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.