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Press Release [FREE Access]
Petro Intelligence Ľ BPCL Selloff: Foreign Equity Players May Be Fronting For The Big Boys

By R. Sasankan

The petroleum industry is increasingly bemused by the Modi government's determination to press ahead with its negotiations with two foreign private equity firms for the privatisation of Bharat Petroleum Corporation Ltd (BPCL).

The selloff plan for the state-owned refinery and petroleum retailer has been bedevilled by problems ever since the Union cabinet cleared the plan to privatise it in October 2019. The early suitors for BPCL -- Aramco of Saudi Arabia and Rosneft of Russia – seemed to have melted into the shadows, their interest sapped after the outbreak of the Covid pandemic that has forced global companies across the world to conserve capital resources till this crisis fully plays out.

The front-runners in the race for the government’s 52.98 per cent stake in BPCL are the US-based Apollo Global and 1 Squared Capital. The third bidder is Anil Agarwal-controlled Vedanta. Private equity companies have no experience to run oil companies. They have a reputation for asset stripping after taking over troubled companies and putting operations back on an even keel.

This is a strategy that will not be in the interests of BPCL which recorded its highest-ever stand-alone profit before tax of Rs 226.18 billion in the year ended March 30, 2021. Critics have slammed the Modi government's decision to pursue talks with the private equity players with some going on to dub the strategy as "madness par excellence". The sharp cavil against the selloff of BPCL to private equity firms is based on the argument -- a view echoed in this column in the past -- that the carve-up of the state-owned entity will only maximise the profits of the buyer and have no positive impact on the fortunes of the company.

Petroleum industry experts believe that the real value of the Mumbai-based Bharat Petroleum Corporation Ltd (BPCL), the second largest Oil Marketing Company (OMC) in the public sector, goes way beyond its market capitalisation or book value.

The government has been extremely secretive about the BPCL privatisation process. However, it did let on that it had started talks with the private equity firms that had bid for the lucrative asset, possibly to blunt the mounting criticism against the selloff. However, one thing is clear: the Modi government will not take a political decision that will destroy the marketing structure of BPCL. (This column has repeatedly emphasised this point).

As the race for the government stake in BPCL enters the final stage with the bidders preparing to submit their financial offers, market watchers have started to wonder whether there is a "method in this madness" after all.

It is increasingly clear that BPCL’s retail marketing structure will remain intact no matter who acquires the company. The government may also be able to achieve its original intention of selling BPCL to an international oil major -- which was articulated by then petroleum minister Dharmendra Pradhan when he announced the plan to privatise BPCL.

It now appears that the two foreign private equity companies are virtually 'fronting ' for two oil majors. On present reckoning, there are only two who still have shown a modicum of interest in BPCL. Saudi Aramco has always been keen to enter India’s downstream retail market. In fact, there was an impression in the domestic industry circles that BPCL had been put up for sale for the benefit of Aramco after it openly expressed its interest in India’s downstream market.

The pandemic and the financial crunch that it wrought had created the impression that Aramco had dropped out of the race for BPCL. Aramco made no statement to this effect; the Government of India was equally reticent. However, its absence from the list of bidders only lent credence to that popular view and it now appears that such an impression suited everyone.

"Aramco could make a killing as it has access to surplus and cheap petroleum products, relative to Indian producers, and could undercut them if it decides to capture market share,” says an eminent oil expert. Will this happen?

Rosneft of Russia has also been interested in entering the retail business. Through its subsidiary Nayara Energy (the erstwhile Essar Oil), it already has over 6000 retail outlets and a 20 million tonne per annum refinery in the state of Gujarat. Its refinery’s capacity is already being expanded to 40 million tonnes per annum. India is a target market for President Putin who is believed to have intervened three years ago to ensure that Rosneft managed to acquire the troubled Essar refinery and its retailing network. BPCL is also on Rosneft's radar and one of the two private equity firms could well be fronting for it.

Both Aramco and Rosneft are interested only in BPCL's retail marketing network. Neither is interested in the three refineries of BPCL and the associated infrastructure. Indian Oil Corporation has come out with a plan to expand its refining capacity. It has no refinery either in Mumbai or Kerala. BPCL's refineries fit very well into its expansionist plans. If prompted, ONGC may also be interested in one of the refineries.

Such a strategy will find favour with the government also. One theory that is being tossed around is that the Adani group, Reliance industries or any global player will be prepared to grab BPCL’s marketing terminals.

BPCL's privatisation plan has to be cleared by the market regulator SEBI which is not going to be all that easy. But the government does not seem to be worried on that count.

The mist has started to lift -- and the picture is almost clear now. The entity that acquires BPCL will have to take the government into confidence and reveal its plans for the future. It cannot be dismantled and sold at will. In fact, This strategy must have already been worked out by the oil companies after consulting the government.

There is one element of uncertainty that may have some bearing on the future of BPCL. Aramco is preparing to acquire a 20 per cent stake in RIL’s oil to chemicals (O2C) project. RIL, with its partner BP, is already into petroleum retailing in India. Sources say RIL may not be favourably disposed to Aramco's entry into the retailing sector. But it may opt to keep quiet and may not exert its influence to thwart such a prospect. The two sides have a very durable relationship -- and would like to keep it that way.

The government does not seem worried either as Rosneft is equally keen to get its hands on BPCL. All in all, this is one deal that could prove to be a win-win for everyone.



To download the latest issue 'Volume 28 Issue 12 - September 25, 2021', click here
Petro Intelligence [FREE Access]
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BPCL Selloff: Foreign Equity Players May Be Fronting For The Big Boys
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When Competition Comes A Cropper
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Monthly Downstream Data
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