According to sources, the creation of a holding company will eventually pave the way for a merger between the two oil PSUs. The model is likely to be on the lines of the Steel Authority of India (SAIL) which is the main holding company and has different subsidiaries like Durgapur Steel Plant, Rourkela Steel Plant, Bhilai. The plan being conceived could involve transfer of government equity in HPCL (51 per cent) and BPCL (66 per cent) to the holding company. The entity will supervise functioning of the two navratnas which will actually end up being its subsidiaries. The board of the holding company will comprise representatives from both HPCL and BPCL.

"This is a sensible option as there will be relatively little governmentinterference in the functioning of the two oil companies. The board of the new entity will decide on the areas of mutual cooperation and largely ensure that the interests of BPCL and HPCL are protected post-deregulation," sources say.

Effectively, the combined strength of these two PSUs would translate into a market share of close to 40 per cent. And once government share in IBP passes on to BPCL, this will increase to about 45 per cent. The trio will be well positioned to take on the might of Indian Oil Corporation which would be even stronger after 2002 when it will cater to complete marketing of Reliance Petroleum's (RPL) products. With deregulation scheduled to happen barely three years down the line, the ministry believes that it makes sense for oil PSUs to consolidate instead of competing with each other.

The scenario that is likely to emerge in 2002 will see an alliance/merger of BPCL, HPCL, IBP and Cochin Refineries. This group will be directly pitchforked against the combined strength of IOC,RPL, Madras Refineries and Bongaigaon Refinery and Petrochemicals. Essar Oil has not been indicated in either list because it is still too early to say who the new owner of the project will be. The first group will have a stronger retail network but will be way behind in refining capacity. Eventually, the overall marketing infrastructure will cater to vending products from both groups through a system of swaps and product assistance agreements.

This is already happening in the case of BPCL and IOC as also between IBP and BPCL/IOC.

HPCL and BPCL, it may be recalled, have already decided to share their terminal facilities in Loni and Manmad. An expert team from the two navratnas is now examining the option of drawing up similar arrangements for other terminals across the country.

"There is little point investing in individual terminals when there is already one in place. Even though this belongs to a competitor, it makes more sense sharing a facility which will eventually pave the way for a strongrelationship," sources said.

HPCL's terminal is located along the company's Mumbai-Pune pipeline while that of BPCL is on the Mumbai-Manmad network. Both are large enough to permit sharing products and this will gradually extend to other regions, especially the north and south.

BPCL and HPCL are now looking at broadening this relationship to LPG bottling plants and pipelines where facilities could be shared or joint investments envisaged. Another area of cooperation which has been identified as top priority is information technology.

The expert team from the two companies has now started work on the possibilities of teaming up in a refinery and this for the moment seems a "remote possibility". HPCL is serious about getting on with its nine-million-tonne Bhatinda project though the issue of finalising a partner is still not complete. Likewise, BPCL already has two projects in Bina and Allahabad which it is keen on commissioning despite the inordinate delays that have occurred.

The PSUs are believed tobe of the view that it makes strategic sense to keep their interests confined to one project.

In the opinion of experts, this would have to be a tossup between Allahabad and Bhatinda which are both potential consumption zones. Assuming neither HPCL nor BPCL is able to locate a partner for these projects, they may consider joining hands for one of these. Increasingly, PSUs have realised that with deregulation around the corner, they would have to hold their own in a fiercely competitive market where the possibilities of a takeover are quite strong. Strong multinational companies, keen on getting a foothold in marketing, would logically view the vast retail outlets of HPCL and BPCL as ideal starting points for their business.

This significance of this threat was apparent when Shell and Saudi Aramco presented a proposal to the petroleum ministry which involved creation of a marketing company where 50 per cent of the equity would be held by one of the big three -- HPCL, BPCL or IOC -- and the balance sharedequally between Shell and Aramco. The catch here was that the PSU concerned would transfer all its retail product outlets to the new marketing company representing its equity contribution. The petroleum ministry shot down the proposal following strong protests from the oil companies.