By. R. Sasankan

A year is a long time in business: many things can change so dramatically over that period that a business plan that once looked bright and exciting could quickly start to lose its allure. It is still too early to say this about the giant refinery that the Ratnagiri Refinery and Petrochemicals Ltd (RRPCL) proposed to build in the state of Maharashtra.

RRPCL is backed by three state-owned oil companies: Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd. In June last year, this entity signed a frame-work agreement with Saudi Aramco and Abu Dhabi National Oil Company to build a $ 44 billion project that was touted as the largest single location refinery complex in the world spread over 15,000 acres.

Since then, the Narendra Modi government has won a crushing mandate and one would have thought that this in itself would provide the spur to one of its showpiece projects. But suddenly, a pall of uncertainty seems to have clouded the 60 million tonne per annum refinery project where the costs have already ballooned to $ 70 billion.

Both Saudi Aramco and ADNOC, the two middle-eastern giants, which have together been assigned a 50 per cent stake in the refinery project, remain committed to it. The Modi government still considers it as a prestigious project. So, why is the mega refinery’s future looking uncertain?

Several circumstances seem conspiring to undermine the project. The anti-BJP front that has assumed power in the state of Maharashtra means that the state government – which is crucial to the success of the project – may not be as keen to push the buttons. There are growing fears that even it does not oppose the project overtly, the state government will in all probability drag its feet on land acquisition for the project. If there are any further delays, Aramco and ADNOC – which are not used to India’s culture of tardiness – may start to look at other investment options.

One attractive option already looms. The government, which has turned aggressive on its disinvestment program, has proposed a strategic sale of its 53.29 per cent stake in Bharat Petroleum Corporation Ltd (BPCL). That will be the first dampener for the mega refinery project. Either alone or with ADNOC, the Saudi giant is expected to bid for BPCL. In fact, this is what even the government seems to believe. If that happens and BPCL becomes an Aramco-controlled asset – the Saudi petrochemical giant may seriously re-examine its other investment options. Remember, Aramco’s initial interest in India, as articulated by its executives, was to invest in one of the existing refineries. It was a major strategic shift to invest in a mega refinery. While agreeing to pick up a 50 per cent stake in the mega refinery along with ADNOC, Aramco had made it absolutely clear that it was very much interested in India’s petroleum retailing. This would not be possible without a share in the country’s petroleum infrastructure, 90 per cent of which is controlled by the three state-owned oil marketing companies. The strategic stake sale in BPCL opens up a new opportunity to grab a major piece of India’s petroleum industry. BPCL has a roughly 38 million tonne refining capacity and a 25 per cent share in the retail marketing network. If Aramco succeeds in wresting BPCL, it could be tempted to reconsider the option of investing in the mega refinery in Maharashtra.

The mega refinery was originally conceived by Indian Oil Corporation (IOC) and it had hoped to keep a 50 per cent stake for itself. The rest was to be farmed out equally between BPCL and HPCL. IOC was not averse to roping in a foreign partner but was prepared to offer only a small stake. But the government torpedoed its plan. IOC is now a minor player with all the three Indian PSUs together holding a 50 per cent stake.

IOC has not really reconciled to the notion of playing second fiddle to anyone in a domestic project in which it participates. But there are limitations to its ambitions because it is a public sector unit (PSU). After Mukesh Ambani’s RIL, IOC is considered to be the most politically influential corporate in the country. It never got identified with any political party but has connections with all.

Since the cost of the proposed refinery has zoomed to $ 70 billion, there is a feeling in some circles that the capacity of the project should be pruned. Aramco has just floated an initial public offering at home and expects to raise over $25 billion through the sale of a 1.5 per cent stake this month. IOC will find it hard to live with the possibility that Aramco will call the shots at the mega refinery should it decide to invest in the project.

If Aramco gains control of BPCL, it will threaten IOC’s dominance in the Indian market because of Aramco’s financial clout. And if Aramco starts to dominate the affairs of the mega refinery as well, then IOC will find it excruciatingly painful. It will come as no surprise if IOC tries its hardest to ward off this threat. IOC is in charge of executing the mega refinery project. It may not be in any hurry to quicken work on the project because of all these troubling developments.

There is no urgency to create fresh capacity in the refinery business. If the domestic demand goes up in the near future, it might be better to stop exports and use all the available capacity in the country including that of Reliance Industries.

Aramco has negotiated an agreement to acquire a 20 per cent stake in RIL’s petroleum and petrochemical businesses which carries an enterprise value of $ 75 billion. There is no clarity yet on when Aramco will make the $ 15 billion equity infusion in RIL. Aramco has had extremely good relations with the RIL leadership. One might have thought that RIL would be put out by Aramco’s involvement in the mega refinery project along with state-owned oil companies and would do everything it possibly could to scuttle the project. But RIL may choose to wait for the project to collapse under the weight of its own contradictions. At no stage did RIL seriously believe that the mega refinery project would get off the ground.

At the same time, IOC cannot afford to let the project die. If Aramco changes its plans after acquiring BPCL, it may choose to go ahead with a truncated project size. IOC is keen to retain its No 1 slot in the country and the mega refinery will survive if it fits in with this plan.