By R. Sasankan

It is uncanny how history repeats itself, particularly in India’s petroleum sector. Back in 2002, a liquidity-starved government decided to sell its stake in IBP Co Ltd, a relatively small petroleum marketing company, as part of its disinvestment programme. That was the time when Reliance Industries and Royal Dutch Shell were circling around the arena looking for opportunities to retail transportation fuels. Reliance did make its formal entry in 2003.

It was natural, therefore, for the government to expect that the competition to acquire IBP would be intense. There was a clear perception that the IBP sale would yield an eye-popping price. Surprisingly, Reliance Industries was not keen to acquire IBP. But it was perceived to be equally keen to ensure that Shell did not acquire the stake. So, true to form, it conveyed the impression that it was going to make an aggressive bid to keep everyone off balance. An additional secretary in the ministry of Petroleum and Natural Gas (MoPNG) was in charge of deciding the IOC’s bidding strategy. In the end, he ensured that IOC’s bid beat Shell’s offer hands down.

IOC had come up with a whopping bid of Rs 1551 per share for IBP in February 2002 – which was an 80.8 per cent premium to its then market price. The government benefited hugely from this ‘disinvestment’ but it is still a matter of conjecture whether IOC profited from the deal. IBP had about 1,550 retail outlets, mainly in north Indian states which did not make much a difference for IOC in terms of widening its geographical footprint.

Cut to 2017. Faced with a yawning fiscal deficit, the government had no choice but to start thinking seriously about monetising its stake in downstream petroleum entities. As a first step, it decided to hive off Hindustan Petroleum Corporation (HPCL). A reluctant Oil and Natural Gas Corporation (ONGC) was persuaded to acquire the public sector entity that was formed in 1974 when the government took over the erstwhile Esso Standard and Lube India Ltd and then quickly Caltex Oil Refining and Kosan Gas Company were merged into HPCL soon after.

The government is now looking to sell its 53.29 per cent stake in Bharat Petroleum Corporation Ltd (BPCL) along with management control after carving out Numaligarh refinery from the petroleum entity. A number of oil giant including Aramco of Saudi Arabia and ADNOC of Abu Dhabi are eager to enter the Indian market to retail petroleum products. Saudi crown prince Mohammad Bin Salman has already announced his country’s decision to invest around $ 100 billion in India over the next two years. Clearly, Aramco has to be accommodated.

The global giants will soon find out that it is going to be very hard to break into India’s petroleum retailing market. Close to 90 per cent of the marketing infrastructure is held by the three PSU oil marketing companies. No foreign oil major can hope to succeed without grabbing a slice of this infrastructure. And that’s why the BPCL strategic sale – along with the promise of management control – is such a huge opportunity for any global player looking to establish its presence in the country.

The Union cabinet’s approval of the strategic disinvestment in BPCL seems to be part of a strategy to accommodate the desires of Aramco. Not many oil majors are expected to enter the race for BPCL. On present reckoning, Aramco may not make an aggressive bid as has been widely speculated. It does not fear threats from oil majors. It may find that the real threat to its ambitions comes from within India. Left alone, IOC can outbid Aramco. It can also team up with ONGC for the purpose too as they might want to stymie Aramco which could eventually challenge their market dominance. If the government wants to ensure entry of Aramco or any other foreign player into India through BPCL, it has to rein in IOC. But this need not be done formally. As in the case of the disinvestment of IBP, the government strategy can be managed through the Ministry of Petroleum and Natural Gas by nudging IOC not to make an aggressive bid. Being a PSU, it cannot defy the government. But if the bid price of oil majors falls below the government estimate, it will be forced to consider IOC’s participation in a re-bid as distress sale can be politically damaging. IOC is not a corporate lightweight.

Reliance Industries is not likely to do anything to scupper Aramco either. After all, the Saudi giant has dangled a bait by offering to buy a 20 per cent stake in RIL’s refining operations that will help the Mukesh Ambani-owned company to trim its outsize gross debt of Rs 2920 billion.

The question now is whether the government will get an attractive offer for its stake in BPCL as it did in the case of IBP. BPCL is a listed company and it is perceived to be overpriced at its current price of Rs 505 per share yielding a market capitalisation of about Rs 1095.25 billion. The 52-week high and low of the BPCL share have swung between a wide range of Rs 545 to Rs 308 per share. A buyer will look at the real estate of BPCL and the current cost of building the retail network  to determine a fair price. My impression, which is based on interaction with market experts, is that the bid price for a controlling interest will fall in the range of Rs 300-500 per share.

Ideally speaking, Aramco will be looking at the investment in RIL as a standalone portfolio investment. Aramco's interest in entering retail would likely be independent of its decision to invest in RIL. Aramco BP and Reliance can independently or jointly seek BPCL as an investment independent of their existing relations/investments. If they are serious about India's retail market, their objective would be to keep IOC away from acquiring BPCL either singly or jointly with ONGC.