Supporting the government’s decision to create integrated domestic oil companies, Indian Oil Corporation (IOC) chairman B Ashok on Monday said the company would look at all possibilities of mergers and acquisitions. “Mergers and acquisitions are not new to us and in the past 15 years or so, we have taken over some big companies. So with such experience, we think it definitely is worth our while to look at the possibilities. The finance minister has offered a window of opportunities for us,” he told FE in an interview.
IOC, India’s largest company by revenue, had taken over Bongaigaon Refinery, a standalone refining company, and Indo-Burma Petroleum, a downstream company, in the past. Finance minister Arun Jaitley in his Budget speech had announced that the government intended to merge state-run oil and gas entities to create an integrated company which will have the “capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders”.
Since then, there have been talks of national oil explorer ONGC taking over oil marketer Hindustan Petroleum, though there has been no official confirmation from the companies.
Ashok believes that such a move makes sense in the larger context as bigger organisations with greater financial muscles in today’s integrated world have a far better means of looking at opportunities unlike smaller companies. “I would look at it from that perspective and especially now with oil prices being in a range and expected to remain range-bound for some time, we as a consuming nation need to look at international opportunities that come our way,” he added.
The other side, he said, is that an integrated company has the flexibility in terms of stable performance because the oil industry is volatile and different parts of it are volatile at different points in time. Being integrated provides the opportunity to face such a situation. “It could be that when upstream is doing well, the downstream is not doing well or the other way round. Or maybe even further downstream such as petrochemicals is not doing well. Everything doesn’t fall during the same cycle,” he added.
Internationally, companies such as BP, Royal Dutch Shell and Chevron, among others, are integrated, though they have different focus areas.
However, some experts don’t see merit in such mergers. Former Planning Commission member Kirit Parikh wrote in The Times of India: “One giant oil corporation will increase the bargaining power of the company in purchasing crude in the international market. But the bureaucratic and political oversight that is inherent in public-sector procurement may more than negate such gains.
“The larger financial clout of the company may provide some advantage in upstream acquisition or bidding for oil or gas blocks overseas. However, these benefits can be captured by other measures such as bidding jointly with financial institutions who can do independent risk assessment, and provision of risk capital support by the government.”
However, echoing the finance minister’s reasoning, Ashok said some of the company’s largest buys in the recent past have been as integrated consortium and so the National Democratic Alliance government’s decision is one step ahead. “From that perspective, larger companies will have better wherewithal in terms of international presence and buying stakes,” the chairman added.
He, however, emphasised the need to have a balanced portfolio and said IOC cannot become a purely upstream company, though the firm has aspirations in the upstream and there are opportunities in terms of further value additions as well.
The company’s upstream portfolio includes fields in Russia, Pacific north west in British Columbia, Canada and Venezuela, among others, producing 60,000 barrels a day.
Asked if it is in talks with Oil India for a possible merger, Ashok said it is not only vertical integration but other opportunities too that the company may look at.