labels: bharat petroleum corporation, gas authority of india limited, haldia petrochemicals, indian oil corporation, hindustan petroleum corporation, ongc
The case for merger of oil PSUs news
22 January 2005

Integration of oil companies will result in global majors with clout, Uday Chatterjee reports. In the early '70s, a decision was taken by the government of India to set up an oil refining plant with crude imported from Iran. The government decided to set up the refinery at Mathura in UP. That would have meant that the crude would have to be first shipped to Bombay and then transported all the way to Mathura.

The decision was fundamentally flawed as the refinery should have been set up near the west coast to save on transportation costs. But then, the then minister for petroleum was Kamalapati Tripati, who hailed from UP.

This is how some of our refineries were conceived.

IOC, HPCL and BPCL all belong to the government of India and yet they have set up state of the art retail outlets next to each other's, competing for the same market.

IOC and GAIL are having public spats for a share in Haldia Petrochemicals and for developing a LNG block with Iran's Petropas.

Nowhere in the world are there so many public sector companies in the same business - three, IOC, BPCL and HPCL in fuel retailing; two, ONGC and OIL in oil exploration and production; and two, IOC and GAIL in petrochemicals. Besides, IOC, BPCL and HPCL want a slice of overseas equity oil, where they will compete with ONGC Videsh.

Thus, instead of competing with private sector companies like Reliance, Essar and global companies, they are busy competing among themselves.

The destructive competition and duplication in the oil sector has reached such proportions that it prompted petroleum minister Mani Shankar Aiyyar to lash out at these PSUs in public. Speaking at the Petrotech 2005 conference held at New Delhi this week, he said that while he is not for an interfering minister or an interfering ministry, he was helpless at the PSUs fight among themselves.

"I don't know why these people, who have worked together for 30-40 years, are behaving like this," Aiyar said, when asked about his views on IOC's Iran deal.

In the absence synergies in this sector, the time has come therefore for initiating radical changes in this sector and prime minister Manmohan Singh spelt out a road map during his inaugural address of Petrotech 2005.

Singh said the government was looking at the possibility of restructuring the oil PSUs on a priority basis, with a view to making them globally competitive. "We can no longer be complacent and must learn to think strategically, to think ahead and to act swiftly and decisively."

He went on to add that the move required a greater degree of professionalism in the management of the country's oil and gas PSUs and in formulating an energy security strategy.

For meeting the burgeoning demand for petroleum and gas, the government had completely opened the exploration and production sector for private participation. Rational pricing of energy was a critical aspect of energy policy and a vital element of energy security for the country.

Apart from pricing and sourcing, technology is another area that requires special attention. Technology today is driving business in the hydrocarbon sector and has transformed the oil industry from a commodity business that it once was to a high-tech industry.

Singh ended his speech saying, "I urge our oil and gas PSUs to think big, think creatively and think boldly. They have to be more fleet-footed in making use of global opportunities, both on the supply and demand side."

Aiyyar told the Petrotech delegates that an advisory panel has been constituted to look into the restructuring of public sector oil firms.

The national advisory council member, V Krishnamurthy, would head the six-member advisory committee on 'Synergy in Energy', and it would look at options of merging two or more companies to create oil behemoths that have financial capabilities to match the Chinese firms in the international arena.

The options that the panel will study include merging all oil PSUs into one mega firm or creating two oil behemoths by merging HPCL and BPCL with ONGC and Oil India Ltd with IOC.

Another option would be to keep the oil companies as they are but devise a management structure that coordinates PSU efforts. Merging all the oil PSUs would create a monolith, ranking 34 in the Fortune 500's list of global majors.

The proposals should be viewed from the fact that today, every major oil company in the world is vertically integrated. This brings about better efficiencies in the upstream as well as downstream sides of the activity and also reduces the cost of production as well as the price. The percentage of oil to be imported will also come down.

Finally, being a huge company, it will have the clout to bid competitively for international tenders and global CEOs will come to India to meet our CEOs instead of the other way round as it is now.

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The case for merger of oil PSUs