"KPC has been dilly-dallying for months now and IOC is categorical that it has the financial muscle to commission the project on its own," sources said. The board has already cleared an initial investment of Rs 750 crore for the refinery and is confident that the nine-million-tonne facility will be operational by end-2002.

IOC will now write to the ministry of petroleum and natural gas for approval as the east coast refinery was originally cleared by the cabinet more than five years ago as a 26:26 joint venture with KPC. The other two projects in this category were the central India refinery (Bharat Petroleum Corporation with Oman Oil Company) and the now shelved west coast project, a 26:26 venture of Hindustan Petroleum Corporation andOman Oil.

The petroleum ministry is not expected to object to IOC's request to go it alone as the country desperately needs more refining capacity to be able to meet the growing demand for petro-products in the future. The fact also remains that the board decision has the support of the additional navratna directors who have been appointed directly by the Centre.

Though KPC has not officially indicated its intention to withdraw from the Paradip project, it is clear that future discussions on its role will be on IOC's terms. At one point, KPC had indicated that it would bring in another partner for the project to which IOC said that it could exercise a similar option. The Fortune 500 company had also offered KPC the right to market the products of the refinery wholly or partially through a new joint venture company but even this did not help expedite matters.

The IOC offer was made keeping in mind that all multinational oil companies are keen on getting a foothold in marketing first before investing inrefineries. This explains why Shell and Saudi Aramco had conceived of a proposal to start a marketing venture where an oil PSU would transfer its retail outlets to the new company.

Reports have incidentally been doing the rounds that KPC is keen on picking up a stake in Mangalore Refinery and Petrochemicals (MRPL) promoted by Hindustan Petroleum Corporation and the AV Birla group of companies. A host of global oil majors have expressed interest in participating in the nine million tonne project as a third partner and experts say that it would make sense for KPC to opt for a functional refinery like MRPL instead of investing money in a greenfield plan.

The grapevine has it that other oil companies like Petronas of Malaysia and Marubeni of Japan are ready to pitch in as alternatives to KPC, though this could not be confirmed from IOC officials.

The Oil and Natural Gas Corporation is also open to the idea of picking a stake in the project and it is now up to the ministry of petroleum and natural gas togive its final approval. IOC and ONGC, it may be recalled, have decided to work in a series of petro-related activities, both here and abroad, which include exploration and production, refining and marketing, petrochemicals and power. The objective of this alliance is to work towards becoming a strong integrated oil company which can hold its own in the market vis-a-vis strong international counterparts.

The petroleum ministry is of the view that ONGC should concentrate on its key strengths of exploration and production before investing in other downstream areas like refining. The corporation, in its turn, reiterates that it is imperative to consider projects like the east coast refinery at this stage so that it can learn the basics in marketing of petro-products. If ONGC finally takes a stake in the Paradip refinery, it will keep its equity component confined to 24 per cent so that the venture remains a non-government company.

INSIGHT
No need for equity dilution

With more than Rs 3,000crore generated from operations itself, IOC should not find it difficult to fund the entire project from internal accurals without going for equity dilution. But investment decisions should not be based on cash generation only. Returns on capital employed are equally important.

The expected commissioning of private and PSU refineries would make India a surplus in refined products by year 2002. In addition duties on refined projects is surely going to come down, which will bring down product prices in India to the international levels. This will depress refining margins in India, especially of new projects who would have an extra burdern of capital cost.

Possibly higher capital outlay in pipeline and marketing infrastructure may yield higher returns than the standalone refinery projects.

Percy Dubash