"BPCL is categoric that it will go ahead with the refinery even if Shell opts out," sources said.

Shell's chances of participating in the plan "could be safely ruled out" as it has already indicated that it will be tying up with Saudi Aramco instead in a 25:25 downstream venture. The move indicates that Shell will confine itself to this project and not risk venturing into another one.

The 6.75-million-tonne UP refinery is scheduled to be commissioned near Allahabad after 2002. It will also have a 500mw power plant, and recent estimates indicate the total project cost to be around Rs 7,000 crore.

If the proposed tie-up with ONGC materialises, it will mark the upstream major's first serious foray into the refinery sector. ONGC will also be a co-promoter forthe project, possibly with a 26 per cent stake, and this partnership will be one of its kind as it will be the first-ever alliance between two top players in refining and exploration.

While it is still not known if the two have begun discussions on the tie-up, observers believe it would be to their advantage. ONGC has, over the last two years, made it known that it is keen on diversifying. This becomes especially important in a deregulated scene where it would be competing with some big names in the world exploration business.

ONGC is also keen on a foray into power and the UP refinery would offer ample revenue potential. The corporation has also entered into a memorandum of understanding with the National Thermal Power Corporation and is believed to be exploring avenues for its entry into power.

Experts also indicate that an entry into the downstream sector would give ONGC the much-needed expertise in marketing and put it on a par with other international oil companies who "are complete in their fieldsof specialisation, right from exploration to marketing."

Being a co-promoter of a refinery would also ensure that ONGC's own production of liquefied petroleum gas (LPG) would find its way into retail outlets.

To BPCL, the tie-up with ONGC will, most importantly, guarantees availability of crude from the country's largest exploration company. An equal partner would bring in initial capital for the refinery, thereby reducing BPCL's financial burden.

In the process, the company would also get an opportunity to learn the ropes in exploration and production, an activity it has consciously stayed away from.

The UP refinery is a vital component of BPCL's future plans and will be commissioned despite news of Shell having second thoughts on the project. The crude pipeline from Vadinar to Bina, linking BPCL's other refinery with the Oman Oil Company, will now be extended to Allahabad where the project will be located. Once it is commissioned along with the Bina refinery, BPCL's total refining capacity will bearound 20 million tonnes.

Interestingly, ONGC is still open to the idea of picking a stake in the Bina project where the other co-promoter with BPCL is the Oman Oil Company. This will, however, be a nominal 10-15 per cent and the idea is to give ONGC an "initial foothold" in downstream activities, unlike the UP project where it will be a full-fledged partner, sharing the profits and risks equally.

Around two years ago, ONGC had plans to pick an equal stake of around 12 per cent in both the UP and Bina projects as part of its endeavour to get into the downstream sector. It was also tipped to pick up 10 per cent in the Numaligarh refinery but finally boiled down its choice to Bina. ONGC and BPCL had also decided to participate in a Rs 2,500-crore paraxylene project in Hazira where the two would jointly hold 49 per cent of the equity. This has, however, been put on hold owing to the high project cost and falling prices of paraxylene the world over.

Infrastructure status for pipelines likely

Thebudget is expected to make a series of important announcements for the petroleum sector largely keeping in line with the Nirmal Singh committee recommendations. Also, given the growing importance of pipelines as a means of transport for the future, the finance minister is likely to accord it infrastructure status.

Private sector refineries may also be allowed to market their products freely and this will be a shot in the arm for players like Essar Oil and Reliance Petroleum whose capacities are due to be commissioned towards the end of 1999.

The reduction of import duty on crude will mean that the oil pool will be relieved of this burden which it has been bearing since April 1 this year. Likewise, imposition of a 5 per cent duty on naphtha, as recommended by the Nirmal Singh committee, would not be the best of news to the petrochemicals industry.

Infrastructure status for pipelines would mean satiating a long-felt demand and, in the present context of deregulation, is a significant development. Thejoint venture pipelines company, Petronet India, can now embark on its extensive network with greater confidence as availability of funds will not be a problem.

Nearly 50 per cent of Petronet India's equity is held by IOC, BPCL and HPCL, and 20 per cent will be picked up equally by IL&FS and ICICI. Others like IDFC, UTI and IDBI will now be eager to participate in the company's equity.

Petronet India has already got the go-ahead for three projects - Jamnagar to Kandla, Mangalore to Bangalore and Kochi to Karur - where the total investment would be around Rs 1,200 crore. Other networks have also been planned, like Chennai to Madurai via Tiruchi and Bina to Kanpur via Jhansi, which would require similar substantial investments.

Funding will, however, cease to be a problem once the budget announces the new status for pipelines. The biggest question remains - what would free marketing mean to the private refiners? They may not be able to kick-off the process immediately after commissioning their refineriesand would have to depend on stronger PSUs for a while. It is after this period that roles could be reversed and the PSUs will need to worry about retaining their own retail outlets.

INSIGHT

A win-win tie-up

For ONGC to enter into a tieup with BPCL for a downstream sector project makes much sense as it will not only find a ready buyer for its crude oil but also take one step towards being an integrated player. Further, in a deregulated environment, it will have access to the retail market in LPG through the BPCL network. As far as BPCL is concerned, the tieup will basically bring in funds in the form of equity participation. Shell's reason for dilly-dalling from the beginning has been that it is unwilling to commit funds unless marketing of products, specially middle and light distillates, is decontrolled. Further, the company would have had a 26 per cent stake, making it a minority shareholder, with the remaining portion being held by BPCL (26 per cent) and financial institutions and thepublic (48 per cent). This could have been another deterrent. However, with its 25:25 venture with Aramco, the two multinationals will be in a better position to dictate terms.