No case

It is hard to defend the Reliance request, made to the petroleum minister, that the public sector oil companies should continue to buy Reliance's refinery products ""for two reasons.

First, unlike in the past the public sector companies now have (or will soon have) sufficient refinery capacity of their own, and they should not have to back down on this capacity or hunt for markets overseas, in order to help Reliance offload its own products in the domestic market.

Second, it is no longer the case that Reliance has not had either the time or the opportunity to build its own marketing network "" as could have been argued when the refinery was first commissioned.

Indeed, Reliance has been expanding its refinery capacity in the interim, by doing de-bottlenecking investments.

Surely, the company should then have paid attention to the possible outlets for its increased throughput.

To be sure, Reliance could argue that it is the repeated delays in the disinvestment of the oil marketing companies (delays caused by the same petroleum minister!) that have prevented the company from making an acquisition bid and thereby getting a readymade marketing network.

But this argument doesn't stand scrutiny because IBP was in fact offered on the market, and Reliance bid too low. Equally, therefore, there can be no guarantee that Reliance will be the successful bidder the next time round, when HPCL is offered for sale; nor can there be any guarantee that the government that comes to office after the elections will be inclined to continue with the sale of any of the oil companies.

In short, Reliance took a risk in not developing its own marketing chain, and it is now asking the minister to get the public sector companies to bail it out.

There are three reasons for the PSU's reluctance to do this. First, any deal whereby they have to buy petro-products while reducing their own refinery throughput, will reduce their valuation if and when they finally get put on the auction block.

Second, any deal with Reliance will encourage Essar to make similar demands on the public sector companies when the Essar refinery finally goes on stream.

And third, selling the PSU's own refinery throughput in export markets as an alternative is not an attractive option because the domestic market is far more profitable, on account of the extra duty protection that is available.

That's because refineries today are paid on the basis of what's called an import-parity price "" this is the international price, plus (and this is important) the import duty margin on the product.

In the case of products like petrol, where the import duty is 20 per cent while that on crude is 10 per cent, the nominal duty difference is 10 per cent but the effective protection is more like 60 per cent.

That's because the duty protection should be calculated on the value addition that is created by refining petrol from crude oil. No export market can therefore match the margins of the domestic market.

Naturally, Reliance wants to sell in the domestic market, instead of exporting. Equally naturally, the PSUs are resisting. It only remains to be seen what the minister will do.