‘Oil firms merger may not be good for consumers, private retailers’

Industry:    February, 2017

The proposed merger of the state- controlled oil companies, both upstream and downstream, can reduce inefficiencies and improve competitiveness but will be an execution challenge apart from being not so good for consumers and competition, says a report.

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, RILBSE -0.12 % 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 BSE 0.92 %, ONGC BSE 0.54 %, BPCL BSE 0.45 %, HPCL BSE 1.47 %, Oil India BSE 0.61 %, and Gail BSE 0.56 %.

Plans to consolidate the oil and gas sector have been floated before, but last week the idea was presented in the Budget speech for the first time.

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.

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