"The idea has emanated from the recent move by Indian Oil Corporation and Oil and Natural Gas Corporation to go in for an equity swap," sources said. In the background of the government's buyback programme, this thinking by the two navratnas makes sense as it would not only lead to asset creation but ensure that a major part of the disinvestment target of Rs 5,000 crore will be met.

Similarly, if the Centre were to sell out its stakes in MRL, CRL and IBP to BPCL, it would meet the twin objectives of creating an equitable alliance in the downstream sector as also help raise revenue to bridge fiscal deficit. At current market prices, BPCL'soutgo would be to the tune of Rs 1,500 crore for buying out government holding in the three companies. The estimate has been based on the six-month average of scrips of MRL (around Rs 45/share), CRL (Rs 190) and IBP (Rs 110).

For the record, the centre's stake in IBP is 59 per cent, around 52 per cent in MRL and 55 per cent in CRL. In BPCL, it holds 66 per cent which means alloting 3 per cent each to these companies would still ensure that its stake does not go below 51 per cent. Further, buying out 3 per cent would also mean that none of the three -- MRL, CRL and IBP -- will need to fork out an astronomical sum for their share in the much stronger BPCL.

Even with this stake, there will be a representation from each of these companies, whose identities will continue to exist, on the BPCL board of directors. It would also meet the petroleum ministry's stance that government stake in BPCL would not go below 51 per cent. "This is an ideal formula as there would be democratic functioning of the board andensure the survival of the PSUs," experts say.

The arrangement is the best bet in the interests of the oil sector which will be completely deregulated four years down the line. In such a scenario, stand-alone refining and marketing companies would be less vulnerable if they had a tieup with a partner who is formidable in both departments.

To elaborate, BPCL's greatest strength lies in marketing with an evenly spread retail network across the country. However, it only has one refinery in Mumbai though it plans to set up two more in Madhya Pradesh and Uttar Pradesh. Hence, BPCL is perfectly equipped to market products from both MRL and CRL and with IBP also in the picture, a marketing alliance would emerge which would be evenly positioned vis-a-vis Hindustan Petroleum Corporation and IOC.

The Sengupta Committee is not likely to suggest any changes for HPCL which, apart from its 4,000-and-odd outlets, is stronger than BPCL on the refining front. It has two facilities in Vizag and Mumbai totalling 10million tonnes (with a 3 million tonne expansion planned for Vizag) and is also the co-promoter of Mangalore Refinery and Petrochemicals (MRPL) whose capacity is being increased to 9 million tonnes towards the end of this year. The Punjab refinery, being planned by the oil PSU, will also have a capacity of 9 million tonnes.

IOC, of course, is the strongest with six refineries processing 25 million tonnes of crude. It has planned two more in Paradip (Orissa) and Nagapattinam, Tamil Nadu, apart from expanding capacities at its existing facilities. This will hike its overall capacity to over 50 million tonnes in the years to come. IOC's greatest plus, observers say, is its vice-like grip in the deficit north zone. It also has strong supporting infrastructure in its pipelines and over 7,000 retail outlets.

Eventually, a restructuring of the downstream sector on the lines of the Sengupta Committee's recommendations will benefit the customer in terms of both price and product accessibility. This apart, such amodel will effectively thwart any threat of control to stand alone refiners/marketers from multinational oil companies keen on getting a foothold in the country.