The five-year freeze on capacity will give Indian Oil time to upgrade its own refining capacities at Mathura and Barauni and stabilise the output of its old refineries at Digboi and Guwahati. The agreement, which has an enabling provision for setting up joint venture marketing companies subsequently, gives the national oil company an assured access to petroleum products at a time when its refining capacity will not keep pace with its market share, Indian Oil chairman MA Pathan said.

Indian Oil now controls 55 per cent of the oil market, but has a refining capacity of 41 per cent. The market leader refines 27 million tonnes of petroleum products and sells 45 million tonnes.

By the year 2004, when the demand for petroleum products will increase to 115 million tonnes from 80 milliontonnes at present, Indian Oil's refining capacity will be barely 31 per cent of the total capacity available in the country. To preserve its market share, the company will have to tie up supplies in advance.

Pathan vehemently denied any `political pressure' to sign the marketing agreements with Reliance and Essar and said all the conditions in the pact had an element of quid pro quo. Indian Oil had imposed a freeze on the capacity of the private sector refineries and accepted a condition that it would not import petroleum products, if they were available within the country.

"Indian Oil will not import in any case, since Reliance and Essar are offering a take or pay arrangement," company director (human resources and business development) Subir Raha said. Domestic supplies will ensure value addition within the country, he added.

Speaking to reporters at an informal gathering on Wednesday, Pathan and Raha pointed out that the take-or-pay condition, which entails a penalty of Rs 700 per tonne, wasreciprocal. Indian Oil will pay a penalty for not lifting supplies and the refineries will pay a penalty if they fail to supply products.

Indian Oil has agreed to lift 52 per cent of the motor spirit (MS), high speed diesel (HSD) liquefied petroleum gas (LPG), superior kerosene oil (SKO) and aviation turbine fuel (ATF) offered by Reliance Petroleum and Essar Oil at international rates. The two private sector refinery owners had together offered 25 million tonnes of the five products, which still come within the administered price mechanism (APM).

Reliance Petroleum, which will need eight million tonne of petroleum products for its petrochemical units, had offered 16 million tonnes of MS, SKO, ATF, LPG and HSD. Essar Oil had offered nine million tonnes of petroleum products.

Indian Oil is committed to market half the products offered, or 13.5 million tonne of MS, ATF, LPG, HSD and SKO via a 10-year marketing pact and the rest through joint venture companies. It plans to set up two joint ventures withReliance Petroleum, one for the five `controlled products' and another one for marketing naphtha.

Naphtha, of which there is a surfeit in the country, will be in short-supply once all the liquid-fuel consuming power plants go on stream. Indian Oil plans to form two similar joint ventures with Essar Oil, one for marketing the remaining 4.5 million tonnes of its MS, ATF, LPG, HSD and SKO and the second one for marketing fuel oil and naphtha.

The joint venture proposals will have to be approved by the Cabinet Committee on Economic Affairs (CCEA). The joint ventures will come into effect in 2002, the year in which the administered price mechanism (APM) is scheduled to be dismantled.

The enabling clause for the joint ventures was built into the marketing agreement to ensure that Indian Oil did not want for products at a time when the Oil Coordination Committee will no longer determine marketing rights.