The ministry of petroleum and natural gas has started discussions with state-run oil and gas companies to take forward the Budget proposal to create a globally competitive “oil major” by consolidating the firms.
The ministry officials have met heads of all public-sector oil companies and asked them to suggest possible merger scenarios, said a person close to the development requesting anonymity.
Finance minister Arun Jaitley had announced in his Budget speech on February 1 that the government plans to merge state-run oil and gas entities to create an integrated firm having the strength to compete with international and domestic private oil and gas majors. He had emphasised that the move will provide the merged entity “capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders”.
The move will require the petroleum ministry to do a lot of ground work and think of ways to initiate the proposed consolidation, before the department of investment and public asset management steps in to execute the plan.
There are 18 oil and gas state-run utilities including Oil and Natural Gas Corporation (ONGC), Oil India, GAIL (India), Bharat Petroleum Corporation, Indian Oil Corporation and Hindustan Petroleum Corporation.
The idea has been received with mixed reactions by the industry. Though some have welcomed it, ONGC chairman Dinesh Sarraf had on February 9 told Reuters that the oil explorer’s overseas arm, ONGC Videsh, should not be merged as such horizontal integration would create monopoly.
A GAIL (India) executive, as reported by FE earlier, had said their business model is distinct from others and it may remain a separate vertical even in case of a merger.
However, unlike as was believed after Jaitley’s announcement that one large behemoth will be created, oil minister Dharmendra Pradhan had clarified that it will not be a merger of all companies, that more than one large company could be created or smaller firms may be merged into larger Navratna companies.
News channel ET Now, sourcing wire agency Newsrise, on Tuesday tweeted that according to an oil ministry official, at least one merger between oil firms will be announced by September 30.
Talking about the merger scenarios, a government official not wanting to be named said there are various options to consolidate the public sector oil companies. “These include creating a holding company, or creating two companies by merging the upstream ones together and downstream ones separately.” The official reiterated what Pradhan said and added that the third option could be merger of smaller companies with larger ones.
According to a recent Fitch Ratings report, though the move could reduce inefficiencies across the sector and create an entity that is better placed to compete globally for resources and less vulnerable to shifts in oil prices, a merger would face significant execution challenges.
The main hurdles, according to the report, will be faced in terms of managing the integration of employees, addressing overcapacity in the merged entity, and winning the backing for merger from private shareholders.
Some experts like former Planning Commission member Kirit Parikh have argued against the government’s move. “When these activities are combined into one unit, inefficiency in one activity can be hidden by the efficiency of another. This reduces the incentive to be efficient for the loss-making company and reduces resources for growth and investment for the profit-making company,” Parikh wrote in The Times of India, even as he admitted that one giant oil corporation will increase the bargaining power of the company in purchasing crude in the international market.