by R. Sasankan

It takes two to tango – and the curious two-step shuffle that the Modi government is playing with the Saudi Arabian government in recent weeks has started to stir a pot of speculation over the nature of the alliance that the two sides seem to be negotiating.

The bombshell was dropped sometime last year when the petroleum minister Dharmendra Pradhan announced that the public sector oil giants planned to team up with Aramco of Saudi Arabia to establish a 60 million ton oil and gas refinery on the West coast which, on the face of it at least, would give Reliance Industries’ Jamnagar facility a run for its money.

India has witnessed a strong surge in crude oil imports that now ensure that its public and private sector refineries are ticking over at optimal rates of production. So, it seemed a little odd when Pradhan told reporters at Dabhol in the state of Maharashtra recently that India was “open to the Saudi oil giant Aramco’s interest in owning a majority stake in the proposed 60 million ton per annum refinery on the west coast of the country”.

The statement was carefully worded. The minister did not explicitly state that Saudi Aramco has asked for a majority stake. The word he used was “interest” – which is a very iffy thing and does not indicate any definiteness in intent. However, it is clear that at some stage during the discussions, Aramco has explored the possibility of owning a majority stake in the proposed joint venture.

Saudi Aramco has been more circumspect about giving out any details about the ongoing discussions between the two sides. It certainly has not so far stated that it is keen on a majority stake in the refinery. The Saudi version is that the Rs 3 trillion mega refinery is a project in which it is mulling investment. On record, it has stated it intends to invest in one of the refineries. It could even be one of the existing refineries or even an expansion project of an existing refinery.

That begs the question: who is wooing whom?

Saudi Arabia – the oil-dependent, culturally-austere economy — is going through a period of massive change and is turning out to be a bundle of surprises. Crown prince Mohammad bin Salman has been crafting epoch-making policy initiatives at home and making dramatic changes in external relations. Is it possible that India has moved up several notches on his priority list? And is this purely part of an economic strategy or should it be attributed to something else?

Experts believe that if there is an economic strategy at play, then it is predicated on the fact that India’s combined oil and gas consumption could rise by three to four times current levels if it starts to emerge as a middle income country. This economic strategy, they say, can be pursued even without an investment in the proposed mega refinery. So, there must be a larger geo-political driver here. It is difficult to predict what this could be but it is possible that the Iranian and American equation is driving this. Under President Trump, the US is trying to isolate Iran.

Relations between Saudi Arabia and Iran have been sinking at an unprecedented pace. India-Iran relations have also been badly frayed even though India has traditionally tilted more towards Iran in its Middle East diplomacy. It is in Saudi Arabia’s interest to outsmart Iran by establishing a foothold in the fast-growing Indian economy. Right or wrong, there is an impression that India’s petroleum ministry is showing some antipathy towards Iran. Significantly, neither the external affairs ministry nor the ministry of petroleum and natural gas under Dharmendra Pradhan has made any attempt to disabuse anyone about such an impression.

The 60 MMTPA refinery has been proposed as a joint venture among the three state-owned Oil Marketing Companies: Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL). In the ownership structure already inked, IOC will have a 50 per cent stake in the refinery with BPCL and HPCL sharing the rest equally.

The Indian PSUs may not be keen to give Aramco a majority stake in the proposed refinery project but they will not be able to resist if the political leadership takes such a decision. The mega refinery project is essentially inspired by IOC which enjoys enough political and bureaucratic clout to ensure that it remains the single largest stake holder in the joint venture.

If the government concedes a majority stake to Aramco, the mega refinery cannot be classified as a public sector project. The joint venture could be modelled on the lines of Petronet LNG Ltd (PLL) where the combined shareholding of the four state-owned oil and gas companies is capped at 50 per cent. Such an arrangement could prove to be disastrous as it has in the case of PLL which has the characteristics of a private company but has the petroleum secretary as its ex-officio chairman. This unique structure ensures that it doesn’t fall within the scrutiny of the government’s enforcement agencies, allowing a free play to corrupt business practices. This is precisely what undermined the working of PLL which had to wrestle with the fallout of a renegotiated contract with RasGas for the supply of 7.5 million tons of LNG.

Saudi Aramco will not attempt any such violations. Nor will it hire senior bureaucrats to work as its agents. However, it may find the going tough while pressing for a majority stake in the refinery venture. The arrangement can work if the entire production from the refinery is exported. That cannot happen in this case. The attraction of India is its growing domestic market. If it wants to sell its products in the Indian market, Aramco will need the support of the PSU oil marketing companies which enjoy a near monopoly over the marketing infrastructure.

From the point of view of pure economic interest, the mega refinery can ensure a market for Saudi crude at a time when the world is witnessing a slowdown in the consumption of fossil fuels. Electric vehicles are catching up in the industrially advanced countries. It has entered India too, but cannot be expected to make an appreciable dent in India’s fuel consumption at least in the next 30 years.

Iran which has a 15 per cent stake in the Chennai-based CPCL, an IOC subsidiary, has been negotiating its participation in the proposed 10 million ton per annum refinery which is proposed at Nagapattanam in the state of Tamil Nadu. Iran has been striking a hard bargain, which has led to a stalemate. The Indian PSUs expect a far greater level of sophistication in their negotiations with Aramco.