Slick it ain’t for sure
Mar 12 2017
In principle one cannot have any argument with ideas on making CPSEs stronger, it is necessary to move after considering our experience of such efforts in the government in certain other areas. The proposal to have a holding company of State Trading Corporation, Metals and Minerals Trading Corporation and PEC in the ’80s did not succeed. It did not add any value and the experiment had to be finally given up. Efforts made recently to create a large company like Air India by merging Indian Air Lines and Air India has not been a happy one. There are a large number of issues relating to personnel and the new company is financially weak and there has been no creation of additional value to stakeholders. Government had to provide about Rs 20,000 crore to save the company.
Lot of this enthusiasm in the oil sector emanates from seeing international oil companies. In China we have three integrated oil majors: CNPC, Sinopec and Petro China. All have turnover of about $400 billion. Next to Saudi Aramco these have the largest business. China has in addition an offshore oil company. Indian oil is our largest company with a turnover of about $80 billion. ONGC is a profitable company but with annual revenue stream of less than $15-20 billion. The desire to match some of the global oil majors has driven this idea in the oil sector. It has however to be realised that to match any global oil major, we would need large investment and revenues from operations in other countries and take upon other activities like gas and oil pipelines, technical operations of oil drilling and petrochemical business. This may take time, need resources and involve risks.
The merger of upstream companies like ONGC with one or two downstream companies like BPCL or HPCL may also have serious problems in an era of high oil prices. When oil prices are high, ONGC will make profit but retail prices may be difficult to increase for downstream companies in view of consumer resistance. The downstream sector will make losses. This will reduce investment capability of the company in new exploration ventures.
Oil sector is taxed heavily and has been the largest source of revenue to the government. In an era of moderate oil prices, the new company may generally have a surplus. This will provide an incentive for the government to get additional taxes from this company. It will be easy for the government to get additional revenues from it without much effort. This will weaken the sector and reduce its capability for expansion and investment instead of providing any additional value. Government will need to curb such an approach if it wants investment and expansion.
There is also need for clarity on the number of companies which may be merged. We have three companies in downstream sector IOC, BPCL and HPCL distributing oil products and one company GAIL distributing gas and LPG. There are two upstream producers ONGC and OIL India. Any merger of all these companies will be considered anti-competitive behaviour. Since network of private oil product distributors is limited, merger of all centre public sector units (CPSU) distributing oil products may be difficult to sustain. The mergers will have to be limited keeping this in mind. The competition commission will look at it closely and may not approve any wholesale merger of oil CPSUs.
OIL India represents the aspirations of people of north east. The region is extremely sensitive about its resources and merger of the company may appear to dilute this independence. The proposal to develop the oil major will have to keep this in mind. This will limit the extent of merger to develop a giant CPSU oil major.
The method of mergers and acquisitions will also need to be looked at from cost perspective too. In one approach ONGC could purchase the majority share of the government. This could cost the company about $5 billion to $6 billion for acquiring a company like HPCL and give the government this much of resources. It would be costly for ONGC and deplete their capability to invest in expansion. In the alternative the ONGC could float new shares and offer it to shareholders of HPCL.This will involve HPCL shareholders who may not be willing to take these new shares. Some sweeteners will be needed for mergers to go through.
From oil security perspective also we need a look at this idea. It is necessary to consider its implications for continued availability of oil and LPG when there are calls for strike by the unions of the new giant oil major. The risks will have to be weighed against such calls when there are a number of oil companies with their own unions which may take a different view on the strike call. Clearly for disruption in supply of essential goods like petrol, diesel and LPG, the risk with a single union will be higher as against multiple unions as at present.