Fund-raising exercise

Sushma Ramachandran

THE decision to finally go ahead with the merger of two public sector oil giants, Oil and Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation Limited (HPCL) has been taken after over a decade of mulling over the proposal. The idea was initially mooted in 2004 by then Petroleum Minister Mani Shankar Aiyar who set up a high-level committee to examine the issue. The committee  headed by V Krishnamurthy and comprising luminaries like Vijay Kelkar and GV Ramakrishna was opposed to the proposal. Instead, it suggested setting up a national shareholding trust to vest government shares in such companies while providing greater autonomy to the oil firms. Despite this categorical rejection, it is now a reality.

The restructuring of these two public sector companies cannot be seen in isolation. It seems to be part of an overall policy move to shake up government owned companies. This is indicated by the fact that the merger is the second of two major changes proposed in this sector. The first was the relatively radical decision to privatise the failing national carrier, Air India. A rational measure but difficult to implement, given the emotional public attachment to the carrier which is viewed as an iconic institution. The second major overhaul in the public sector is the merger in the hydrocarbons sector. This particular decision may seem equally logical but may not yield all the desired results.

Experts have debated for years over the need to have an integrated oil entity on the lines of global oil majors  Shell, Exxon, Petronas and BP. Historically, however, oil companies in the country evolved in a manner that did not naturally lead to the creation of such a vertically integrated organisation. ONGC and the Indian Oil Corporation were set up as fledgling exploration, production and refining companies in 1956 and 1959. The supply of petroleum products in the country, however, was handled largely, even after Independence, by multinationals. These were nationalised in the early 1970s by then Prime Minister Indira Gandhi. Esso and Caltex became HPCL and Burmah Shell became BPCL.

The two largest oil companies, ONGC, an oil producing firm, and IOC, an oil refining and marketing concern, have been highly profitable over the years and a  merger to create a vertical integration has never been on the cards. Besides, it has always been considered wiser to have at least two such entities in the petroleum sector rather than one behemoth. 

The benefit of the merger right now, however, will accrue to the government rather than to the oil industry or the consumer. With ONGC buying  the government shareholding of 51.1 per cent in HPCL, it will have to shell out as much as Rs 29,000 crore to the exchequer. This amounts to about 40 per cent of the disinvestment target of Rs 72,500 crore set for the current fiscal. With this inflow, the Finance Ministry should be able to comfortably meet its fiscal deficit target for the year. It has even been decided that the funds from the stake sale in HPCL will be used for social sector programmes. 

As for the aspect of competing with global majors, it looks a far cry right now. The combined revenues of ONGC and HPCL are estimated roughly at about $60 billion. This may look huge in the Indian context but still makes the merged venture look like a pygmy compared to Shell’s revenues of $419 billion and Exxon’s  $365 billion. Indian oil companies will thus remain much smaller than foreign oil majors and the merger is not likely to give a significant competitive edge to the new concern. The other argument being made is that an entity with vertical integration of oil production, refining and marketing will have greater flexibility in bidding for assets abroad. But this can equally be done by having the two companies work together for overseas projects.

Besides, doubts are being expressed over ONGC’s ability to actually raise the huge amount needed to buy the HPCL stake. It is already reported to have a huge debt overhang on its books. With this acquisition, the company may lose much of its financial muscle in future. 

Yet another factor that may have a negative effect on the merged firm will be the clash of two company cultures. HPCL has long had a reputation of being highly efficient while ONGC, despite being profitable, has not always taken the right policy decisions. Some of this can be attributed to lack of autonomy, such as the decision to offer its own discovered fields for production to private operators. Its stakes in foreign oilfields have also not been productive in all cases. Though so far the decision is to keep HPCL as a separate subsidiary company with ONGC as a holding company, there remain fears that its vibrant corporate culture may be hurt by the merger.

As far as playing a big role in refining and marketing, it must be pointed out that HPCL currently has only an 11 per cent share in oil refining capacity from its three plants. This will be supplemented with the addition of the Mangalore Refinery which is already part of ONGC. Even so, the bulk of refining capacity remains with IOC. 

The question is, is there any upside for consumers of petroleum products. The clear answer appears to be in the negative. The merger is aimed at trying to be competitive in the international market rather than the domestic one.  True competition would mean allowing private domestic and foreign players into the marketing arena for petrol and diesel sales. Owing to strategic issues, foreign entry into oil refining and marketing is virtually ruled out. Hence consumers have no option but to rely on supplies from the dominant public sector companies, as private companies like Reliance and Essar still remain marginal players in the area of marketing.

To sum it up, the ONGC-HPCL merger is more about shoring up government revenues than creating a vertically integrated entity in the hydrocarbons sector. One can only hope that this short-term objective will not lead to a long-term disaster. Many lessons have surely been learned from the botched merger of Air India and Indian Airlines, but the government would be wise to tread carefully as the merger is in a highly strategic and sensitive area of the economy.