Just a few months after Finance Minister Arun Jaitley announced creating an oil behemoth in his budget speech in February, the Union Cabinet today approved the plan to sell government’s 51 per cent stake in state-refiner HPCLBSE -2.70 % to explorer ONGCBSE 2.27 %.
The HPCL-ONGC deal is a major step towards India’s efforts to build a mega company that can compete with global majors. Below are the main reasons why the deal is important for the country:
1. Mergers and consolidation of state-owned companies are the only way to create an oil giant. HPCL-ONGC deal is the first step towards that goal. It will pave way for further consolidation. The government might ask IOCL to acquire the smaller Oil India.
2. State-run oil PSUs consolidated into a single major company will create economies of scale and have higher capacity to bear risks, improved margins and more efficiency.
3. Consolidation in oil sector is a globally acknowledged practice. International oil giants such as ExxonMobil and Royal Dutch Shell too have consolidated exploration, refining and retail operations. HPCL is a refining company while ONGC is an oil explorer. Consolidation of different operations will give ONGC control over value chain leading to strengthening of balance sheets.
4. A bigger Indian oil company will be able to better withstand the volatility in the global oil market.
5. The domestic companies are increasingly scouting for overseas assets in a bid to protect themselves from volatility in crude prices. A bigger company will have better bargaining power.
6. The HPCL-ONGC deal will help the government meet more than a third of its divestment target for the current financial year without losing control over the company. The disinvestment target is of Rs 72,500 crore and the deal is valued at nearly Rs 28,000 crore.
Source: Economic Times