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Press Release [FREE Access]
Petro Intelligence » BPCL Selloff: ‘Multiple Bids’ May Mask Strategic Options

By R. Sasankan

The Narendra Modi government is maintaining a studied silence on the selloff of the 52.98 per cent stake in Bharat Petroleum Corporation Ltd (BPCL), the country's second largest oil marketing company. From all accounts, it seems that the government has secured at least three bids for BPCL: two of them from private equity companies and the third from Anil Agarwal-controlled Vedanta, which owns and operates India’s largest onshore oil field at Barmer district in the state of Rajasthan. The deadline for the BPCL bids was extended four times and it would appear that the Covid-19 pandemic has sparked a situation where none of the global oil and gas giants have stumped up offers.

So, why is the government unfazed by the lack of interest from the big boys in the business?

That is an intriguing question to which there are no easy answers. An element of speculation is inevitable in order to make sense out of a highly confusing situation. My hunch is that an oil major can still come in. And who can rule out the possibility that either of the two private equity firms, or even both, may be fronting for one of the oil majors?

When the Modi government declared its intention to privatise BPCL, the compelling argument was that it wanted to inject badly needed competition into India’s petroleum retail market which is dominated by the PSUs. Petroleum minister Dharmendra Pradhan had remarked at a press conference that the government preferred to sell its stake to an international oil major.

The decision to privatise BPCL was taken in November 2019, long before the outbreak of the pandemic Covid-19 and the government had naturally expected a good response from oil companies. The decision came close on the heels of Saudi Aramco’s announcement that it was keen to enter India’s retail petroleum market.

A year before that the Saudi oil giant had quietly commissioned a study on India’s retail market. India’s relations with Saudi Arabia were clearly being re-set and heading in a new direction. Saudi Aramco had already signed a MoU with the IOC-led consortium which had proposed to establish a 60 MMTPA refinery on the west coast in the state of Maharashtra. The decision to privatise BPCL was, therefore, seen in the industry circles as a move to accommodate Saudi Aramco.

The pandemic undermined many oil and gas projects the world over and all oil companies including majors such as Aramco, Exxon, Shell, BP and Rosneft saw their balance sheets badly gouged with the sharp fall in crude oil prices.

Neither Aramco nor Russia’s Rosneft, which were perceived as front runners for BPCL, has so far said anything about their dwindling interest in BPCL. They did not submit any Expression of Interest (EoI) when the extended deadline expired in November. Obviously, Covid-19 had wrecked their plans.

The government has been forced to put on a brave face after BPCL -- the cornerstone of the government's disinvestment programme -- failed to attract high-quality suitors. This raises a question: can the government afford to sell this precious asset to a private equity firm which could dismantle it and sell the parts to maximise its profits? Such a prospect would severely undermine the government's original intention of injecting competition in the market through the BPCL selloff.

BPCL has several assets: two refineries, 17,000 retail outlets, pipelines, tankages, stakes in the giant CGD company, IGL and Petronet LNG Ltd, upstream E&P assets within and outside the country including the producing giant Mozambique gas block. But the real value for any investor -- be it Aramco, Rosneft, Exxon or BP -- is the massive retailing network that BPCL which is spread across the country which accounts for a 25 per cent market share. The private equity firm can either play the role of a stalking horse -- which front runs an auction and sets a floor price -- or a critical ally assigned the task of acquiring BPCL for a fixed fee and then disposing off the non-retailing assets. Obviously, there will be a lock-in period which can be used by these oil majors to bolster their finances. Till then, the private equity company can run this profit- making BPCL.

The Indian government cannot be unaware of such a strategy -- should it exist. This could explain why the government decided to negotiate with limited “multiple bidders”. Alternatively, the government can sell the stake to Anil Agarwal’s Vedanta which is also roping in a partner and is reportedly busy mobilising $ 10 billion to backstop the deal. Agarwal has supporters within the country though he cannot be expected to make any positive impact on the market as an oil major can.

“The real value of BPCL lies in its retail network but stripping that away for sale to an independent operator of retail assets alone will not work in the Indian market without the backward linkages, unless the government allows free import of products. This is unlikely. If the government is hell bent on selling BPCL, then a sale to Vedanta would be the best possible outcome; Vedanta would then become an integrated player with upstream, mid- stream and downstream interests. That may be the best outcome given the current state of play,” said an acknowledged energy expert. The Modi government is expected to sell BPCL in toto to a private equity firm only if it is sure that retailing infrastructure will ultimately be passed on to an oil major whose identity is already known to it.

Some interested circles have tried to create the impression that the government is desperate to sell its stake in BPCL because it is under pressure to bridge the ballooning fiscal deficit. It is true that the government's finances have been strained badly this year. But the government has been bedevilled by a fiscal deficit problem for a long time.

The total value of the government stake in BPCL, estimated at around $ 10 billion, will not have a significant impact on the fiscal deficit which at the end of October had ballooned to almost $ 127 billion. The government has the option of going in for increased borrowings to cover the gap rather than rely on revenues from its disinvestment programme which has come unstuck during the pandemic.



To download the latest issue 'Volume 27 Issue 19 - January 10, 2021', click here
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