Oil Vadinar Kandla Ltd (ovkl)

OIL VADINAR KANDLA LTD (OVKL)

The Lenders to the pipeline of OVKL were in dilemma. The Project put before them had significant positive potential but the promoters were not willing to abide by some of the conditions stipulated by the lenders. But these conditions were considered essential by the lenders to reduce the business risk. The details of the case are as under:

Background:

It is long realized that the country has to develop pipeline infrastructure for transport of petroleum products because of low operating  costs (due to low energy consumption - to 135 Btu/T for pipelines as compared to 320 Btu/T by rail and 1700 Btu/T by road) environment friendliness, enhanced safety as they are submerged, minimum transport losses (0.1% to 0.15% in pipelines as compared to 0.3% to 0.5% by road/rail), ability to handle a variety of  products, possible expansion with marginal additional investment, low impact of natural calamities and low maintenance cost. The pipelines capacity can also be increased by 20% by the use of drag reducers. If an efficient pipeline system could be installed a substantial part of the road/rail traffic could shift to pipelines decongesting the transport system. With this view in 1986, Government of India constituted a Committee comprising representatives of the oil industry, Ministry of Petroleum and Natural Gas, Planning Commission, Railway Ministry of Surface Transport to suggest a policy for development of pipeline transport for petroleum products. The Committee after considering refinery location, rail transport availability and Indian port handling facilities identified the following sectors for pipelines where there is a potential for transport of more than 2 million tonnes of petroleum products. Places identified on the basis of Rail transport and port handling, namely Kandla–Bhatinda, Guwahati-Siliguri, Vizag-Vijayawada, Pradeep-Allahabad, Mangalore-Bangalore, Mumbai-Manmad and Cochin-Coimbatore. Vadinar-Kandla was added after conceiving the refineries of Essar Oil at Vadinar and Reliance Petroleum at Sikka.

So far, all pipeline projects in India have been developed by individual oil companies giving them complete control over the use of these pipelines, which has become a distinct competitive advantage. As this gives a monopoly situation, Oil India Limited (OIL) was promoted to implement these projects to partly dissociate ownership and use and subject the pipelines to “Common Carrier Principle” where whoever wants to transport the petroleum products would be given capacity subject to certain common conditions irrespective of ownership of individual pipelines in line with the practice in other developed countries.

Based on the Committee’s recommendation, a holding company by name Oil India Ltd (OIL) was promoted by three Oil Marketing companies namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) for development of a pipeline network to transport petroleum products mainly Diesel (HSD), Kerosene (SKO), aviation turbine fuel (ATF) and petrol (MS) in India. The Government at that time (prior to 2002) has granted a monopoly status to OIL for laying petroleum product pipelines as it wanted to install an efficient pipeline transport system. As a Public Sector Unit (PSU) has to get several approvals from Government of India for investment above Rs.100 crores (the pipeline costs are expected to be over this figure), it was decided to float a company in the private sector with public sector marketing companies holding 50% equity and the balance 50% being offered to five companies namely ICICI Bank Ltd, Infrastructure Leasing and Financial Services Ltd (IL&FS), State Bank of India (SBI) and two merchant refining companies namely Essar Oil Ltd and Reliance Petroleum Ltd (RPL-since merged with Reliance Industries Ltd (RIL).