Oil PSEs asset sale, a Halloween’s trick or treat? IOCL has been the success story of an Indian government company
IndianOil has been the success story of an Indian government company, much like the energy behemoths - Sinopec of China, Gazprom of Russia and Petrobras of Brazil. These national companies not only act as custodians of their country's strategic interests but also provide much-needed energy security. IndianOil ranked 151 in the latest Global Fortune 500 Ranking, is the envy of many MNCs and Private players. In energy circles, it is also well known that IndianOil has been at the receiving end of predatory attacks in myriad forms.
The News that the Pipelines section of Indian Oil Corporation Ltd. has been instructed to carry out an exercise of asset monetization may not have come as a big surprise to many but certainly tugged at a few hearts. Currently, the venture appears to be on a backburner possibly as a trick or treat choice to be savoured at an opportune Halloween. The notification on of divestment of Pipelines section of Indian Oil is akin to sounding the death knell for a distinguished PSE which has been performing exceptionally well and providing steady returns to shareholders from its very inception. The much-touted selloff of Bharat Petroleum Ltd., another winning horse of the Government’s stable, was nothing short of a disaster with the most promising suitor being Vedanta whose ratings have been recently downgraded by both Moodys and Standard &Poor. The cherry-picking of economic advisors and policymakers seems to have now zeroed on to one of the most prized assets of a legendary PSE. The desperation amongst the high priests of disinvestment who call the shots and miss most times is understandable. They hardly have anything to show by way of accomplishments and citing it’s all work in progress, is passé. Simultaneously, cries of many commoners are becoming stringent that a distress sale, in present circumstances, would hardly fetch any real value rather it may lead to unseen dangers. The argument is growing stronger, by the day, that selling bits and pieces of valuable national assets is actually throwing in the towel prematurely by those whose job is to find workable solutions. Opting for the most clichéd route, without putting in real diligent efforts at bolstering the economy, seem slothful. Many citizens have started to get a feeling that the venerable, highly paid economists and policymakers should stop behaving like errant sons, hell-bent upon selling the family silver to get their daily fix.
IndianOil has been the success story of an Indian government company, much like the energy behemoths – Sinopec of China, Gazprom of Russia and Petrobras of Brazil. These national companies not only act as custodians of their country’s strategic interests but also provide much-needed energy security. IndianOil ranked 151 in the latest Global Fortune 500 Ranking, is the envy of many MNCs and Private players. In energy circles, it is also well known that IndianOil has been at the receiving end of predatory attacks in myriad forms. The Pipelines section of IndianOil plays an irreplaceable role in Supply & Distribution of liquid and gas fuels for the entire nation. Incidentally, IOCL Pipelines section also generates the maximum profit and ultimately contributes to the government exchequer in a big way. IndianOil, today operates 14,600 KMs of crude oil, petroleum products and gas pipelines with a throughput capacity of 94.42 million metric tonnes per annum of oil and 21.69 million metric standard cubic meters of gas per day. The world over, Pipelines play a crucial role in the transportation of crude and fuels. Today, they are considered the safest, most cost-effective, energy-efficient and environment-friendly mode for transportation of crude oil, petroleum products and gas Till recently, Pipelines were considered as natural monopolies and in the majority of cases in India, they still are. Pipelines offer that vital competitive advantage much akin to a Ghatak platoon in infantry. Most energy companies would therefore endeavour to have access to the maximum number whether by ownership or otherwise. Ingress into Pipelines business has a huge catch though. Large capital investments, long gestation periods, captive nature, land acquisition problems etc. are reasons for most companies shying away from themselves investing in Pipelines. Many Indian energy majors have realized to their utter dismay, despite having coastal refineries, if ‘export only’ is not going to be the sole marketing strategy, for getting hinterland business access to Cross Country Pipelines is a sine qua non, and therein lies a story.
While no Indian Oil & Gas company in business today is open to suggestions of trolling individual Refineries, schemes like Common Carrier or Contract Carrier for Pipelines have been repeatedly touted. The cry became more stringent after many private players in India learnt the hard way that Pipelines are an irreplaceable asset and cannot be substituted even with ultra big bousers or owned rail rakes. From that point onwards attempts have been made to somehow bring the Pipeline business of IndianOil to heel. How simple economics dictate all this can be seen from this illustration. If Indian Oil Corporation Ltd., in year 2019-20, earned a profit of about Rs 1,300 Crores then the Pipelines business alone notionally posted a profit of around Rs 5,500 Crores – such is the competitive advantage of Pipelines. Hence, whoever possesses this vital asset is bound to score over their rivals, big-time. Theoretically, Pipelines neither face inventory losses like Refineries nor they have to face the market forces impacting Sales as Marketing sections do. IndianOil, is a pioneer of Pipelines in India and has been systematically investing in them over the years. It had very early on made the wise tactical decision of developing its own trunk transport system and today has a tremendous first-mover advantage. This move-in itself speaks for the business acumen of this leading PSE. It operates a network of more than 14,600 kms of crude oil, petroleum products and gas pipelines. Incidentally, India is the third-largest consumer of Oil and poised to become the largest consumer by 2030 but has a low Pipeline penetration. As per available information, while USA had 4,023,360 KMs of Pipelines in 2017, China 169,000 KMs in 2020, Iran 80,000 KMs of Pipeline in 2019, India had only 36,284 KMs of Pipeline in year 2012. As regards the major crude and product pipelines in India; on 1.12.2020, the total length of Crude Oil Pipelines was 10,419 KMs and Products Pipelines 18,465 KMs, respectively. Thus, there exists an enormous potential for development of additional Pipelines in India. Despite this, many players have tended to shy away from investing in trunk pipelines while setting up shop in India and are now contemplating it.
Now let us fully understand the recurring manifestation in some circles for sale of Pipeline assets of IndianOil. Since the PSE has a ready-built Pipeline network it’s very lucrative for new players to make a demand for using them rather than investing on their own. Asset sales in PSEs being the current and popular dispensation, it’s inevitable that IOCL Pipelines are seen as low hanging fruits ready for the plucking. Lack of enthusiastic buyers willing to pay the actual value of PSEs and present market conditions due to Covid – 19 could be the cause for a brief holding back in the selloff. Nevertheless, the notion is extremely lucrative and beckons easy pickings during leaner days and is bound to spring back any time. However one needs to remember that seductive calls can also lead to slippery turns. It is entirely unrealistic to assume that an appropriate suitor will be willing to purchase the Pipelines business of IndianOil without a matching set of most alluring connubial rights. Giving a bailout and coughing up ready cash would obviously be contingent upon an unfettered right of operation with easy and assured returns. It makes for scant business sense doing a favour without a serious attendant quid pro quo. In all propriety, the buyer will legitimately expect to be paid a generous transportation tariff with a flattering take-or-pay component thrown in. Most economists and policymakers advocating the sell-off would want Indian citizens to look at the deal without a jaundiced eye. However, a niggling doubt which may keep popping up in the collective consciousness is – Whether such a deal would have foolproof guarantees? What about arm twisting in the future by the new owners ? Who can, after all, stop this knight in shining armour to claim later that at the time of the deal it got the wrong end of the stick. Consequently, a demand can be made to have everything looked into afresh and further concessions given. In absence of the latter, the new owners may want to mull over other greener pastures and partners demurring from operating these hitherto captive Pipelines for IndianOil alone. Since most of these Pipelines do not have spare capacity a piquant situation is bound to develop. Mind you, the take or pay clause would be operative and IndianOil would in all probability have to continue paying even when the Pipelines are not operated by the new owner. In such a scenario, IndianOil, may witness a situation where it is between the devil and deep sea. At best IndianOil may have to cough up that extra bit or at worst buy back the low on maintenance, ageing assets, almost certainly much above the book value, if not at a replacement cost basis. Of course, IndianOil can always cry foul and as often PSEs do, enter into vexatious litigation.
Indian economists, policymakers and advisors, instead of having a paradigm-shifting game-changing narrative for profit meaning PSEs have curiously developed a deep penchant for killing the golden geese itself. Genuine efforts at attracting FDI, Investments in greenfield projects and Collaborative Constructs seem to have taken a back seat and the utopia of selling vital assets to meet fiscal deficits a favourite pastime. In fact, rather than collectively lamenting on the failure of ready sale of Bharat Petroleum, a lesson may be being given by providence itself, needs to be leant. Certainly, there are never easy answers to vexed issues but the most important thing which the current pandemic has taught us is resilience. Countries should resist the temptation of the relatively easy, albeit transient, path of total extermination of PSEs which in the long run can be counterproductive to national economy. Knowingly killing competitive and successful government companies would make the country more vulnerable. In India, genuine ease of doing business should be the ultimate goal and pursued with sheer doggedness while holding on to the birds in the strategic sectors should auger well. There are no free lunches in this world, and making India strong and self-reliant has clear cut and definitive economic imperatives. India is poised at the very cusp of making economic history for which it needs to play its hand carefully. In the neighbourhood, even Bangladesh is making remarkable economic progress and several other countries are scoring over India in human indices and happiness quotient. India has a long way to go and needs to learn from the mistakes of other nations who had made privatization their number one priority. Let India’s future citizens be truly free; weaponisation of business by monopolistic, international and domestic corporations should never be permitted. Let us not forget, Indian PSEs have long been part of the national landscape and no sovereign power lets go of its land without a valiant fight.
By: Siddhartha Mukherjee. The writer superannuated after serving more than three decades in a leading Fortune 500 PSU of India and the views expressed in this article are purely his personal.