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Indian Oil Corporation Ltd. Business Information, Profile, and History

government companies company refineries

Indian Oil Bhavan G9, Ali Yavar Jung Marg
Bandra (East),
Bombay
400051
India

History of Indian Oil Corporation Ltd.

The Indian Oil Corporation, a 100% state-owned company, is the largest commercial organization in India and ranks among the 100 largest industrial corporations in the world. Since 1959, this refining, marketing, and international trading company has served the Indian state with the important task of reducing India's dependence on foreign oil and thus conserving valuable foreign exchange. Exploration and production are reserved largely for two other government organizations, the Oil and Natural Gas Commission (ONGC) and Oil India Ltd.

Indian Oil owes its origins to the Indian government's conflicts with foreign-owned oil companies in the period immediately following India's independence in 1947. The leaders of the newly independent state found that much of the country's oil industry was effectively in the hands of a private monopoly led by a combination of British-owned oil companies Burmah and Shell and U.S. companies Standard-Vacuum and Caltex.

An indigenous Indian industry barely existed. During the 1930s, a small number of Indian oil traders had managed to trade outside the international cartel. They imported motor spirit, diesel, and kerosene, mainly from the Soviet Union, at less than world market prices. Supplies were irregular, and they lacked marketing networks that could effectively compete with the multinationals.

Burmah-Shell entered into price wars against these independents, causing protests in the national press, which demanded government-set minimum and maximum prices for kerosene--a basic cooking and lighting requirement for India's people--and motor spirit. No action was taken, but some of the independents managed to survive until World War II, when they were taken over by the colonial government for wartime purposes.

During the war the supply of petroleum products in India was regulated by a committee in London. Within India, a committee under the chairmanship of the general manager of Burmah-Shell and composed of oil company representatives pooled the supply and worked out a set price. Prices were regulated by the government, and the government coordinated the supply of oil in accordance with defense policy.

Wartime rationing lasted until 1950, and a shortage of oil products continued until well after independence. The government's 1948 Industrial Policy Resolution declared the oil industry to be an area of the economy that should be reserved for state ownership and control, and stipulated that all new units should be government-owned unless specifically authorized. India remained effectively tied to a colonial supply system, however. Oil could only be afforded if imported from a country in the sterling area rather than from countries where it had to be paid for in dollars. In 1949 India asked the oil companies of Britain and the United States to offer advice on a refinery project to make the country more self-sufficient in oil. The joint technical committee advised against the project and said it could only be run at a considerable loss.

The oil companies were prepared to consider building two refineries, but only if these refineries were allowed to sell products at a price 10% above world parity price. The government refused, but within two years an event in the Persian Gulf caused the companies to change their minds and build the refineries. The companies had lost their huge refinery at Abadan in Iran to Prime Minister Mussadegh's nationalization decree and were unable to supply India's petroleum needs from a sterling area country. With the severe foreign exchange problems created, the foreign companies feared new Iranian competition within India. Even more important, the government began to discuss setting up a refinery by itself.

Between 1954 and 1957 two refineries were built by Burmah-Shell and Standard-Vacuum at Bombay, and another was built at Vizagapatnam by Caltex. During the same period the companies found themselves in increasing conflict with the government.

The government came into disagreement with Burmah Oil over the Nahorkatiya oil field shortly after its discovery in 1953. It refused Burmah the right to refine or market this oil and insisted on joint ownership in crude production. Burmah then temporarily suspended all exploration activities in India.

Shortly afterward, the government accused the companies of charging excessive prices for importing oil. The companies also refused to refine Soviet oil that the government had secured on very favorable terms. The government was impatient with the companies' reluctance to expand refining capacity or train sufficient Indian personnel. In 1958, the government formed its own refinery company, Indian Refineries Ltd. With Soviet and Romanian assistance, the company was able to build its own refineries at Noonmati, Barauni, and Koyali. Foreign companies were told that they would not be allowed to build any new refineries unless they agreed to a majority shareholding by the Indian government.

In 1959, the Indian Oil Company was founded as a statutory body. At first, its objective was to supply oil products to Indian state enterprise. Then it was made responsible for the sale of the products of state refineries. After a 1961 price war with the foreign companies, it emerged as the nation's major marketing body for the export and import of oil and gas.

Growing Soviet imports led the foreign companies to respond with a price war in August 1961. At this time, Indian Oil had no retail outlets and could sell only to bulk consumers. The oil companies undercut Indian Oil's prices and left it with Storage problems. Indian Oil then offered even lower prices. The foreign companies were the ultimate losers because the government was persuaded that a policy of allowing Indian Oil dominance in the market was correct. This policy allowed Indian Oil the market share of the output of all refineries that were partly or wholly owned by the government. Foreign oil companies would only be allowed such market share as equaled their share of refinery capacity.

In September 1964, Indian Refineries Ltd. and the Indian Oil Company were merged to form the Indian Oil Corporation. The government announced that all future refinery partnerships would be required to sell their products through Indian Oil.

It was widely expected that Indian Oil and ONGC would eventually be merged into a single state monopoly company. Both companies have grown vastly in size and sales volume but, despite close links, they have remained separate. ONGC has retained control of most of the country's exploration and production capacity. Indian Oil has remained responsible for refining and marketing.

During this same decade, India found that rapid industrialization meant a large fuel bill, which was a steady drain on foreign exchange. To meet the crisis, the government prohibited imported petroleum and petroleum product imports by private companies. In effect, Indian Oil was given a monopoly on oil imports.

A policy of state control was reinforced by India's closer economic and political links with the Soviet Union and its isolation from the mainstream of western multinational capitalism. Although India identified its international political stance as non-aligned, the government became increasingly friendly with the Soviet Bloc, because the United States and China were seen as too close to India's major rival, Pakistan. India and the USSR entered into a number of trade deals. One of the most important of these trade pacts allowed Indian Oil to import oil from the USSR and Romania at prices lower than those prevailing in world markets and to pay in local currency, rather than dollars or other convertible currencies.

For a time, no more foreign refineries were allowed. By the mid-1960s, government policy was modified to allow expansions of foreign-owned refinery capacity. The Indian Oil Corporation worked out barter agreements with major oil companies in order to facilitate distribution of refinery products.

In the 1970s, the Oil and Natural Gas Commission of India, with the help of Soviet and other foreign companies, made several important new finds off the west coast of India, but this increased domestic supply was unable to keep up with demand. When international prices rose steeply after the 1973 Arab oil boycott, India's foreign exchange problems mounted. Indian Oil's role as the country's monopoly buyer gave the company an increasingly important role in the economy. While the Soviet Union continued to be an important supplier, Indian Oil also bought Saudi, Iraqi, Kuwaiti, and United Arab Emirate oil. India became the largest single purchaser of crude on the Dubai spot market.

The government decided to nationalize the country's remaining refineries. The Burmah-Shell refinery at Bombay and the Caltex refinery at Vizagapatnam were taken over in 1976. The Burmah-Shell refinery became the main asset of a new state company, Bharat Petroleum Ltd. Caltex Oil Refining (India) Ltd. was amalgamated with another state company, Hindustan Petroleum Corporation Ltd., in March 1978. Hindustan had become fully Indian-owned on October 1, 1976, when Esso's 26% share was bought out. On October 14, 1981, Burmah Oil's remaining interests in the Assam Oil Company were nationalized, and Indian Oil took over its refining and marketing activities. Half of India's 12 refineries belonged to Indian Oil. The other half belonged to other state-owned companies.

By the end of the 1980s, India's oil consumption continued to grow at 8% per year, and Indian Oil expanded its capacity to about 150 million barrels of crude per annum. In 1989, Indian Oil announced plans to build a new refinery at Pradip and modernize the Digboi refinery, India's oldest. However, the government's Public Investment Board refused to approve a 120,000 barrels-per-day refinery at Daitari in Orissa because it feared future over-capacity.

In the 1990s Indian Oil refines, produces, and transports petroleum products throughout India. Indian Oil produces crude oil, base oil, formula products, lubricants, greases, and other petroleum products. It is organized into three divisions. The refineries and pipelines division has six refineries, located at Gwahati, Barauni, Gujarat, Haldia, Mathura, and Digboi. Together, the six represent 45% of the country's refining capacity. The division also lays and manages oil pipelines. The marketing division is responsible for storage and distribution and controls about 60% of the total oil industry sales. The Assam Oil division controls the marketing and distribution activities of the formerly British-owned company.

Indian Oil has established its own research center at Faridabad near New Delhi for testing lubricants and other petroleum products. It develops lubricants under the brand names Servo and Servoprime. The center also designs fuel-efficient equipment.

The Indian Oil Corporation is not the only state-owned refining organization in India, but it is the country's largest commercial company and the inheritor of most of the role and market dominance established by its colonial predecessor, Burmah-Shell. With nearly two-thirds of oil industry sales and responsibility for the country's international oil trade, Indian Oil is likely to remain a powerful force in India.

Principal Subsidiaries: Indian Oil Blending Ltd.

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