by R. Sasankan
It takes two to tango – and the curious two-step shuffle that the Modi
government is playing with the Saudi Arabian government in recent weeks
has started to stir a pot of speculation over the nature of the alliance
that the two sides seem to be negotiating.
The
bombshell was dropped sometime last year when the petroleum minister
Dharmendra Pradhan announced that the public sector oil giants planned
to team up with Aramco of Saudi Arabia to establish a 60 million ton oil
and gas refinery on the West coast which, on the face of it at least,
would give Reliance Industries’ Jamnagar facility a run for its money.
India has witnessed a strong surge in crude oil imports that now ensure
that its public and private sector refineries are ticking over at
optimal rates of production. So, it seemed a little odd when Pradhan
told reporters at Dabhol in the state of Maharashtra recently that India
was “open to the Saudi oil giant Aramco’s interest in owning a majority
stake in the proposed 60 million ton per annum refinery on the west
coast of the country”.
The statement was carefully worded. The minister did not explicitly
state that Saudi Aramco has asked for a majority stake. The word he used
was “interest” – which is a very iffy thing and does not indicate any
definiteness in intent. However, it is clear that at some stage during
the discussions, Aramco has explored the possibility of owning a
majority stake in the proposed joint venture.
Saudi Aramco has been more circumspect about giving out any details
about the ongoing discussions between the two sides. It certainly has
not so far stated that it is keen on a majority stake in the refinery.
The Saudi version is that the Rs 3 trillion mega refinery is a project
in which it is mulling investment. On record, it has stated it intends
to invest in one of the refineries. It could even be one of the existing
refineries or even an expansion project of an existing refinery.
That begs the question: who is wooing whom?
Saudi
Arabia – the oil-dependent, culturally-austere economy — is going
through a period of massive change and is turning out to be a bundle of
surprises. Crown prince Mohammad bin Salman has been crafting
epoch-making policy initiatives at home and making dramatic changes in
external relations. Is it possible that India has moved up several
notches on his priority list? And is this purely part of an economic
strategy or should it be attributed to something else?
Experts believe that if there is an economic strategy at play, then it
is predicated on the fact that India’s combined oil and gas consumption
could rise by three to four times current levels if it starts to emerge
as a middle income country. This economic strategy, they say, can be
pursued even without an investment in the proposed mega refinery. So,
there must be a larger geo-political driver here. It is difficult to
predict what this could be but it is possible that the Iranian and
American equation is driving this. Under President Trump, the US is
trying to isolate Iran.
Relations
between Saudi Arabia and Iran have been sinking at an unprecedented
pace. India-Iran relations have also been badly frayed even though India
has traditionally tilted more towards Iran in its Middle East
diplomacy. It is in Saudi Arabia’s interest to outsmart Iran by
establishing a foothold in the fast-growing Indian economy. Right or
wrong, there is an impression that India’s petroleum ministry is showing
some antipathy towards Iran. Significantly, neither the external
affairs ministry nor the ministry of petroleum and natural gas under
Dharmendra Pradhan has made any attempt to disabuse anyone about such an
impression.
The 60 MMTPA refinery has been proposed as a joint venture among the
three state-owned Oil Marketing Companies: Indian Oil Corporation (IOC),
Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum
Corporation Ltd (HPCL). In the ownership structure already inked, IOC
will have a 50 per cent stake in the refinery with BPCL and HPCL sharing
the rest equally.
The Indian PSUs may not be keen to give Aramco a majority stake in the
proposed refinery project but they will not be able to resist if the
political leadership takes such a decision. The mega refinery project is
essentially inspired by IOC which enjoys enough political and
bureaucratic clout to ensure that it remains the single largest stake
holder in the joint venture.
If the government concedes a majority stake to Aramco, the mega refinery
cannot be classified as a public sector project. The joint venture
could be modelled on the lines of Petronet LNG Ltd (PLL) where the
combined shareholding of the four state-owned oil and gas companies is
capped at 50 per cent. Such an arrangement could prove to be disastrous
as it has in the case of PLL which has the characteristics of a private
company but has the petroleum secretary as its ex-officio chairman. This
unique structure ensures that it doesn’t fall within the scrutiny of
the government’s enforcement agencies, allowing a free play to corrupt
business practices. This is precisely what undermined the working of PLL
which had to wrestle with the fallout of a renegotiated contract with
RasGas for the supply of 7.5 million tons of LNG.
Saudi Aramco will not attempt any such violations. Nor will it hire
senior bureaucrats to work as its agents. However, it may find the going
tough while pressing for a majority stake in the refinery venture. The
arrangement can work if the entire production from the refinery is
exported. That cannot happen in this case. The attraction of India is
its growing domestic market. If it wants to sell its products in the
Indian market, Aramco will need the support of the PSU oil marketing
companies which enjoy a near monopoly over the marketing infrastructure.
From the point of view of pure economic interest, the mega refinery can
ensure a market for Saudi crude at a time when the world is witnessing a
slowdown in the consumption of fossil fuels. Electric vehicles are
catching up in the industrially advanced countries. It has entered India
too, but cannot be expected to make an appreciable dent in India’s fuel
consumption at least in the next 30 years.
Iran which has a 15 per cent stake in the Chennai-based CPCL, an IOC
subsidiary, has been negotiating its participation in the proposed 10
million ton per annum refinery which is proposed at Nagapattanam in the
state of Tamil Nadu. Iran has been striking a hard bargain, which has
led to a stalemate. The Indian PSUs expect a far greater level of
sophistication in their negotiations with Aramco.
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