An expert team from the two navratnas is drawing up a plan which will involve BPCL sourcing the key decontrolled products -- furnace oil, naphtha, bitumen, low sulphur heavy stock and light diesel oil -- from IOC's inland refineries in Koyali, Barauni, Mathura and Panipat and selling them in the northern region.

In turn, IOC will buy products from BPCL in the south (which, in turn, will have sourced the products from Madras Refineries with whom it recently entered into a 10-year marketing agreement) and sell them in the region.This will do away with the need to import products at the coast and transport them to the markets concerned.

"It will translate into enormous savings in costs and, more importantly, help build a strong relationship between two oilgiants," sources said. BPCL has a weak base in the north and needs to move products from the Kandla port in Gujarat which receives imports. This can stop once it begins direct sourcing from IOC's refineries where a particular quantity can be allocated to BPCL.

Similarly, in the case of IOC, it will be to its advantage to buy products in the south from BPCL which will have enough to spare after its marketing tie-up with MRL. IOC is keen on building up a stronger foundation in the south and is already working on this through a marketing pact with Cochin Refineries (CRL) apart from planning a nine million tonne refinery in Nagapattinam.

The products of CRL are just about enough for the Kerala region and parts of Tamil Nadu while the surplus from MRL accruing to BPCL could be given to IOC. The fact also remains that IOC has the infrastructure in place to dispose of products from BPCL-MRL in Tamil Nadu and will effectively stand to benefit from this arrangement.

"With the process of deregulation already inmotion, oil PSUs have realised that it is futile to spread risks where a joint approach is safer and more practical," sources say. This becomes all the more imperative what with private sector refiners like Reliance Petroleum and Essar Oil planning huge capacities.

The biggest advantage the PSUs have is their strong marketing network which includes retail outlets and pipelines, clearly a plus point for IOC. If they consolidate their strengths by working together, it will actually them from possible takeovers by stronger refining companies both from here and abroad.

This threat turned out be real more than a year ago when Shell and Saudi Aramco presented a proposal to the petroleum ministry which involved a virtual buyout of the product outlets of one of the big three-IOC, BPCL or HPCL.The valuation of these assets will constitute a 50 per cent equity contribution of the PSU concerned which will be contributed equally by Shell and Aramco with 25 per cent each.

The oil companies objected to the plan andwere categoric that there was no way they would part with their prized assets. HPCL, however, was ready to give the proposal a second look but by then, the petroleum ministry decided to put it on the backburner though there have been unconfirmed reports that it could be revived in the months to come.

As far as forging alliances is concerned, the oil PSUs have kicked off the exercise in right earnest. BPCL has already signed a product-assistance pact with IBP, the stand-alone marketeer and has a marketing agreement with MRL in place. Talks are also on between HPCL and BPCL to work in some key operational areas.

IOC, in the meantime, is close to finalising a product assistance deal with IBP and already markets the products of CRL and Bongaigaon Refinery and Petrochemicals.

However, its most significant agreement has been the one with the Oil and Natural Gas Corporation where the two navratnas will work in petro-related activities like exploration and production, refining and marketing, petrochemicals andpower.

INSIGHT

Preparing for decontrol

Sourcing of products from competitors has been an accepted practice as far as controlled products are concerned. However, the recent arrangement of sourcing decontrolled products highlights the point that PSUs are preparing themselves for the post-decontrol era. Both IOC and BPCL will be capitalising on each other's marketing and distribution strengths. The main advantage of the pact will be that the two PSUs will benefit from cost savings in terms of transportation and inventory control.

-- Shishir Asthana