Giant Companies Would Be Less Transparent, More Exploitative

Written by S Narayan | Updated: Aug 13 2004, 06:05am hrs
There has been considerable speculation about merger of companies in the oil sector. However, the suggested mega mergers will only push up crude costs, gas transportation costs, and retail prices, as there has been collusive price-fixing of petrol and diesel every fortnight by the three marketing companies. The move would make the market less transparent and more exploitative.

Interestingly, if the public were given an assurance that the profits are to be used to further the central governments National Common Minimum Programme (NCMP), there would perhaps be some social justification for these moves. But public funds in the hands of these companies are being used for ventures best left to others to pursue. But more of that later.

A major possibility being discussed is to merge Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) with Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) with Indian Oil Ltd. In this scenario, gas utility GAIL is to be re-integrated with ONGC, from which it was carved out in 1984.

A proposal to merge IOC and ONGC was considered earlier, and then shelved. But this time, it is reported that a ministry official has actually been asked to look at the sectoral recast.

A back-of-the-envelope calculation based on 2003-04 balance sheets shows the ONGC-led group to have net sales of Rs 1,44,245 crore. The group will have a reserve of Rs 58,000 crore and an annual profit of Rs 14,141 crore.

The group led by IOC will have a turnover of Rs 1,40,000 crore. It will have a reserve of over Rs 30,000 crore and a profit of around Rs 10,000 crore. The minister has subsequently denied that any such mergers are contemplated, but speculation continues.

Each of the public sector oil majors has its area of specialisation marked out for it. IOC is supposed to be in refining and marketing, ONGC in prospecting and production, and GAIL in gas marketing and transportation.

A few years ago, when the government unveiled its Hydrocarbon Vision 2020, one of the important planks was that these three companies would strengthen themselves and would be strategic players in marketing, upstream and natural gas respectively, and would therefore, in the interests of oil security, remain in the government sector. This was a time when disinvestment loomed large, but the ministry clung desperately to its oil majors, resisting pressure from the rest of the government to let go.

Curiously, this period also saw the strengthening of the public sector in oil due to mergers of Kochi, Chennai, Bongaigaon and Numaligarh refineries with marketing majors, and the acquisition of Mangalore refinery by ONGC. With disinvestments of HPCL and BPCL now off the anvil, the public sector in oil has, after several battles, emerged somewhat bruised as a major monopolist in the field. And it is these monopolistic tendencies that are a cause for concern to the consumer.

The vision statement for the ONGC calls it a firm in oil and gas exploration, and production. Since 2000, its sale of crude oil has remained static at around 23.9 mmte, and of gas at 2110 mcm. No new oil or gas discoveries have come its way, even though in the fields it has given up under the NELP process, others have been discovering quite large quantities of gas. Yet its profits have risen from Rs 2,677 crore in 1997-98 to Rs 105,293 crore in 2003.

This magic has been possible because government has decided to pay international prices of crude to the company even though its costs of production are very much lower. This currently adds over 20 per cent to the total cost of the crude used in India, with attendant consumer costs. These profits are being used for forays into shipping, refineries and petrochemicals, which are quite removed from the original mandate or its core competence. It is even setting up retail outlets.

GAIL is the dominant company in natural gas business, and controls over 90 per cent of all gas transportation. It has a petrochemical facility, and its dominant control over gas pipelines has given it annual profits exceeding Rs 900 crore. This company is also thinking of diversifying into oil exploration and retailing. Indian Oil is the major marketer, with over 20,000 retail outlets and 47 million tonne of refining capacity. It is planning to look overseas at exploration and at petrochemicals.

Why is the spectrum of operations being enlarged One could perhaps find three reasons. First and foremost is perhaps the inability to compete in the areas of core activity. ONGC has had very little success in exploration, and its reserves are running out. GAIL merely pumps other peoples gas production, and has no product of its own. IOC, today the conservative, is not the most efficient refiner, and has to fall back on retailing, where competition is hotting up.

Second, it is interesting that people who have spent their lives in IOC, a marketing company, head top management in all three companies. This could be the explanation for the focus on retailing by non-retailing companies.

Third, and a little sadly, the ministry has been so pleased with the financial performance and commercial muscle of these companies, with continuing control over these resources, that there has been little guidance, vision or strategy from government on where these companies should be going. The minister has subsequently denied that any such mergers are contemplated, but speculation continues. The consumer has paid for all this.

There is a need to relook at existing strategies. At a time when international crude prices are ruling so high, a reduction in costs paid to ONGC will immediately benefit the customer. Moreover, a relook at refining and marketing margins will yield substantial savings, and, coupled with tariff corrections, will reduce subsidies.

More compellingly, in a public sector model, Navaratna or not, the owner cannot stand apart from strategy and vision. Government must, through its directors on the board, enunciate a clear path for each of the companies which does not overlap, and which does not result in monopoly power in the hands of the companies.

There are important tasks ahead. Oil and gas must be found, and equity in oil fields overseas purchased. More and more gas must be evenly distributed over the country for industrial and domestic use. Marketing companies must become global players. All this is possible, and should be the goals of the oil industry. Leave shipping to the shippers, and let us get on with providing the energy needs of the country.

The writer is former petroleum secretary and former advisor to the PMO