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Raghuvir Srinivasan

THREE decades after the last of the oil multinational was forced to leave the country, the doors are once again being thrown open to foreign investment in the refining sector.

Discussions are on for Saudi Arabia's Aramco, which holds a quarter of global oil reserves and produces 12 per cent of the total world output, to invest in the Vizag refinery of Hindustan Petroleum and the planned Paradeep refinery of Indian Oil.

In return, the two Indian companies may get an equity stake in Aramco's large refinery coming up at Yanbu on the Red Sea coast. This refinery is focused on export of products to the West, primarily North America. It is early days yet but what are the implications of the deal? What's in it for the two countries? And why the Vizag refinery and Paradeep project?

Closer to market of future

Aramco was one of the bidders when Hindustan Petroleum was put up for disinvestment by the previous government. Its interest in Hindustan Petroleum then was for two reasons — first, the large presence that it has in the lucrative marketing business, and second, the location of its refinery in Vizag on the east coast.

The deal being discussed now does not include the marketing network of Hindustan Petroleum but is still significant for Aramco, which aims to be a major supplier of refined products and not just crude oil, as has been the case till now. The Yanbu refinery, which is focused on exports to the West, is a part of this strategy.

The Vizag refinery will be a gateway to service the growing markets of East and South-East Asia apart from India itself. The location of the refinery is ideal and will bring Aramco very close to the energy market of the next few decades.

At a smaller level, Aramco will be assured of a secure buyer for its crude oil though the volumes would be minor vis-à-vis its massive production.

Aramco put through a similar deal last year when it picked up equity in a Japanese refiner, Showa Shell. Indeed, during a visit to India last January, Mr Abdallah S. Jum'ah, President and Chief Executive Officer, Saudi Aramco, remarked that India should consider Saudi Arabia its "backyard storage" for oil and expressed his keenness to invest in the refining segment in the country.

Now, what is in it for India? The deal would secure a part of the oil needs of the country. Having invested in the refinery, it would be in Aramco's interests to maintain crude oil supply and at optimal costs. The investment deal being worked out now would presumably include clauses to dedicate a given capacity of the refinery to the Indian market.

Implications for HPCL

What are the other implications? One of the most important is that Hindustan Petroleum, as we now know it, would cease to exist once the deal is put through. The Vizag refinery will probably be hived off into a separate company, where Aramco will be offered the equity stake.

This will mean about 7.5 million tonnes of capacity going out of Hindustan Petroleum, leaving it with just 6.5 million tonnes at its relatively old Mumbai refinery besides, of course, the extensive marketing network.

This would, however, fit in well with the larger game-plan of the Petroleum Minister, Mr Mani Shankar Aiyar, to restructure the oil industry to leave just one or two large integrated companies. The expert committee constituted for this purpose is expected to deliver its report in a month.

Hindustan Petroleum could end up in a merger with one or all of the other government oil companies. This has implications for shareholders, who need to watch the developments closely.

Second, there is bound to be a scaling-up of the Vizag refinery's capacity as at current levels it would not serve Aramco's objectives. This has other implications, such as land availability, environmental issues and, importantly, capacity of the crude import terminal. Any capacity increase has to come with a scale-up of the crude oil import facilities at the Vizag port.

Finally, the most important implication of the whole deal — one that could also be Mr Aiyar's biggest challenge: The deal is nothing but divestment through the back door. Here is a government company selling a significant part of its assets to a private player, and a foreign one at that.

Given the storm that the proposed privatisation of Hindustan Petroleum created a couple of years ago, it remains to be seen if this deal will be allowed to go through by those opposed to disinvestment.

Mr Mani Shankar Aiyar may need to summon all the ingenuity and persuasive skills at his command to pilot the deal through, both in convincing the domestic constituency and also Aramco, if it comes down to the latter being offered only a minority stake. How well this aspect is handled could well decide the fate of the first multinational investment in the refining sector in three decades.

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