By R. Sasankan

The Assam-based Numaligarh Refinery is being spun off from state-owned Bharat Petroleum Corporation Ltd (BPCL) and merged with Oil India Ltd (OIL) -- a situation where the subsidiary of the about-to-be privatised BPCL is being folded into another large integrated company.

There are very delicate reasons that compelled the authorities to make this switch: it has principally been dictated by political consideration though there are equally persuasive economic grounds justifying the emergence of a new paradigm for petroleum sector alignments in the North East.

At a recent press conference, Oil India CMD and NRL chairman Sushil Chandra Mishra amplified on the economic benefits that would flow from such an arrangement: “For Oil India Ltd, the majority acquisition of shares of NRL is not only a strategic business decision but also one of the defining moments in its journey as an exploration and production (E&P) company looking for vertical integration in the oil and gas value chain…At the same time, NRL has now become part of an integrated energy company; OIL and NRL together can create a tremendous synergy that will help both the entities to consolidate their business plans and achieve sustainable growth and success in all their endeavours."

Numaligarh Refinery (NRL) was created as part of the Assam Accord which was signed in August 1985 between the Government of India and the All Assam Students' Union which ended a fierce six-year agitation to deal with the menace of illegal migration from Bangladesh that threatened to rip the political, social, cultural and economic fabric of the north-eastern state. As NRL was created as a part of that deal, it had to be delinked from the BPCL privatisation process -- which explains the political underpinnings for this new arrangement. So, on March 25, BPCL sold its entire 61.5 per cent stake in NRL to a consortium of OIL and Engineers India Ltd (EIL) and the Assam government for Rs 98.760 billion. With this Oil India’s stake in NRL rose to 80.16 per cent.

The economic logic -- which hinges on the concept of an Integrated Oil Company, and completely justified in the case of the OIL-NRL merger -- is, however, somewhat fuzzy when applied universally.

I have strong views on the concept of an Integrated Oil Company and I have articulated these several times in the past. In one of my columns, I had explained how the idea had been corrupted and abused by the country's political leadership which was quick to latch on to a concept with a very dim idea of the precepts that underpinned it.

I would argue that the concept has almost become a shibboleth in India's petroleum universe: which is characterised by an adherence to a belief that is devoid of any real meaning. We have moved so far away from the original conception of the belief that it has become a hollow phrase.

There is nothing wrong with the concept as such and it is good for the growth of a company. However, India is a very different playground and what is applicable elsewhere need not always succeed here. Truth to tell, a few months ago, even I favoured an Integrated Oil Company structure for OIL-NRL combine.

But at the risk of repetition, permit me to clarify why I have been critical of state-owned Indian oil companies opting for an integrated structure. On the basis of my along association with the oil sector, I can claim to have a reasonable understanding of its history. I saw tremendous logic in what K.D. Malviya did in his capacity as petroleum minister 50 years ago. In 1965, the state-owned Oil and Natural Gas Corporation (ONGC) created a 2 million tonne per annum refinery at a total cost of Rs 260 million ( Rs 260 million) in the state of Gujarat to process the crude it produced in the state.

The ONGC management wanted to own and operate the refinery. Malviya vehemently opposed the idea. He wanted ONGC to hand it over to the newly-created Indian Oil Corporation. (As a quick aside: that refinery is now well on its way to becoming the country’s second largest in the country with a total capacity of 18 million tonnes per annum.)

Malviya’s intentions were noble. He did not want ONGC to fritter away its energy in refining and product marketing. He wanted it to concentrate solely on discovering oil which was what the country desperately needed at that time. It was an astute move and under his remarkable leadership, ONGC went on to make big oil discoveries in Bombay High, South Bassein and other fields on the west coast. The Russian geologists generously helped ONGC in making these discoveries. Even the Gujarat refinery was set up under Indo-Soviet friendship treaty.

With the discovery of Bombay High, ONGC’s professional culture drastically changed. Its desire to hunt for new oil fields started to flag. The oil giant purchased a large number of drilling rigs and its drilling strategy shifted from prospectivity-based assessment to the need for keep these rigs engaged. As a result, ONGC gained the dubious reputation of drilling the largest number of dry wells in the world. After the discovery of Bombay High, ONGC preferred to get rid of the Russians.

Malviya had created an integrated structure for India’s oil industry which he considered ideal for the country. Accordingly, ONGC and Oil India oversaw upstream activities; Gas Authority of India focused on the mid-stream; and the oil marketing companies such as IOC, BPCL and HPCL took care of the downstream business.

With ONGC failing to make a significant commercial discovery of oil after Bombay High, it opted for a quiet strategy of diversifying into the downstream sector. Many in the petroleum industry had either forgotten or feigned ignorance about Malviya's grand plan. Refining and marketing can be done by any Tom, Dick or Harry; but you cannot say the same thing about oil discovery.

Soon, the leadership mantle at ONGC fell on Subir Raha who was undoubtedly a very successful downstream man having learnt his ropes at IOC but made no pretence of the fact that he found no joy in a relentless pursuit for new oil fields. He felt miserable in his early years at ONGC as he was unable to make a positive contribution in beefing up its oil reserves.

But his eyes lit up when he learnt that Mangalore Refinery and Petrochemicals Ltd (MRPL) was up for sale. He leapt at the idea of acquiring the entity. Finally, he felt, he could make a significant contribution to ONGC's future. Not very long ago, the Modi government decided to nudge ONGC to acquire the government's stake in HPCL to tide over its fiscal deficit problem. Once again, the helpless ONGC management sought to justify the decision in the name of integrated oil structure.

The so-called integrated structure turned out to be a near disaster for ONGC.

But for Oil India, it can prove to be a blessing if it is lucky enough to have an imaginative leadership. The present leadership is acknowledged to be dynamic. India’s north east region comprising as many as seven states is the most backward area in the country without much economic activity or a proper market.

 Oil India knows the north east better than any other PSU. NRL, which aims to raise capacity to 9 million tonnes per annum, can be a major economic force in the transformation of the region. Oil India with a unique corporate culture can enhance its E&P role by expanding to other states in the region. It just entered Tripura for the first time.

NRL will consume its oil and its unslaked thirst for more should keep Oil India on its toes. The North East will not be able to consume all the products that NRL makes -- a situation that will force it to look for export markets in neighbouring countries. Thus, the compulsions of the region will justify OIL and NRL merging to create an integrated oil company.