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Raghuvir Srinivasan

AS the Indian Oil Corporation (IOC) and Reliance Petroleum Ltd (RPL) discuss the terms of the marketing agreement signed two years ago, it may be in order to focus on the core issue at stake now. What exactly is the core point of dispute between the two companies? A dash of history may be in order here.

Agreement in focus

IOC and RPL signed a marketing agreement in April 1999, one that was much talked about in oil industry circles as much for its terms as for its significance to the industry. RPL's is a stand-alone refinery, meaning that it does not have infrastructure to market its products. And marketing is the name of the game in the petroleum industry. An oil company is only as good as its marketing reach, dealing as it does with an essentially mass-market consumer product.

That margins in marketing are higher than in refining is no small matter too. Installing a marketing infrastructure is no small job, both in terms of investment and planning. Besides, when RPL conceived its refinery, private players were not permitted to enter the marketing of petro products. Thus, RPL had to choose one of the existing marketing companies, all in the public sector, to market its large output. It zeroed in on the biggest of them all, IOC, and signed the agreement, now in focus, to market its products using IOC's infrastructure.

The agreement was conceived in two parts - pre-deregulation and post-deregulation. In the pre-deregulation period, that is up to March 31, 2002, IOC would lift 50 per cent of RPL's output of the controlled products - petrol, diesel, LPG and kerosene. These would be marketed by IOC using its own network.

RPL planned to sign an agreement with Bharat Petroleum and Hindustan Petroleum to market the remaining 50 per cent of the output. That these two companies never got around to signing the deal is a point to be noted; but they certainly picked up RPL's products to the extent of their requirements in this period. For the post-deregulation period, that is from April 1, 2002, IOC and RPL planned to float a joint venture company, which would take over the marketing of the 50 per cent capacity that IOC was independently marketing till then.

Flies in the ointment

Now, RPL's plan ran into two glitches here. First, Bharat Petroleum and Hindustan Petroleum refused to sign their agreements with RPL, disputing the take-or-pay clause in it. As per this clause, these two companies had to reimburse RPL about Rs 750 per tonne if they failed take the assured quantity of products from RPL's refinery. IOC, incidentally, accepted this clause.

Second, the proposed joint venture between RPL and IOC failed to take off and one reason touted for this was that the Government failed to clear it. The reason for the crisis blowing up now is that we are approaching the March 31, 2002 deadline after which IOC is legally not bound to lift products from RPL's refinery and the joint venture that was supposed to have done this is nowhere in sight. This is the crux of the problem now.

Assuming that the two are unable to agree now (which sounds improbable given the stakes involved), RPL's products will have no marketing outlet from April 1, 2002. The company already has the responsibility of marketing the remaining 50 per cent of its output on its own; the last thing it would now want is the entire 100 per cent on its hands.

So what is the deal-making going on now? IOC is holding out for removal of the take-or-pay clause from the deal. The company has its own reasons for this. A lot has changed in the industry from the time the agreement was signed and now. Demand growth for major products such as diesel and kerosene is now in the negative terrain and IOC has a surplus capacity on its own.

It is inconceivable that it would enter into a take-or-pay deal with another refinery in this situation when it has no outlet for its own output. People in the know say that IOC is not averse to signing a deal with RPL post-April 1, 2002 if the latter is amenable to dropping the take-or-pay clause.

But RPL appears to be insisting on retaining it as otherwise its interests will be compromised. And that is where the rub lies. Top industry officials say that a via media may be worked out whereby the quantity under the take-or-pay clause will be significantly lowered and IOC will be persuaded to extend the deal for a limited time period. Of course, nothing will be more convenient than a postponement of the deregulation itself, which will automatically put off all these awkward issues.

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