No one should be opposed to consolidation in the hydrocarbons industry across operations in exploration, refining and marketing of petroleum products. Multiple players may have come into being with specific purpose in the hydrocarbons industry evolution. Inefficiencies and deficiencies in state-run oil companies notwithstanding, these enterprises have done yeoman service to this large diverse country beset by different problems. The Union cabinet’s decision on Wednesday to merge refiner cum marketing company HPCL with the country’s largest explorer ONGC must be viewed in this context.
There is no doubt that a behemoth of $42 billion will come into being as a first step towards consolidation of oil industry players. Restructuring, mergers and acquisitions amongst 23 state-run oil enterprises was announced by finance minister Arun Jaitley through his budget proposals this fiscal. The ONGC-HPCL merger is the first big attempt made by the Modi government that may be followed by other similar moves. The government’s announcement in this merger proposal raises serious issues that should have been considered by the council of ministers. ONGC would not only draw out the entire $2.5billion cash reserves, but would also borrow about $2.1 billion from the market to fund the government’s 51.1 per cent stake in HPCL.
If that’s the case, then what does it mean from the ONGC’s perspective? Huge investments that could have otherwise been made both in domestic and global markets in exploration assets, will now have to be deferred given that cash crunch would hit the company in a big way. Unless both ONGC and HPCL cut corners and consolidate their operations under one roof, there’s no material benefit for the two organisations. The merger scheme confirms the worst fears entertained by the industry stakeholders. More than the merger, the idea is geared towards getting Rs 30,000 crore out of ONGC to fund the Narendra Modi government’s fiscal deficit this financial year. Funds accrual to the government kitty constitute over 40 per cent of the disinvestments targets set by Jaitley, raising serious doubts about this first merger. And, how’s this consolidation move different from cross holding attempted by UPA government under P Chidambaram? Chidambaram resorted to crossholding between oil and power companies based on recommendations of then revenue secretary Vijay Kelkar.
Even in the present context, if the objective was to achieve the divestment target, then the merger of ONGC-HPCL must be opposed tooth and nail. If merger funds were to be credited into a dedicated account to buy energy assets abroad, it would set the precedence for achieving self sustainability in energy sector as the stated goal for most governments. Even after the merger, ONGC-HPCL will not attain the size and reach of global behemoths like Rosneft with $56 billion valuation. For that matter, ONGC-HPCL will be nowhere near companies like Exxonmobil ($340 billion), Shell ($220 billion), Total ($128 billion) or British Petroleum, with a market capitalization of $114 billion. Structuring of the deal could have been entirely different, given that HPCL was only being transferred into another pocket borough of the government. For instance, merging refining capacities of MRPL, a subsidiary of ONGC with that of HPCL, would have led to consolidation, savings on administrative and operations costs.
Retaining HPCL as another arm of ONGC does not augur well for the company in terms of branding, stature and future growth prospects. Consolidation in sectors like power, insurance, banking and telecommunications must be attempted with larger economic objectives to facilitate growth to match competition and build Indian brands globally that can make a difference.