The letter of intent was signed between BP and HPCL coinciding with the visit of BP chairman Sir John Browne.
Sir Browne is visiting India to explore opportunities for BP in deepwater exploration, oil refining and fuel retailing. HPCL is looking for foreign partners for the refinery and has been held preliminary talks with BP, Total of France and Petronas of Malaysia.
The agreement does not mean that BP would pick stake in the refinery, but only marks the beginning of formal talks between the two companies.
The British firm will decide on a stake based on the outcome of these talks. HPCL and the foreign partner will hold 26 per cent stake each in Guru Gobind Singh Refineries Ltd, the company which is implementing the 9 million tonnes per annum refinery project.
The remaining 48 per cent would be offered to public through an IPO in 2007. The refinery would be completed by 2009.
BP and Total are keen to enter India's oil retailing market and see Bhatinda refinery as an ideal opportunity to meet the minimum investment criteria that would give them the retail licence.
A licence to sell petrol and diesel in India is contingent on a company investing a minimum of Rs 2,000 crore (Rs 20 billion) in oil infrastructure projects like refineries, pipelines, exploration and production and terminals.