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Alternative Energy / Fuel
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Market Watch
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Companies
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RIL Becomes India’s First $150 Billion Company
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IGL Q4 Results: Net Profit Up 12% On Higher Gas Sales
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Confidence Petroleum Net Profit Declines 75.77%
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Asian Oilfields Announces Robust Results For 2019-20
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Press Release [FREE Access]
Petro Intelligence » Pandemic Puts BPCL Selloff In Doubt

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.



To download the latest issue 'Volume 27 Issue 6 - June 25, 2020', click here
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Global Rig Count Declines
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