Union Budget 2017: Merging oil PSUs to create a goliath bad idea, instead privatise HPCL or BPCL

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Published: February 4, 2017 3:58:21 AM

On the face of things, the Budget’s plan for a big, integrated oil PSU is a sound one, even an old one.

Before creating an ‘integrated public sector oil major’ as finance minister Arun Jaitley spoke of on Wednesday, the government would be well advised to look at its downsides. (Reuters)Before creating an ‘integrated public sector oil major’ as finance minister Arun Jaitley spoke of on Wednesday, the government would be well advised to look at its downsides. (Reuters)

On the face of things, the Budget’s plan for a big, integrated oil PSU is a sound one, even an old one. Price cycles for crude oil and petroleum products are different so, based on even just this, an integrated player will have less fluctuations in revenue cycles. That is why, during the UPA years, oil marketing firms IOC/

HPCL/BPCL got into the exploration business and ONGC bought MRPL to get into the refining business—later, ONGC expanded into petrochemicals by, along with the Karnataka government and ILFS, setting up a unit in an SEZ. In the case of exploration too, while the Gujarat government-owned GSPC did well in its deep-sea discoveries especially since the deep-water wells were very complex, it simply didn’t have the financial resources to complete the job—that is where ONGC’s financial muscle will be useful. To that extent, standalone PSUs need to be merged with bigger ones.

But before creating an ‘integrated public sector oil major’ as finance minister Arun Jaitley spoke of on Wednesday, the government would be well advised to look at its downsides. Even globally, the history of M&As succeeding is a poor one, imagine doing this in a PSU environment. A key element of any M&A, it is obvious, is savings in manpower and resources—when the government is unable to even privatise PSUs due to fear of job losses, what are the chances it can shut down various departments in the merging PSUs? Merging Air India and Indian Airlines took years with the work cultures very different and each airline continuing to follow different policies for a long time, and there was even a tussle on whether AI or IA pilots should be flying certain routes. To the extent decision-making in any PSU is influenced by bureaucrats and politicians, or by the fear of the CAG/CBI/CVC, one integrated oil company is even more risky since even bigger decisions will be taken under pressure or put on hold.

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What India’s oil and gas sector needs, more than anything else, is competition and that is what the government should be trying to foster. Theoretically, private players like Reliance Industries and Essar Oil are already in the fuel retailing business, but this is really in the highway sector where there is land to be bought—in most cities, however, this opportunity doesn’t exist. Ideally then, the government should privatise an HPCL or a BPCL since this is what will bring in genuine competition, with all its attendant benefits, in the marketing segment. Similarly, in the piped gas segment, bringing in multiple players into each city will end the cosy PSU monopolies that exist right now. Having India’s own BP or Shell in the public sector may be prestigious but the customers will benefit more from competition while a large PSU will only restrict this—the success of a Reliance Industries or a Cairn Energy in exploration, in any case, is proof that newcomers or relatively small firms can do better than larger and well-established players.

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