Budget 2017: Arun Jaitley proposes plan to merge state firms to create global oil major

Industry:    February, 2017

India may be on its way to having its own hydrocarbon behemoth that can take far more risks than individual oil companies can at present and make larger investment decisions. The aspiration is to create an entity on the lines of ExxonMobil Corp. or Royal Dutch Shell Plc.

Finance minister Arun Jaitley, in Union Budget 2017-18, proposed an integrated “oil major” which can create more value for shareholders.

The move is in line with the Narendra Modi government’s plan to utilize the synergy between various state entities for achieving efficiency and cost competitiveness.

International firms such as ExxonMobil, Royal Dutch Shell, and BP Plc have integrated operations across upstream exploration, refining, and fuel retail.

“We see opportunities to strengthen our central public sector companies through consolidation, mergers, and acquisitions. By these methods, they can be integrated across the value chain of an industry. Possibilities of such restructuring are visible in the oil and gas sector,” said Jaitley.

Although the move would result in fewer firms in the energy sector dominated by state-run entities, experts said that having an integrated entity would not diminish competition in retailing or in oil and gas block auctions.

“The competition between state-owned oil companies is rather limited today for the reason that although they are different legal entities, they are under the control of the oil ministry and constitute a single economic entity with the President of India as the controlling shareholder. The issue before government seems to be the choice between the internal competition among these companies vis-à-vis creating an entity that can compete globally,” said Subodh Prasad Deo, partner at Saikrishna and Associates, a law firm.

Deo had earlier initiated an examination of the issue of competition among state-owned oil companies as additional director general in the Competition Commission of India (CCI) but that was not concluded due to a Delhi high court stay.

State-owned firms in the oil and gas sector are Oil and Natural Gas Corp. Ltd (ONGC), Oil India Ltd, GAIL (India) Ltd, Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd, Numaligarh Refinery Ltd, Chennai Petroleum Corp. Ltd, Engineers India Ltd, Balmer Lawrie and Co. Ltd, and Biecco Lawrie Co. Ltd.

ONGC welcomed the move.

“Though the finer details are yet to come, but the intention appears to be to form an integrated company on the lines of oil firms such as ExxonMobil, Shell, and BP,” said Dinesh K. Sarraf, chairman and managing director of ONGC.

India’s energy demand growth is expected to outpace that of the other BRIC (Brazil, Russia, India and China) countries, according to the latest BP Energy Outlook released last week.

“The new entity will have economies of scale and Indian industry’s negotiating power globally will increase significantly. This will also contribute to improved stability of the industry because of integration,” added Sarraf.

“The integration may take more than a year unless the government has already done considerable groundwork. These are all listed entities and the pros and cons of such a move need to be assessed carefully,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu India Llp.

The move to create an oil behemoth comes in the wake of domestic companies increasingly scouting for overseas assets in a bid to protect themselves from volatility in crude oil prices.

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