Strategic issues being re-assessed after Ukraine crisis, Govt’s tacit control on auto fuel prices dampens investor interest
State-run oil-refiner-cum-retailer BPCL’s privatisation, which has been held up for over a year, could prove to be a challenging task for the government in the next fiscal as well, as potential investors have turned more sceptical of the verity of pricing freedom with state-owned fuel retailers.
Investors fear that tacit government control on auto fuel prices by state-run retailers, as was evident between November 4, 2021, and March 22, when the retail rates were despite a sharp rise in global oil prices, could be a recurring phenomenon. They feel such practice would deny a level-playing field to BPCL after privatisation, hurting its businesses. While the government can subsidise its firms, if required, private companies have to fend for themselves.
Auto fuel prices, though formally deregulated, have not seen any change since November 4, 2021. The Indian basket of crude rose from around $83 per barrel in early November to a peak of $113.4/barrel on March 22. The retail prices were put on hold till Tuesday presumably in the context of the assembly elections in five states, which concluded on March 7.
Also, sources said that market sentiments on the petroleum sector assets have changed a lot due to the global focus on green technology assets. “Investor focus on green projects is one of the very important factors why things have slowed down in BPCL privatisation,” department of investment and public asset management secretary Tuhin Kanta Pandey told FE recently.
Earlier, to address the investors’ concerns on subsidy on cooking gas, the government had agreed that subsidised LPG would continue to be avalaible to BPCL customers even after privatisation. “The lack of actual pricing freedom in auto fuels to state-run firms at times due to political considerations is a risk to the BPCL transaction that needs to be addressed,” said a person aware of the matter.
Bidders have to finalise a financial arrangement with investors before financial bids are called for the oil firm.
In November 2020, multiple bidders, including Vedanta, Apollo Global Management and Think Gas (I Sqared Capital), showed interest in the government’s 52.98% stake in BPCL. However, US private equity firm I Squared Capital is reported to have dropped out of the race to buy the state-run oil firm, due to the complex deal structure and lack of financial backers for the transaction. The market value of the Centre’s entire stake in BPCL is worth about `42,000 crore at the current prices.
The Ukraine-Russia war, which has fueled the recent surge in crude prices, may also force the government to rethink its plan to privatise BPCL, from an energy security point of view, a section in the government reckons.
Despite the occasional pricing variation between state-run and private fuel retailers, BPCL could still find a buyer, said Deepak Mahurkar, partner, PwC India. “Private sector companies have already realised that any differential pricing with public sector cannot be matched. The private sector companies, even BPCL, have started to increase their non-fuel retail portions significantly such as offering other amenities like pharmacy, groceries and ATMs at their outlets to attract customers,” Mahurkar added.
Even if the government fails to execute the privatisation of BPCL, the Centre could still manage to garner Rs 65,000 crore pegged in for FY23 comfortably. Besides LIC IPO, which could fetch Rs 65,000-70,000 crore, other big-ticket transactions lined up include the government’s proposed stake sales in IDBI Bank (45.48% stake worth Rs 20,000-25,000 crore) and Container Corporation (30.8% stake worth Rs 11,000 crore).
