Although the proposal looks great from Reliance Petroleum's point of view, one problem is how the refined products would be sold. The reports say that RPL products would be marketed by IOC and BPCL. The problem for RPL is that there would be a surplus in refined products in most of the regions in India. Seeing the surplus scenario, IOC has indicated that it would sell RPL products to the extent of the shortage in the market. This could result in the RPL facility being underutilised.

To overcome this bottleneck, RPL has proposed to set up a product pipeline traversing central and southern India. But for selling to retail customers this does not alter the situation in anymanner. Instead of asking IOC and other marketing companies to pick up products from the company godown, they would be asking them to pick them up from the tap off points in the pipelines. Now why should IOC or any other company sell Reliance products, even if they are cheaper ( because of lower transportation cost) at the expense of their own production?

Several analysts, however, hold a different view. They believe that possibly in future Reliance would tempt many retail outlets owners selling PSU refined product to switch to dealing in Reliance products. This would severely affect the profitability of all the three PSUs as the retail sales would offer the maximum margins in post liberalisation period.

In addition bulk users would be tempted to shift to Reliance. This is going to hurt IOC hard as 40 percent of their sales is to bulk customers.

So on the face of it the situation looks a win - win scenario for RPL as well as for customers. Simply because the pipeline is the cheapest and the most ecofriendly mode of transportation. While the energy consumed per tonne per km in pipeline mode is 50 btu to 135 btu , the consumption for railways is around 320 BTU and for roads as high as 1700 btu per tonne per km. So customers can expect to see their purchase prices decline.

But as the Sundararajan Committee report has pointed out, product pipelines are natural monopolies. With a product pipeline a company has the leverage to reduce the price in the range of 15-25 percent. In fact, with a pipeline a refinery can just reduce the price by 5 percent and still capture the bulk of the market. Hence it is important to treat product pipelines as utilities and make applicable the common carrier principle to all of them. This is the logic behind setting up Petronet. The tariff for the usage of pipeline may be fixed by a regulatory body. The committee suggests that OCC can become an appropriate regulatory body for fixing of tariff structures on product pipeline.

Based on the committee report, Petronet was formed,who are implementing around 4000 kms of additional product pipeline in various states for this purpose. The pipelines to be commissioned include Paradeep- Daitari, Daitari- Allahabad, Koyali- Ratlam, Ratlam - Kota. In addition BPCL is building a 320 kms pipeline for connecting Bina-Jhansi- Kanpur. RPL's proposed pipeline passes through these areas. The pipelines proposed by RPL would be duplicating the existing and the planned network in central and northern India.

Under such a scenario, if RPL decides to go ahead with the project it would put in jeopardy the entire planning behind the setting up of additional capacities and pipelines in India.

Further even if it decides to implement the project, the company should do it as a part of separate company, governed by a separate set of regulations which will ensure that other companies too will be able to use the utility. In countries such as UK, Argentina, Peru, and Spain deregulation has ensured that pipelines are separate from the refinery companies andthey generally earn returns based on cost plus some return formula. Even IOC shares its product pipeline with other marketing companies and gets a return based on cost plus formula.

Moreover even under the present cost plus formula the company investing in a pipeline gets an IRR of 15.6 percent on 4mmtpa -600 kms line over 22 years of life. This is the reason why RPL has decided to go ahead with investment in a pipeline, but, as mentioned earlier, it is very important that the rules and regulations governing such pipelines should be overseen by a regulatory authority.