To start with, the two oil majors will examine the issue of crude importswhere skills could be pooled together. "There is no point trying to competein this area and open the gates to competition. The better option is to goin for contractual obligations where the skills and expertise of one companycan be used to help the other," sources said.

Natural gas has also been identified as another potential area of jointcooperation. IOC and BPCL are already stakeholders in Petronet LNG, thejoint-venture company set up to build LNG infrastructure at strategiclocations. The Government is now planning to allow oil companies to enterthis activity directly as there is a dire need to increase LNG availabilityin the country. This is where BPCL and IOC plan to work jointly so thatthere would be savings in cost and no duplication of efforts.

The partnership could also be expanded to include investments in refiningand marketing. BPCL has reiterated that it would rather concentrate on itskey strengths of marketing but an alliance with IOC may see a foray intoother vital areas like exploration, power and petrochemicals.

IOC and BPCL have, incidentally, drawn up a unique product swap arrangementwhich will help them consolidate their market shares in the northern andsouthern regions of the country.

This will involve BPCL sourcing key decontrolled products -- furnace oil,naphtha, bitumen, low sulphur heavy stock and light diesel oil -- from IOC'sinland refineries in Koyali, Barauni, Mathura and Panipat and selling themin the north.

In turn, IOC will buy products from BPCL in the south (which in turn wouldhave sourced them from Madras Refineries with whom it recently entered intoa ten year marketing agreement) and sell them in the region. This would doaway with the need to import products at the coast and transport them to themarkets concerned. "It would translate into enormous savings in costs and,more importantly, help build a strong relationship between two oil giants,"sources said. BPCL has a weak base in the north and needs to move productsfrom the Kandla port in Gujarat which receives imports. This can stop onceit begins direct sourcing from IOC's refineries where a particular quantitycould be allocated to BPCL.

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

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

"With the process of deregulation already in motion, oil PSUs have realisedthat it is futile to spread risks where a joint approach is safer and morepractical," sources say. This becomes all the more imperative what withprivate sector refiners like Reliance Petroleum and Essar Oil planning hugecapacities.

The biggest advantage the PSUs have is their strong marketing network whichincludes retail outlets and pipelines, clearly a plus point for IOC. If theyconsolidate their strengths by working together, it would actually protectthem from possible takeovers by stronger refining companies both from hereand abroad.

With market-determined pricing due to happen three years down the line, oilPSUs are getting set for the challenges ahead by forging strategicalliances. IOC has already entered into an understanding with the Oil andNatural Gas Corporation to work in key petro-related activities. Theultimate objective of this relationship is to form a strong integrated oilcompany which can be at par with the best in the world.

Similarly, BPCL is working with Hindustan Petroleum Corporation to share andcreate infrastructure like terminals, depots and pipelines. A furtherconsolidation is due to take place once the Government decides to sell itsstake in stand-alone refining companies like MRL and CRL to strongercounterparts like IOC and BPCL. IBP, the marketing oil PSU, is tipped tomerge with BPCL while a portion of the Centre's holding in Engineers Indiamay be sold to IOC.