The proposal is believed to be the brainchild of IBP top brass who are of the opinion that in a deregulated scenario, it makes sense for stand-alone refining companies to tie up with their counterparts in marketing. It is only this way that each could help protect the other's interests.

However, even while this logic cannot be defied on paper, there are certain limitations, especially, IBP's own marketing strengths. The company has a 5 per cent share in the retail trade, which is way behind the big three - Indian Oil Corporation (IOC) (55 per cent), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) with 20 per cent each.

It is precisely for this reason that experts have suggested that inlieu of the IBP proposal, it makes more sense to conceive of an alliance involving Madras Refineries/Indian Oil on one hand and Cochin Refineries/Bharat Petroleum on the other. Both the recommendations came from a committee headed by former Cochin Refineries chief, J Jayaraman, which was assigned the task of suggesting appropriate restructuring of Madras Refineries and Cochin Refineries.

Sources have also indicated that MRL is not too enthusiastic about the IBP plan and could be more inclined towards tying up with Indian Oil. This would leave the arena open for an alliance between CRL and BPCL which would leave IBP left with Bongaigaon Refinery, an option that makes little sense given that each can hardly help the other in their basic requirements of sourcing crude or marketing adquate products.

Bongaigaon Refinery's merger with Oil India was also considered by the petroleum ministry more than a year ago and a committee, headed by the company's former CMD Bijor Barua, studied its feasibility. The ministryis now of the opinion that this cannot be done, which leaves the entire process of restructuring the oil sector in a limbo.

Experts have another practical solution which, in their opinion, can work comfortably. Given that an MRL-IBP alliance is virtually out of question given the former's reluctance to do so, a tie-up between BPCL, CRL and IBP can be thought of, instead. This trio can also rope in Numaligarh Refinery, to be commissioned early next year, where IBP has a 19 per cent stake.

BPCL is the major stakeholder in the Rs 2,600-crore project with 32 per cent and observers believe the navratna will not have any objections conceiving of such an alliance. If this arrangement fructifies (BPCL, CRL, IBP and Numaligarh Refinery), it will result in an overall marketing share of close to 30 per cent, which would give the companies an even chance in a deregulated environment. By then, IOC and MRL will have planned their own alliance which could even lead to a merger.

If this leaves Bongaigaon Refinery inthe cold, there is really no option unless the government works out an assured supply of crude for the refinery. The Arthur D Little report on the Indian downstream sector had recommended that Bongaigaon Refinery's products be marketed by IBP while merging both MRL and CRL.

INSIGHT
Need to tie up with marketing companies

With a drop in demand, simple refining margins in the world have become negative. Refineries with catalytic converters and other secondary refining processes are earning $1.4- $1.5 per barrel. In a deregulated scenario, it is quite likely that in an economic downcycle, domestic stand-alone refineries may start getting negative refining margins or break-even margins from the present $3 to $3.5 per barrel.

Considering the low refining margins, the only way for stand-alone refineries to get assured cash flow is to join hands with marketing companies, where the margins are three to four times the refining margins. Moreover, India will soon become surplus in refinedproducts. This can mean lower throughput for stand-alone refineries unless they expedite the agreement with marketing companies. Whether they join hands with IBP, IOC or BPCL is immaterial because product exchange can be effectively used to offset the strengths of marketing companies in various regions.