"The petroleum ministry believes that BPCL could defer this investment after the Ninth Plan and instead buy out the government's stakes in MRL and CRL first," top sources said. Apart from this, the centre would also actively pursue selling its holding in IBP, the stand-alone marketing oil company, to BPCL, they added.

The thinking in the ministry is that it makes little sense for any oil PSU to consider investment in a greenfield project at this stage. Returns on refining continue to remain low and this has been a major factor in discouraging international companies fromparticipating in joint venture refinery projects in India. The latest to withdraw is Exxon Corporation of the US which, according to recent reports, has announced its intention to drop out of a refinery with Hindustan Petroleum Corporation in Bhatinda, Punjab.

Prior to this, Shell had also withdrawn from a project planned with BPCL in Sultanpur, Uttar Pradesh. Likewise, Saudi Aramco was the original partner for HPCL's Bhatinda plan but decided to withdraw and team up with Shell instead for a unique downstream venture. This project, however, has not been cleared by the petroleum ministry.

"The message coming in is loud and clear. Big names in the world oil business are keen on getting a foothold in marketing petro-products and will not put their money in refining," sources said. Though Oman Oil is still keen on the Bina project, the ministry believes that it makes sense for BPCL to consider this massive investment when there is a change in fortunes in the future.

Quite logically, therefore, withmarket-determined pricing mechanism (MDPM) due to happen in the oil sector three years from now, the ministry is keen on ensuring the interests of stand-alone refiners as top priority. It has asked the Nitish Sengupta committee to line out a series of recommendations for the downstream sector which would largely involve alliances and mergers with stronger refining/marketing PSUs.

Hence, as regards BPCL, the ministry is categoric that the navratna is better off enhancing its refining capacity (BPCL has only one refinery in Mumbai with a capacity of six million tonnes) through alliances with stand-alone refiners for the moment. As and when the situation improves, the PSU could then think of greenfield projects like Bina and Uttar Pradesh after the ninth plan, sources say.

The best tradeoff for the Government is that it can sell its stakes in these three companies -- MRL, CRL and IBP -- to BPCL and garner valuable revenue in the process. It could, probably, consider the same exit route in other PSUs like OilIndia, Engineers India and Bongaigaon Refinery and Petrochemicals. The next stage would be for the Government planning a privatisation agenda for the stronger oil companies like IOC, BPCL, HPCL and ONGC.

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 the fiscal deficit. At current market prices, BPCL's outgo would be to the tune of around Rs 1,500 crore for buying out Government holding in the three companies. The estimate has been based on the six-month average of the 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 that the PSU can allot 3 per cent each of Government holding (which will still be over 51 per cent) to these companies as a practical crossholding arrangement. Further, buyingout 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 and ensure 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.