NEW DELHI: The government’s plan to create an integrated oil company will likely involve Oil and Natural Gas Corp taking over either Hindustan Petroleum Corp (HPCL) or Bharat Petroleum Corp (BPCL) but won’t result in a mega merger leading to the creation of an industry giant.
In his February 1 Budget speech, FM Arun Jaitley had said the government proposes to “create an integrated public sector oil major which will be able to match the performance of international and domestic private sector oil and gas companies”.
The merged entity will span the spectrum of activity from exploration to retail sale, said officials who elaborated on the strategy on condition of anonymity. “The actual intention behind the Budget announcement is not to create one huge oil firm,” one of them said. Under the plan, explorer ONGC will “control” HPCL or BPCL, which are refining and distribution companies.
“Currently, HPCL and BPCL have the government as the majority shareholder. The plan is to transfer the government’s holding to ONGC, which will become the holding firm of one of these companies (HPCL or BPCL),” said a person cited above.
The government does not intend to tinker around with any of the other upstream companies such as Oil India Ltd (OIL) or downstream ones like Indian Oil Corporation Ltd (IOC).
“Hence, this proposal does not result in any reduction in competition or efficiency in the oil sector,” said one of the persons cited above. One of the key ideas behind the plan is to lower risk, he said.
“The world over, the largest and most successful oil companies like Shell, BP and Exxon are vertically integrated,” the person said. “They combine exploration activities with refining and distribution.”
The logic is that when crude oil prices are high, the exploration business does well and when they drop, the distribution business benefits, said the people cited above.
“By combining the two in a single company, the overall profit of the undertaking becomes more stable. Investors benefit from reduced volatility of profits,” said another official. In order to achieve the objective, the government plans to transfer its majority shareholding in HPCL or BPCL to ONGC, said the people cited above.
These sources said a “complete merger” of the two entities may take longer and the basic objective of integration can be achieved even without this.
The Budget announcement had led to intense speculation that the government intended a grand merger of all the oil companies to create one mammoth entity. Critics had flagged the various problems that could result from such a merger.
State-owned ONGC is the country’s biggest oil producer and one of the largest companies in the country.
HPCL, a Navratna company, owns and operates two major refineries in Mumbai of 6.5 million metric tonnes per annum (MMTPA) capacity and another in Visakhapatnam of 8.3 MMTPA capacity besides owning and operating the largest lube refinery in the country. IOC is the nation’s largest refiner and fuel retailer.
Source: Economic Times