentary approval for disinvestment in HPCL and BPCL. Another set of options was aimed at challenging the Court's ruling through a review petition, a re-examination by a larger Bench or a Presidential reference.

Arun Shourie said the CCD had zeroed in on three options - executive, judicial and legal. He said that although the Supreme Court had blocked the immediate sale of BPCL and HPCL, without modifying or repealing the special legislation that govern the functioning of the two oil companies, these restraints were not relevant in the case of IOCL because it was not governed by any special statutes. The executive option, he explained, would enable the government to restructure IOCL so that the refining capacity of the company could be separated from its marketing operations. To those familiar with the petroleum industry, it would be clear that exercising this option would result in IOCL's marketing networks being handed over to a private player. After all, the whole point about the disinvestment of BPCL and HPCL was to enable private players to have access to these companies' wide marketing network in India.

Speaking to the media, Shourie said that the government was discussing the modalities of a "swap" among the three public sector oil companies. It is obvious that the idea is to pool the petroleum marketing capabilities of the three companies, hive them off into a separate entity belonging to IOCL, and then sell off that entity to a private company. All this, Shourie reasoned, was perfectly legal because the government could sell off IOCL at any time without being hampered by legal restrictions.

The government's decision to restructure IOCL and then sell it is perceived as a means to enable it to push ahead with its disinvestment programme even as it seeks judicial and legal remedies to the problems it faces on the BPCL/HPCL disinvestment front. However, Shourie's interpretation that the disinvestment in IOCL would not need parliamentary ratification is not without pitfalls. A closer reading of Justice Rajendra Babu's order would reveal, for instance, that the government had to get clearance from Parliament if it intended to sell public sector companies, because their establishment is ratified by Parliament. In fact, Shourie himself, away in Germany at the time the Supreme Court judgment was delivered, admitted that the disinvestment programme "had suffered a major setback" because of the extensive scope of the order.

Ordinary people may be wondering why the government is in such a hurry to sell off its stake in the oil companies, particularly their marketing capabilities. After all, there are legal issues to be sorted out. But even more important are the deep divisions in the polity on the issue. The Cabinet is divided on the issue. Ram Naik has time and again announced his opposition to the move to sell the oil majors to private companies. The Bharatiya Janata Party-led National Democratic Alliance (NDA) coalition has always been divided on the issue. Opposition parties have repeatedly expressed outrage at the move to disinvest government stake in companies that were built at enormous cost over a long period.

Petroleum Minister Ram Naik.-SHERWIN CRASTO/REUTERS

So, who stands to benefit from the sale of the oil majors? The answer appears to lie in the way liberalisation has unfolded in the petroleum industry, particularly in the manner in which a private monopoly led by Reliance Industries is taking shape. Reliance owns the biggest petroleum refinery in India - at Jamnagar in Gujarat - but has virtually no clout in the market. This is because it does not have any distribution network to deliver products to markets. In fact, Reliance is dependent on the three public sector oil companies to deliver its products to consumers. On the other hand, the three oil companies virtually control the entire marketing network in the country, delivering almost every drop of petroleum products that is distributed to retail customers.

Of course, it is not just Reliance that would benefit from such control of the huge marketing capabilities of these companies. Others like the multinational oil major, Shell, would be just as interested in grabbing these companies, because there is no private company that has any marketing network in the country. It is important to recognise that the marketing network of the oil companies has been developed at a huge cost and that once these companies are sold, they will be readily available to the private players who buy control of the companies.

Indeed, the government has pushed the oil companies to offer terms that are attractive to companies like Reliance, while incurring huge costs in the process. Reliance, for instance, has a marketing agreement with IOCL, which will terminate in April 2004. A senior IOCL official told Frontline that the company was "compelled to sell" Reliance products because Reliance does not have the capability. "The government," he said, "has only planned to further Reliance's interests." The agreement, signed in 2002, requires IOCL to buy Reliance products and sell them in the market. Company insiders say that the marketing agreement is loaded in favour of Reliance. For instance, the terms of the agreement require that IOCL pay immediately to Reliance, even before it effects final sales to customers. This means that credit facilities that would normally be available to IOCL in other situations, are not available in this deal. Moreover, IOCL also incurs substantial costs associated with storage costs. This, says a company official, has been particularly important because IOCL has had to buy Reliance products and store them even though demand has been sluggish because of the recessionary situation. At least one-third of Reliance's products are sold through IOCL, according to a source in the company.

The IOCL also has an extensive pipeline network, which enables it to deliver products to consumers. IOCL's pipelines also carry Reliance products. The 1,200-km-long Kandla-Bhatinda pipeline, which was built to carry IOCL's own products, also carries Reliance products. This agreement is also due to lapse in December 2004.

Speaking to Frontline, a company official said: "We are asked to be commercially savvy but are forced to take care of the interests of our competitors. Things are happening fast now because after April 2004 we would be under no obligation to sell their products." It may be recalled that in 1998, the government tried to push IOCL into a 10-year marketing agreement with Reliance. Protests from within the company, the media and political parties forced the government to work out an agreement with a much shorter tenure.

The move to sell IOCL, after breaking it up, is fraught with serious consequences for India's biggest company. The move also goes against the logic of integrating operations, which is what petroleum industry observers have been calling for a long time. In fact, the Parliamentary Standing Committee attached to the Petroleum Ministry has advocated this in several recent sittings. Integrated operations in the petroleum industry - covering exploration and extraction, refining and marketing - would enable an entity to cover risks in the highly volatile business. The Parliamentary Committee's 42nd Report had even suggested that ONGC, the primary exploration company; IOCL, the company with leadership in refinery capacity and marketing; and HPCL and BPCL, whose primary strength lies in their marketing reach, be merged to form a formidable Indian oil major. Such an entity would also protect the national economic interest.

Industry sources say that the margins in the refining business are volatile, depending on the price of crude. However, the margins in marketing are more lucrative because they are a "pass-through" variable. Companies can pass on the costs to the final consumer without suffering any loss of margin. Even when crude prices go up sharply, the refined product can be priced higher to recover margins lost in the earlier segment of the petroleum business. It is this logic that drives the argument that public sector companies' operations in the petroleum sector be integrated. The IOCL is such a huge company that it would be virtually impossible to find a buyer for it. In fact, a stock market analyst remarked thus soon after Shourie's announcement: "It is not that easy to sell off such a big company like IOCL."

The company registered a net turnover of Rs.1,20,170 crores during 2002-03. It made a net profit of Rs.6,662 crores. There are fears that IOCL would be reduced to a shell if its marketing facilities are sold off and its refineries are handed over to either HPCL or BPCL (which can then be sold off separately). "Nothing would remain of the IOCL we know today," said a company official. The government currently holds 82.03 per cent of the equity in IOCL.

The announcement of the government's intention to sell IOCL was greeted by protests. The president of the Indian Oil Officers' Association, E. Haque, told Frontline that officers of the company were "totally opposed" to the move to dismantle the company. He said the government's move was "not aimed at furthering the national interest".

Haque, in a letter to Ram Naik written on October 6, pointed out that the government had justified the liberalisation of the oil sector by claiming that private investment was needed to build infrastructure. The argument that the entry of private companies was also justified on the ground that it would result in greater efficiency in the public sector. Haque pointed out that in reality, the decision of the CCD would "kill the public sector companies" while "helping private sector companies capture the publicly owned Navaratna companies". Private companies were simply trying to acquire public assets without in any way creating assets through their own effort, Haque said. He also pointed out that the Assam Oil Company was merged with IOCL in 1981 as a result of an Act passed by Parliament and, therefore, the sell-off of IOCL may well have to get Parliament's sanction.

Congress(I) spokesperson Jaipal Reddy said that the party was "totally opposed" to the move. He also accused the government of "fighting shy" of discussing the issue. "There may be a difference of view but how can any government think of bypassing Parliament in a democracy?" he asked. A statement issued by the Communist Party of India(Marxist) said that the government's "destructive" move was "nothing but unbridled loot" of public assets.

A letter from the Editor


Dear reader,

The COVID-19-induced lockdown and the absolute necessity for human beings to maintain a physical distance from one another in order to contain the pandemic has changed our lives in unimaginable ways. The print medium all over the world is no exception.

As the distribution of printed copies is unlikely to resume any time soon, Frontline will come to you only through the digital platform until the return of normality. The resources needed to keep up the good work that Frontline has been doing for the past 35 years and more are immense. It is a long journey indeed. Readers who have been part of this journey are our source of strength.

Subscribing to the online edition, I am confident, will make it mutually beneficial.

Sincerely,

R. Vijaya Sankar

Editor, Frontline

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
×