Finance Minister Arun Jaitley in his Budget for 2017-18 proposed to merge some of the 13 state oil firms 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."
There are 13 oil PSUs ranging from upstream oil producers like ONGC and Oil India to downstream oil refining and fuel marketing firms IOC, BPCL and HPCL to gas transporter GAIL India Ltd and engineering firm Engineers India Ltd.
The proposed merger can reduce inefficiencies and improve competitiveness but will be an execution challenge apart from being not so good for consumers and competition, a report has said.
Though a merger can create an entity that is better placed to compete globally for resources and less vulnerable to shifts in oil prices, it will face significant execution challenges, particularly on the HR integration, addressing overcapacity and getting it backed by private shareholders, Muralidharan R, a director at Fitch said in a report today.
"There will be considerable difficulties in merging a number of entities with differing structures, operational systems and cultures," he said adding it may not be good for consumers as well.
Though political sensitivities will limit job cuts, personnel-related issues are likely to arise from the need to manage hierarchies and potential overcapacity in the integrated entity, he added.
"Moreover, being listed companies with public shareholding of 51-70 per cent, can cause some problems in obtaining the mandatory 75 per cent approval for a merger, particularly if there are concerns over valuation," he warned.
There is also a question of how the state will handle the likely decline in competition post-merger as consumers have benefited from competition among these state-controlled retailers, and the resultant improvement in service standards.
The plan comes at a time when private players like Essar, RIL and BP and Royal Dutch Shell are planning it big in the retail space, but if the proposal works out these players may not be able to compete with a single large state- controlled behemoth.
He expects the new entity getting much stronger bargaining power with suppliers, and greater financial clout to secure oil resources. Most Asian countries have just one national oil company integrated across the value chain.
As against this India has 18 state-owned oil companies, with at least six of them being key players - IOC, ONGC, BPCL, HPCL, Oil India, and Gail.
More than 12 years after a proposal to merge oil PSUs was first mooted by the then Oil Minister Mani Shankar Aiyar.
Plans to consolidate the oil and gas companies was first mooted by the then Oil Minister Mani Shankar Aiyar 12 years ago but last week the idea was presented in the Budget speech for the first time.
An idea was mooted a few months back to merge them to create a behemoth that can not just compete globally but also withstand oil price volatility by using profits the refining business make in low oil prices to make up for losses in upstream and vice versa.
Top eight listed state-owned oil and gas companies have a combined market capitalisation of about USD 80 billion, making it ninth largest globally. The combined entity will be larger than Rosneft of Russia and billionaire Mukesh Ambani-led Reliance Industries.
The merged entity would have opportunities to save on costs and improve operational efficiency. For example, there would be less need for multiple retail outlets in a single area.
Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own, as is the common practice now, he argued. It would also be able to share expertise for exploration and acquisition.
In 2015-16, all state oil firms together reported a profit of Rs 45,500 crore on revenues of Rs 9,32,000 crore. They had planned a capital expenditure of Rs 87,600 crore in the current fiscal.
The merged entity could rival the likes of Russia's Rosneft (USD 60 billion in market cap) and UK's BP Plc (USD 92 billion) in market value.
