By R. Sasankan
COVID-19 has upended the global economy which is now at grave risk of
sliding into a deep recession. The upshot of this sudden, black
swan-like event is that government and corporations have found to their
dismay that several plans which were close to fruition have unravelled
very quickly. The brunt of the crisis is being faced within the global
oil industry where the situation has been complicated by the cat fight
between Russia and Saudi Arabia over crude oil production cuts,
deepening worries about the fortunes of a once-robust industry.
India, which has been wrestling with a slowing economy and growing
trouble with the management of its fiscal deficit, had drawn up big
plans to sell its stake in state-owned companies in order to put a lid
on its budgetary mess. The selloff of its stake in a prized asset like
Bharat Petroleum Corporation Ltd (BPCL) was central to its strategy to
raise big bucks and re-order its finances. That plan has now been shot
to bits.
BPCL is the second largest public sector oil marketing company. When the
Union cabinet decided in the last week of November 2019 to sell the
government’s 52 per cent stake, it had looked like a fairly easy option
and the government was confident that it would be able to wrap up the
deal quickly. In fact, finance minister Nirmala Sitharaman had said at a
press conference at that time that the government expected to privatise
BPCL by March 31 – allowing it to book the receipts before the fiscal
year ran out.
The government was reasonably sure that the first real privatisation of a
public sector oil company – it had after all barred state-owned
entities from bidding for this asset – would command a very high price.
It had good reason to be so confident. Several global oil giants,
notably Rosneft of Russia and Aramco of Saudi Arabia, had been circling
around to swoop down on Indian oil assets and BPCL clearly offered the
best prospect for a spectacular entry into India’s tightly-controlled
petroleum and lubes market.
The timing of the decision to sell the stake in BPCL was dictated by the
urgency to bridge the fiscal deficit which was threatening go wide of
the mark. But a lot of issues still had to be resolved.
Numaligarh Refinery, which is a BPCL subsidiary , could not be sold as
it had been created as part of the Assam accord under which the
government had committed to retain its stake. The plan to carve up other
assets before the selloff meant that the government had to take care of
its interests in a BPCL subsidiary in which a foreign partner was a
partner.
But even before the COVID-19 episode assumed such a threatening
dimension, the government realised that the market conditions were no
longer favourable. So, the plan to conclude the sale before the close of
fiscal 2019-20 had to be quietly abandoned. But the government remained
upbeat: it resolved to go ahead with the sale and sought Expressions of
Interest (EoI) from potential bidders. On March 31, the deadline for
the submission of EoIs was extended to June 13 in view of the
uncertainty created by COVID-19.
The decision to extend the bidding deadline for BPCL has caught the oil
industry by surprise. The mavens believe that the government should have
shelved the selloff plans indefinitely. The world oil industry has
never faced a situation like this before. Moreover, the oil market is
facing a glut and prices have plunged to dramatic lows – and there is no
uncertainty that they will rise in the near term. The fortunes of the
oil industry are closely linked to global crude prices and these have to
stabilise if the government is to have a chance of extracting a decent
price for the BPCL stake. A distress sale of this stake could become a
huge embarrassment for the government – and it could be politically
damaging.
Prime Minister Narendra Modi and Petroleum Minister Dharmendra Pradhan
had a perfect rationale when they decided to privatise BPCL. India’s
petroleum sector lacked competition. Even the entry of private players
such as Reliance Industries Ltd, Essar Oil (now Nayara) and Shell did
not improve the lot of the consumers. Therefore, they were keen to
persuade one of the big oil giants to acquire BPCL.
Companies such as Saudi Aramco and Rosneft have been keen to enter
India’s retail market. They would not be able to make any dent unless
they were able to acquire sizable marketing infrastructure – and that
has been monopolised by the three state-owned oil marketing companies.
They could, however, gain some heft if they acquired BPCL which has a 15
per cent share of the country’s total refining capacity of 249.4
million tonne per annum (MTPA) and 15,177 retail outlets spread across
the country. BPCL has the reputation of being an efficiently-run company
and originally belonged to the Shell group.
At one stage, Aramco was extremely keen to enter India’s retail market
and made its intention very clear to the Indian authorities. Rosneft of
Russia was also being goaded by Vladimir Putin to home in on India. The
coronavirus scare has put paid to everyone’s plans. Aramco, for
instance, has already announced its decision to tighten capital
expenditure in 2020.
Is it advisable for the Indian government to go ahead with privatisation
of BPCL in the prevailing market situation? Experts expect the
government to defer plans at least till the end of 2020. “BPCL should be
kept on the back burner for some time. Even a rich company like Aramco
with deep pockets will not have flexibility to invest in new ventures,”
said oil expert Dr Bhamy Shenoy.
The prudent thing would be to halt the process of seeking EoIs. The
entire issue can be re-examined in late 2021 or 2022. By that time, a
clear picture may emerge about the direction and the fortunes of the oil
industry.
Let us acknowledge the fact that currently the oil sector is in the
doldrums. It cannot come out of it in the near future. Oil price is not
the only issue; demand has been going down steadily. President Trump,
desperate as he is to bail out the domestic shale industry, has been
pleading with both Vladimir Putin and Saudi crown prince Mohammed bin
Salman to restore price stability. The demon unleashed by COVID-19
cannot be controlled just now. Finance minister Nirmala Sitharaman needs
to realise the gravity of the situation.
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