Need of the hour

The consolidation of the oil sector suggested by the Nitish Sengupta committee makes a lot of sense when viewed in the context of globalisation. One may have differences on the nitty-gritty of the proposals, but the broad rationale for restructuring the sector is not in doubt. While the mode of restructuring may be debated, the principles behind such a reorganisation need to be accepted wholeheartedly. The crux of the matter is that the country's oil industry needs to be able to face not only the pressure of internal deregulation, but also competition form foreign oil majors. The local companies' strength lies in their strong marketing network in this country, while their weakness lies in the fragmented nature of the industry. The smaller companies therefore need to be combined to be able to take on the competition. Furthermore, because of the vertically integrated nature of oil companies worldwide, we need to do the same in this country. ONGC could, for instance, merge with Indian Oil, while the smaller OilIndia can be tied up with the other company to be formed by merging the smaller refiners. The integration should extend from oil exploration to refining to the marketing of petro products. The Reliance group has already done this. Merging the companies will add value and, when the Government divests its stake, it will gain far more once the companies are merged, rather than if it divests individually in each small company. Further, with refinery capacity soon forecast to exceed demand in India, margins of refiners will be under pressure. Integrated companies will be better able to withstand this situation. This is clearly an instance where the whole is greater than the sum of its parts. Of course, merely merging companies is not enough, and it needs to be followed up by cost-cutting measures which will avoid duplication.

What should be the Government's role in these companies? While privatisation should certainly be aimed at, the Government needs to exercise some control on oil companies for reasons ofnational security. That need can be met by keeping a golden share, the rights of which should be exercised in a transparent manner. But even if our oil companies are fully integrated, they will hardly be in a position to become global players. Companies such as Exxon, Mobil, Shell are far too big to be effectively challenged, and in this capital-intensive business, money matters immensely. Much will, however, depend upon the support which Indian oil companies receive from the government. For instance, joint ventures between Russian and Indian companies can help both parties. Indian companies at present do have a marketing advantage, but dealers can very well switch allegiances, nullifying that edge. Defending the Indian oil companies' own territory calls for immediate consolidation.

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