BPCL for sale: Government lacks strategic vision

Finally, the anticipated privatisation of Bharat Petroleum Corporation Ltd., has been cleared by the Union cabinet. While the media is highlighting how the government will be able to meet its ambitious target of Rs 1.05 lakh crore from this disinvestment, no one has asked, what is the strategic vision behind the sale of this ‘Maharatna’.

Before the BPCL sale proposal was brought to the cabinet, Petroleum Minister Dharmendra Pradhan said that Prime Minister Narendra Modi’s philosophy -- “the government has no business to be in business” -- is driving it. If it is indeed the case, why is his government announcing that it wants to keep a controlling interest in public sector units like Indian Oil Corporation while selling BPCL? In 2018, ONGC was forced to buy 51.1% stake in HPCL paying Rs 36,915 crore. For one and a half years, HPCL did not recognize ONGC as its major promoter. Before the purchase, ONGC was cash-rich, and then it became debt-ridden.

Selling HPCL to ONGC was not privatization since the latter is still controlled by the Petroleum Ministry. The ONGC chairman has said the company wants to sell its stake in HPCL. When Pradhan was asked for his comment, his response was that ONGC is autonomous and free to take a decision in its interest. Will ONGC be able to unload its interest in HPCL now?

While BPCL, and most likely HPCL, are for sale to strategic investors, Reliance has been successful in finding partners to buy a part interest in its refining and marketing companies. Indian Oil, HPCL and BPCL have been negotiating with Aramco and Abu Dhabi National Oil Company (ADNOC) since 2015 to invest in a mega refinery on our west coast.

In the background of the ‘Peak Oil Demand’ scenario, India is one of the few major economies where there is likely to be above-average growth in petroleum demand. Influenced by this optimistic forecast, the government is assuming that foreign oil companies will be eager to invest in oil marketing companies (OMCs).

Some of the potential investors often mentioned in the media are Exxon Mobil, Chevron and ConocoPhillips (from the US), Royal Dutch Shell and BP Plc (the UK), Rosneft and LukOil (Russia), Petro China, CNPC and Sinopec (China), Total SA (France), Kuwait Oil Company and Saudi Aramco.

Rosneft has already bought Essar’s interest (400,000 barrels/day refinery and 3,500 fuel stations) in 2017 for $12.9 billion. Shell’s retail presence in India is minuscule, with fewer than 200 fuel stations though it has licence to operate 2,000. BP has invested Rs 7,000 crore to buy 49% in Reliance’s 1,400-outlet fuel retailing network. It is highly unlikely any other MNC from the US, France or UK will be interested to invest in downstream operations for the reason discussed below. ConocoPhillips, which was a vertically integrated company, was split into upstream and downstream in 2011 to invest more into higher margin, though risky, upstream (exploration) operations.

The concept of vertical integration came into vogue when the world had plenty of oil supplies and oil companies needed downstream operations to dispose of their oil production. For the foreseeable future, MNCs are unlikely to have any problem selling their production. Given this reality, why will MNCs be interested to invest in India’s OMCs?

Let us not forget the recent history. Just a few years ago, when oil PSUs were subsidised to sell below cost price, Reliance, Shell and Essar had to shut down their fuel stations. Despite such irrational policies, it is intriguing that BP invested in India’s retail network.

However, national oil companies (NOCs) like Aramco, ADNOC, Kuwait Oil Company, etc., are likely candidates that may be interested to invest in India’s downstream. Their economics are very different than that of MNCs in that the more crude oil they sell, the more they are able to earn. For MNCs, return on investment (RoI) is paramount. However, for NOCs, revenue secured by selling oil itself is the driving force and RoI is of lesser interest. This was the situation faced by the giant oil companies in the 1960s, which led them to expand downstream operations to place their crude oil.Already Aramco, with ADNOC, has expressed interest to take 51% in a 60-million ton refinery. In August, Aramco had agreed to enter into an agreement to buy a 20% interest in Reliance’s 60 million-ton refinery and petrochemical complex for $15 billion. While Aramco is actively involved in these two mega projects, will it be interested to buy 53.3% of BPCL from the government, or HPCL from ONGC?

In 1948, the Indian government passed the Industrial Policy Resolution, which stated that its oil industry should be state-owned and operated. This resulted in the formation of HPCL and BPCL by taking over the interests from foreign oil companies in the mid-1970s. Now, we have come full circle. The government is ready to hand over these ‘jewels’ back to any foreign oil company ready to invest in India. While this is a welcome development, it becomes apparent that the government has no strategic vision to achieve its ambitious goal of privatising to improve operations and introduce competition.

So far, the only NOCs which have shown any serious interest are Aramco and ADNOC. All sellers seem to be courting Aramco. If the objective of the government is to promote competition, can we afford to give a dominating share to Aramco like we have done for IOC?

Today, two subsidized products -- kerosene and LPG -- are sold exclusively by public sector OMCs. When they are privatized, what kind of problems will it create? Has the government given any serious thought to this difficult problem?

Apparently, the privatisation effort seems to be driven more by the short-term need of meeting disinvestment targets to raise money rather than to promote healthy competition.