While ONGC is on the verge of acquiring the government’s 51.11% stake in oil retailer Hindustan Petroleum Corporation (HPCL), the government has lined up two more such big mergers under a grand plan to create three oil PSUs with integrated operations. Indian Oil Corporation (IOC), the country’s largest company by revenue, is likely to acquire the government’s 66.13% stake in upstream firm Oil India (OIL) while another oil marketer, Bharat Petroleum Corporation (BPCL) is likely to acquire the government’s 54.88% stake in GAIL (India), the dominant gas transporter and marketer.
The IOC-OIL and BPCL-GAIL transactions could fetch the government close to Rs 31,600 crore as in each case its share in one company will be sold to the other. The proposed ONGC-HPCL consolidation is is expected to enrich the exchequer by Rs 29,000 crore as 51.11% government stake in HPCL will be bought by the explorer.
While the ONGC-HPCL transaction will likely go through in a couple of months after the Cabinet approval later this month, the timing of the other two deals would be decided after evaluating how the ONGC-HPCL consolidation pans out, sources said. ONGC could fund its acquisition via a mix of cash and bonds. It would also likely make HPCL a subsidiary as the organisational structures and work cultures are different in the two organisations.
The same model might be adopted by IOC and BPCL also to keep staff integration issues at bay.
“The plan is to consolidate three upstream companies with three downstream companies to create integrated oil firms on the lines of global practice,” said an official aware of the government’s thinking.
The government is of the view that the consolidation exercise would give financial muscle to these companies to compete with global players like Brazil’s Petrobras if not the biggies like Exxon Mobil and BP to acquire oil assets overseas as well as compete with private sector players in the domestic market. In 2016, BP’s profit before interest and tax, as per replacement cost accounting practice, from downstream business was $5.2 billion whereas that from upstream business was $0.6 billion. Compare this with IOC’s 2016-17 PBT of $4.09 billion.
Besides securing the country’s energy needs, the consolidation of the oil PSUs would generate substantial disinvestment revenue for the Centre to fund developmental projects ahead of national elections in early 2019. The ONGC-HPCL deal alone would fetch about 40% of Rs 72,500 crore disinvestment revenue target for 2017-18. The government’s 54.88% stake in GAIL is likely to cost BPCL about Rs 17,865 crore at current market prices while its 66.13% in OIL might cost IOC Rs 13,735 crore.
Finance minister Arun Jaitley in his 2017-18 Budget speech had said merger of oil companies “will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders”. However, analyst believe gains will be limited. “Though there will be benefits such as larger balance sheet, enhanced bankability and strength to absorb oil price volatility, other synergies will be few,” said Deepak Mahurkar, partner and leader, oil and gas industry practice, PwC.
Back in 2004, then oil minister Mani Shankar Aiyar was the first to moot the idea of merging upstream and downstream companies to create integrated companies though the idea was junked as it did not find much favour.
Former Planning Commission member Kirit Parikh had 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.