In June 2018, two major government-owned oil companies based in the Persian Gulf region, Saudi Aramco and Abu Dhabi National Oil Company (ADNOC), jointly signed a memorandum of understanding for setting up the world’s largest single-location refinery in Ratnagiri district of India’s Maharashtra state. A consortium comprising three Indian state-owed companies, Bharat Petroleum Corporation Ltd (BPCL), Indian Oil Corp Ltd (IOCL) and Hindustan Petroleum Corp Ltd (HPCL), were the other signatories. Recently two major occurrences threatened to stall the progress of this project: the electoral defeat of the ruling party in the Maharashtra State Assembly, the central government’s nod to strategic disinvestment from BPCL.
Shiv Sena, a political party known for opposing land acquisition in Ratnagiri district for installation of a refinery, will lead the new coalition government in the state. The long agitation led by Shiv Sena in land-allocation issues forced the previous state government to relocate the project to Raigad district from its first proposed site at Nanar village in the coastal district of Ratnagiri. This shift increased the estimated cost of construction to US$70 billion from its initial estimate of $44 billion.
The change in the state government will certainly have an impact on the existing deal, specifically as the new ruling coalition has a different view from its predecessor. According to media reports, the new government could overturn another large investment project between Japan and India for a bullet train in Maharashtra and reallocate the funds to forgive farmers’ debts. Similarly, the new coalition may consider increasing the rate of land acquisition and seek some compensation for the displaced farmers, causing additional costs of the refinery project and further delaying its execution. Despite the readiness of the Gulf investors, Aramco and ADNOC, to go ahead with the deal, the project has been continuously delayed because of non-clearance of land entitlement.
More trouble could arise from the Indian Finance Ministry’s intention to disinvest from one of the signatories to the refinery deal, BPCL. Aramco could bid to acquire the Indian government’s 53.29% stake in BPCL while other potential bidders could be ExxonMobil, Chevron and ConocoPhillips of the US, Royal Dutch Shell and BP of the UK, Rosneft and LukOil of Russia, PetroChina, China National Petroleum Corp (CNPC) and Sinopec of China, and France’s Total SA.
After the announcement of the sale of the government stake in BPCL, Moody’s is mulling a downgrade in its rating of the oil company because of the change in its profile from a public to a private entity, indicating that more risk would be involved. If Aramco or the Indian company Reliance succeeds in the bid, the prospects will remain the same or may even be enhanced and hasten the refinery’s construction. Otherwise, the new investor could create problems for the deal by dictating its own terms.
Besides the external issues, BPCL is facing a management crisis as its workers led a nationwide strike against the privatization of this profitable public company. Such disputes within BPCL could ultimately hamper the development of the refinery project in Maharashtra.
Since the deal was signed by three national governments, and not political parties or private companies, the political transition in Maharashtra state or the nature of the ownership of BPCL may not have much impact on the basic framework of the agreement. However, lingering on the implementation cannot be ruled out due to the renegotiation of land acquisition rates and other modalities associated with the change in the state government and ownership of BPCL.
Saudi Arabia’s relations with many countries have been strained over its support for India and plans for massive investments there. Therefore, the Indian government must take the necessary measures to move forward this project, which could potentially prove a milestone in achieving self-reliance in petroleum resources and will create more than 150,000 jobs during the construction and boost the state’s economy.
The government also should refrain from disinvestment of BPCL as it would convert the company into a risk-bearing entity and could create a management crisis. Because of the high asset valuation of BPCL and other factors, it would seem difficult for any Indian company, even Reliance, to bid for the government stake successfully. Obviously a takeover by a foreign company, especially from a rival country in the Gulf region, could potentially drag India into the new global battleground over petroleum resources.