In a setback to the divestment of the Shipping Corporation of India, the petroleum ministry has refused to grant nodal agency status to the corporation for transporting crude.

The divestment ministry had wanted the SCI's status maintained for two years post privatisation.

"In a competitive scenario, public sector oil companies need to reduce their costs wherever they can, and, therefore, it may not be possible now to continue the nodal agency status to SCI, which was agreed to in a protected regime," Petroleum Minister Ram Naik said in a communication sent to Divestment Minister Arun Shourie on Friday.

Moreover, Naik said, following the government's decision to divest Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited, "it will not be possible for the government to impose nodal status for SCI on these two companies."

According to Sanjay Kaul, principal consultant (oil and gas) with PricewaterhouseCoopers, Naik's views make economic sense.

"In case SCI is made the nodal agency, it will adversely affect the valuation of HPCL and BPCL. But if it is denied this status, it will only marginally affect the valuation of SCI since India's oil imports are shifting to very large crude carriers, which the corporation does not have," Kaul said.

Naik said his ministry had no objection to Shourie's suggestion regarding the extension of purchase preference by the oil PSUs to SCI after its divestment. Naik, however, said this would be subject to the following stipulations.

First, based on the least cost option or commercial considerations, the oil PSUs will have the option to import the crude either on carrying and forwarding (C&F) basis or on freight on board (FoB) basis.

Second, if oil PSUs decide to import crude on FoB, the case of SCI will be considered under the extant purchase preference policy of the government for which SCI will need to participate in the oil PSUs' tenders.

Third, after HPCL and BPCL are privatised, they will be under no obligation to offer purchase preference to SCI.

Naik also said the Cabinet had extended the purchase preference policy till March 31, 2004, and the benefits under the policy could be extended till this date only.

In the communication, Naik asked Shourie to bring the petroleum ministry's position to the notice of the Cabinet Committee on Divestment.