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

Company Perspectives:

We strive be a major diversified, transnational, integrated energy company, with national leadership and a strong environmental conscience, playing a national role in oil security and public distribution.

History of Indian Oil Corporation Ltd.

The Indian Oil Corporation Ltd. operates as the largest company in India in terms of turnover and is the only Indian company to rank in the Fortune "Global 500" listing. The oil concern is administratively controlled by India's Ministry of Petroleum and Natural Gas, a government entity that owns just over 90 percent of the firm. Since 1959, this refining, marketing, and international trading company served the Indian state with the important task of reducing India's dependence on foreign oil and thus conserving valuable foreign exchange. That changed in April 2002, however, when the Indian government deregulated its petroleum industry and ended Indian Oil's monopoly on crude oil imports. The firm owns and operates seven of the 17 refineries in India, controlling nearly 40 percent of the country's refining capacity.

Origins

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.

The Indian Oil Industry Evolves: Late 1940s-60s

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, stipulating 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 ten percent 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.

Indian Oil Corporation: 1964 to the 1990s

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 India's Oil and Natural Gas Commission (ONGC) would eventually be merged into a single state monopoly company. Both companies grew vastly in size and sales volume but, despite close links, they remained separate. ONGC retained control of most of the country's exploration and production capacity. Indian Oil 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 closely linked 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 percent 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 eight percent 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.

By the early 1990s, Indian Oil refined, produced, and transported petroleum products throughout India. Indian Oil produced crude oil, base oil, formula products, lubricants, greases, and other petroleum products. It was organized into three divisions. The refineries and pipelines division had six refineries, located at Gwahati, Barauni, Gujarat, Haldia, Mathura, and Digboi. Together, the six represented 45 percent of the country's refining capacity. The division also laid and managed oil pipelines. The marketing division was responsible for storage and distribution and controlled about 60 percent of the total oil industry sales. The Assam Oil division controlled the marketing and distribution activities of the formerly British-owned company.

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

Changes in the Oil Industry: Late 1990s and Beyond

The oil industry in India changed dramatically throughout the 1990s and into the new millennium. Reform in the downstream hydrocarbon sector--the sector in which Indian Oil was the market leader--began as early in 1991 and continued throughout the decade. In 1997, the government announced that the Administered Pricing Mechanism (APM) would be dismantled by 2002.

To prepare for the increased competition that deregulation would bring, Indian Oil added a seventh refinery to its holdings in 1998 when the Panipat facility was commissioned. The company also looked to strengthen its industry position by forming joint ventures. In 1993, the firm teamed up with Balmer Lawrie & Co. and NYCO SA of France to create Avi-Oil India Ltd., a manufacturer of oil products used by defense and civil aviation firms. One year later, Indo Mobil Ltd. was formed in a 50-50 joint venture with Exxon Mobil. The new company imported and blended Mobil brand lubricants for marketing in India, Nepal, and Bhutan. In addition, Indian Oil was involved in the formation of ten major ventures from 1996 through 2000.

Indian Oil also entered the public arena as the government divested nearly 10 percent of the company. In 2000, Indian Oil and ONGC traded a 10 percent equity stake in each other in a strategic alliance that would better position the two after the APM dismantling, which was scheduled for 2002. According to a 1999 Hindu article, Indian Oil Corporation's strategy at this time was "to become a diversified, integrated global energy corporation." The article went on to claim that "while maintaining its leadership in oil refining, marketing and pipeline transportation, it aims for higher growth through integration and diversification. For this, it is harnessing new business opportunities in petrochemicals, power, lube marketing, exploration and production ... and fuel management in this country and abroad."

In early 2002, Indian Oil acquired IBP, a state-owned petroleum marketing company. The firm also purchased a 26 percent stake in financially troubled Haldia Petrochemicals Ltd. In April of that year, Indian Oil's monopoly over crude imports ended as deregulation of the petroleum industry went into effect. As a result, the company faced increased competition from large international firms as well as new domestic entrants to the market. During the first 45 days of deregulation, Indian Oil lost Rs7.25 billion, a signal that the India's largest oil refiner would indeed face challenges as a result of the changes.

Nevertheless, Indian Oil management believed that the deregulation would bring lucrative opportunities to the company and would eventually allow it to become one of the top 100 companies on the Fortune 500--in 2001 the company was ranked 209. With demand for petroleum products in India projected to grow from 148 million metric tons in 2006 to 368 million metric tons by 2025, Indian Oil believed it was well positioned for future growth and prosperity.

Principal Subsidiaries: Indo Mobil Ltd. (50%); Avi-Oil Ltd. (25%); Indian Oiltanking Ltd. (25%); Petronet India Ltd. (16%); Petronet VK Ltd. (26%); Petronet CTM Ltd. (26%); Petronet CIPL Ltd. (12.5%); IndianOil Petronas Ltd. (50%); IndianOil Panipat Power Consortium Ltd. (26%); IndianOil TCG Petrochem Ltd. (50%); Librizol India Pvt. Ltd. (50%).

Principal Competitors: Bharat Petroleum Corporation Ltd.; Hindustand Petroleum Corporation Ltd.; Royal Dutch/Shell Group of Companies.

Chronology

• Key Dates:
• 1948: India's government passes the Industrial Policy Resolution, which states that its oil industry should be state-owned and operated.
• 1958: The government forms its own refinery company, Indian Refineries Ltd.
• 1959: Indian Oil Company is founded as a statutory body to supply oil products to Indian state enterprise.
• 1964: Indian Refineries and Indian Oil Company merge to form the Indian Oil Corporation.
• 1976: The Burmah-Shell and the Caltex refineries are nationalized.
• 1981: Half of India's 12 refineries are operated by Indian Oil.
• 1998: The company's seventh refinery is commissioned at Panipat.
• 2002: The Indian petroleum industry is deregulated.