Top sources in the ministry of petroleum and natural gas said IOC will lose heavily if it were to subsidise freight and transport costs given that it has already taken a beating with the fall in prices of some decontrolled products. For instance, in the case of a single state electricity board, IOC stands to lose Rs 150 crore annually as prices of low sulphur heavy stock (LSHS)) have been reduced by Rs 380 per tonne effective April 1.

"This is bad enough and if the corporation were also to surrender to the pool obvious benefits it enjoys through the location of its refineries, it is just not acceptable," sources told The Financial Express. In principle, IOC has agreed with the Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) andIBP, the stand-alone marketing company, that some kind of price stability will be ensured in the first year of reforms that lasts till March 31, 1999.

The understanding reached between the four will ensure that there is no poaching of business during the period and that prices will be fixed only after a consensus. Likewise, the oil companies will see to it that supplies of decontrolled products are not affected and that prices don't vary from state to state.

Towards this effort, the Oil Coordination Committee proposes to draw up an industry logistics plan (ILP) for decontrolled products like naphtha, LSHS, bitumen, paraffin wax and furnace oil (FO). The ILP will work in the same pattern as the existing supply plan mechanism (SPM) for the controlled products with the only difference being that movements planned through the ILP process will have no adverse implications on the oil pool account.

The petroleum ministry has also indicated that under/over-recoveries in freight etc would have to be adjustedamong the public-sector companies in a mutually agreed manner.

The decision to join hands has been taken as the reforms period could see violent price fluctuations and individual market shares being affected. There is also the added problem of sales tax differing state-wise. Hence, the four oil companies have decided to work together in marketing products so that there is a semblance of stability for at least a year. The existing system of marketing products of the stand-alone refining companies will also continue, sources said.

The companies have acknowledged that only an united approach will protect each one's interests before they can stand on their own feet. "This exercise will be a learning experience and since risks are going to be shared, the oil PSUs concerned will be in a better frame of mind by the time the second and more important phase of deregulation comes into effect during 1999-2000," sources said.

IOC, with nearly 7,000 retail outlets, has a dominant market share of 55 per cent.Analysts say that though its share is more than 2.5 times that of BPCL or HPCL, the number of retail outlets are only about 1.5 times. This is due to IOC having a higher proportion of bulk/direct sales than BPCL or HPCL. This customer base, according to them, is likely to demand better terms from petro-product suppliers once the sector is deregulated.

The buyer bargaining power can only be exercised in early 2000 when the demand-supply will be closely matched. As analysts point out, compared to other oil majors, the proportion of retail outlets not owned by IOC is higher.

In the north, IOC is the sole owner of refineries where there is a substantial demand-supply gap. It is also the sole owner of the Kandla-Bhatinda pipeline through which the deficit in the north can be covered by transporting products from the west coast. This makes all other oil marketers dependent only on IOC to feed their distribution network in the north.

Though IOC does not have a refinery in the south, it has a steady arrangementwith Madras Refineries and hence there should be no problem sourcing products. IOC also has pipelines to transport products from the east to north and to distribute product within the north zone, the north-east zone and the west zone. It owns crude pipelines to supply crude to its non-coastal refineries. These pipelines bestow IOC with significant advantages in terms of cost savings, analysts say.