Big plans are afoot for India’s sprawling hydrocarbons industry. Finance minister Arun Jaitley says the government aims to create an “integrated public sector oil major” to match the might of the international oil and gas giants. The big question is how that plan will unfold. Details are beginning to emerge.
What’s the logic?
The government owns majority stakes in eight major listed oil and gas firms. Combining some or all would create a bigger corporation with clout to negotiate better deals, for instance, on crude oil purchases. India imports some 80% of its crude needs. A merged business would also be less vulnerable to the vagaries of oil prices, say, by combining producers (which benefit from higher prices) with refiners (which get a boost from lower prices).
Just how big are those eight state-owned companies?
Their combined market value is almost $109 billion. If folded into one company, that would rank seventh globally among oil and gas majors. (Exxon Mobil is No. 1 at $345 billion). Such an entity would outstrip India’s private oil giant, Reliance Industries, whose market value is $71 billion. Six smaller unlisted joint-venture oil and gas companies may also come into play.
What do we know about the government’s plan?
Not much, in terms of detail. In August, oil minister Dharmendra Pradhan said his ministry was open to discussing a merger to create a larger, stronger national oil company and that the government was figuring out the appropriate model for the combination.
Jaitley then spoke in mostly general terms during his 2 February budget speech, about strengthening public-sector enterprises through consolidation, mergers and acquisitions.
Where are we now?
According to the Economic Times, the oil ministry, which administers the industry and works independently of the finance ministry, held a meeting in March with the state-run oil companies and asked them to produce a road map for integration.
So far, that road map appears to entail Oil & Natural Gas Corp. purchasing the government’s stake in either Hindustan Petroleum Corp., worth $4 billion, or Bharat Petroleum Corp., worth $7.7 billion.
How would that work?
Surprisingly simply. ONGC could just buy shares from the government and keep the refiner as a separate subsidiary, obviating the need for an official merger. ONGC already has a refining subsidiary -- adding HPCL or BPCL would create the nation’s third-largest refiner. India would receive vital funds for reducing the country’s fiscal deficit, but the move would imperil Prime Minister Narendra Modi’s goal of cutting crude imports, since ONGC might need to divert spending from its exploration investments aimed at boosting oil and gas output.
Is there a precedent?
The government attempted something similar at least once in the oil sector, during the mid-2000s. Those efforts unraveled through opposition from some of the companies and employees. The newly proposed mergers deals would also need to surmount the enormous challenge of absorbing refiners with networks across 29 states, thousands of employees and unique work cultures.
What about beyond the energy world?
Air India has remained unprofitable since its 2007 merger with Indian Airlines, though it managed to reduce losses this year. The government has struggled to integrate the carriers, failed to achieve the expected synergies and faced labour issues.
What does the market think?
Shares of all but one of the five largest state oil companies fell in the two months after the February budget, even as India’s benchmark stock index surged.
A 2015 study by the Journal of Business Management and Economics concluded that while mergers in India’s energy sector may not create immediate shareholder value, they produce companies that are better placed to compete and adapt. Credit ratings company Fitch reached a similar conclusion.