By Subhash Narayan
New Delhi, Nov 13 : Government may shut doors on further consolidation in the public sector oil companies but allow companies to diversify and grow organically to achieve the scales that matches the performance of international and domestic private sector oil and gas companies.
Sources in the government said that unpleasant experience in the last year’s merger of PSU oil refiner and retailer HPCL with upstream major ONGC has tilted the equation in favour of organic growth for state-owned oil companies.
There is also a thinking that government should have no role in oil being a non core sector and most operations should be privatised.
The government’s fresh thinking could seal the fate of an earlier plan to create an integrated public sector ‘oil major’ by merging companies having synergy of operations. Under that plan, the first case of ONGC-HPCL merger was completed last year and there was another plan in works to split gas transportation company GAIL into two and merge one of the entities with either IOC or Bharat Petroleum Corporation.
According to sources, the fallout of the fresh move could also be that PSUs may not be encouraged to bid for Bharat petroleum Corporation Ltd. (BPCL), where government is selling its entire 53.29 per cent equity to a strategic investor. The Centre is hoping to bring in global oil majors such as Aramco, Total, Exxon to pick up its stake in BPCL that at current shares proices may be worth Rs 60,000 crore.
“The projection for oil market remains subdued so putting additional pressure on oil companies to pick up government equity at this juncture is not called for. The companies need to diversify and grow operations by making investments at right places. Putting extra debt burden by pushing through M&A is not required so the consolidation plan would remain on hold for now,” the source quoted earlier said.
ONGC’s acquisition of government’s share in HPCL has pushed the upstream oil major from debt free status into one where debt levels have reached closer to unsustainable levels.
In one of the most expensive buys, ONGC last year paid Rs 36,915 crore to buy government’s entire 51.11 per cent stake in HPCL. But the deal brought down ONGC’s cash reserves to Rs 1,013 crore as of March 31, 2018 from Rs 10,799 crore as of March 31, 2014 and saddled it with Rs 25,593 crore debt in FY18. Moreover, post merger HPCL didn’t even recognise ONGC as its promoter for almost one-and-half-years before a Securities and Exchange Board of India (SEBI) rap forced it to list its majority owner as a promoter.
The things could get worse if an M&A is pushed onto IOC that has already has miniscule cash balance. Though the company is showing relatively fair financial performance, a consolidation exercise would push it to add debt in its books that could weaken its operations. The company is in the midst of an expansion diversification exercise that could suffer if debt get added to its books. IOC is sitting on special oil bonds (liquid holdings) of value running into few thousand crores, but this could only part finance any M&A deal.
The proposal to merge oil PSUs was earlier mooted during the time Mani Shankar Aiyar. It was identical to the one that was explored by the current government — to merge HPCL and BPCL with ONGC, and OIL with IOC to create two large integrated oil and gas corporations.
However, Aiyar’s idea was spiked by an official committee that studied the matter in 2005 but felt that a merger or formation of the holding company was not advisable at that juncture.
The proposal was again revived in 2014 by the BJP-led government, but again in September 2015 a high-level panel on recast of public sector oil firms did not favour mergers to create behemoths and instead suggested greater autonomy by transferring government shareholding in oil PSUs to a professionally managed trust.
The talk of merger has once again started after then Finance Minister Arun Jaitley in his Budget for 2017-18 proposed 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.
(Subhash Narayan can be contacted at email@example.com)