The equity component of the local partner would be calculated based on the value of their retail product outlets which, in turn, would be transferred to the joint venture. The proposal, however, met with stiff resistance from the three oil majors, which were firm that they would not part with their prized assets at any cost.

Sources said Shell and Aramco were keen on having either Bharat Petroleum or Hindustan Petroleum as their partner, given that they had considered refinery projects with each of them. Aramco was the original choice for Hindustan Petroleum's nine-million-tonne Punjab refinery, andShell for Bharat Petroleum's 7.5-million-tonne Uttar Pradesh project. While Hindustan Petroleum has now entered into a memorandum of understanding with Exxon Corporation of the US, Bharat Petroleum is yet to identify an alternative partner for its refinery.

It is clear that neither Shell nor Aramco is keen on investing in a refinery, where the returns are slow in coming and margins relatively unattractive. It is in marketing petro-products where the real money lies, which explains why the two multinational oil companies are interested in such a venture.

In fact, unconfirmed reports said during the time Shell and Aramco were in talks with Bharat Petroleum and Hindustan Petroleum for their refinery plans, they had discussed transferring some of their company-owned, company-operated (Coco) retail sites to new joint ventures. However, the two oil firms reportedly disagreed, which was believed to be among the many reasons why the refinery plans were shelved.

Indian Oil has around 7,500 retail outlets,followed by Hindustan Petroleum and Bharat Petroleum with around 4,500 each. The fourth on the list is the stand-alone marketing company, IBP, which has 1,500-odd outlets. However, in marketing, Bharat Petroleum has the most balanced network, which would have swayed Shell and Aramco to consider the company favourably.

Even though, the state-run oil firms were categorical that they would not even consider transferring their assets to the downstream venture, sources reiterate that in the long run, this sense of proprietorship cannot continue. There have been reports of Kuwait Petroleum Corporation insisting on its own marketing rights, before it invests in the east coast refinery with Indian Oil. Similarly, Exxon is bound to demand exclusive marketing rights for its joint venture with Hindustan Petroleum for the Punjab project.

Of late, most refiners have been wooing the Oil and Natural Gas Corporation to pick up a stake in their refinery projects. While the corporation is keen on diversifying into thedownstream sector, it has reiterated that an investment in refining will have to be accompanied by a fair share of marketing petro-products. Till that happens, the corporation may not consider it worthwhile to put its money in a refinery.

The Nirmal Singh committee report on oil reforms has said that for entering marketing of petro-products, a company will either have to invest Rs 2,000 crore in a refinery or produce three million tonnes of oil in an upstream venture. This will, in effect, give Shell an opening to get into marketing, as it is keen on working on deep-water blocks which are estimated to yield substantial oil.

For the moment, the state-run oil units are going all out to ensure that their retail outlets, especially the "B" sites are not poached by other companies, as this has become the most important threat in a deregulated environment. The importance of marketing has also taken a new dimension, with the petroleum ministry giving stand-alone refiners like Madras Refineries and CochinRefineries the go-ahead to set up their own retail outlets on the highways.

Eventually, however, the government is likely to implement the more practical option of forging alliances between sole refiners with strong marketing counterparts. Moves are believed to be already afoot with a tieup envisaged between Madras Refineries and Indian Oil and between Cochin Refineries and Bharat Petroleum. It is likely that IBP will be a part of one of these alliances.