"We have short-listed four sugar mills in Andhra Pradesh to augment our ethanol production. The proposal is in a preliminary stage and would take another couple of months to close," said an HPCL executive who did not wish to be quoted.

The government has made it mandatory for blending 5 per cent ethanol–a by-product of sugar mills–with diesel and petrol. The country needs around 60 crore litres ethanol a year. Oil marketing companies will have to mix 10 per cent ethanol with petrol by October 2008.

The government issued a notification in December 2007 amending the Sugarcane (Control) Order, 1966, allowing only sugar mills to produce ethanol from sugarcane. However, HPCL has not decided on sugar production from these units.

HPCL is yet to value the sugar mills. "These are functioning sugar mills and we still need to value them. We could end up paying more for these mills than we did in Bihar," added the executive. The refiner bought two sugar mills at Bihar in May this year for Rs 90 crore.

The company is also looking at other states and would adopt an equity ethanol model where it faces difficulty in acquiring the sugar mills. "It is difficult to obtain the mandatory 5 per cent ethanol to blend petrol with diesel. If we need to meet the 10 per cent norm by October 2008, we have to look at other means such as equity ethanol," added the executive.

Andhra Pradesh has 42 sugar mills with ethanol producing units in Krishna and West Godavari districts.

The three oil marketing companies, Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), have signed a contract with sugar mills in the country for a total procurement of 140 crore litres of ethanol. They have already procured 36 crore litres, with IOC purchasing 19 crore litres, BPCL getting 9 crore litres and HPCL opting for 8.3 litres.

According to the Indian Sugar Mills Association, the country's total distillery capacity is 3,700 million litres. Of this, the ethanol capacity is 1,587 million litres and the remaining is alcohol and rectified spirit.