Oil majors -- Pros and Cons

An integrated public sector ‘oil major’ as proposed in the Budget could be an energy behemoth with interests spanning both exploration and refining businesses. This could give it the financial muscle and management bandwidth to hold its own in the highly competitive arena of global energy asset shopping.

So far, Indian PSU energy companies such as ONGC, Oil India, Indian Oil and BPCL have either by themselves, or in consortium, bought asset stakes abroad. But their buys are small in comparison to deals struck by big national oil companies, including those from China, and independent oil companies such as Exxon Mobil and BP. Bigger scale and balance sheet size could give Indian energy companies better bargaining power and access to big capital to bag mega deals. With oil and gas prices subdued, global energy assets are available at reasonable cost, making it a good time to buy. Also, an integrated company will be better placed to weather events such as a crude oil rout.

But such integrated ‘oil majors’ also carry risks. There is a possibility of dampening competition within the country and reducing the choice for customers in areas such as fuel retailing. Next, core competencies and work cultures of these entities could be quite different, making mergers a tricky affair.

If the government sells its 51.1 per cent stake in refiner HPCL to explorer ONGC, as reports suggest, some of these difficult issues could be avoided. For one, it would not be a ‘merger’ – ONGC and HPCL will continue as separate entities. Rather, ONGC will become the holding company and HPCL its subsidiary. This will still give ONGC a much enhanced balance sheet on a consolidated basis, enabling it to take the high tables in big-ticket foreign energy bids. The government, by virtue of holding the controlling stake in ONGC, will also continue to control HPCL, although indirectly. That is, HPCL will become a subsidiary of ONGC and a step-down subsidiary of the government. But the government will still be richer by about ₹30,000 crore or so — the proceeds for selling its stake in HPCL to ONGC. In short, quite an elegant and enriching rejig for the government.

ONGC, though, will have to pay not just the government ₹30,000 crore for its 51.1 per cent stake but will also have to make an open offer worth around ₹15,000 crore for an additional 26 per cent stake from public shareholders. This will likely require it to borrow to finance the deal, and could reduce its capacity for asset acquisitions, at least in the near future.