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Energy: Will 'this' happen? - Views on News from Equitymaster
 
 
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  • Aug 27, 2004

    Energy: Will 'this' happen?

    Recently, the petroleum ministry mooted the idea of two mega-mergers of oil companies, one involving ONGC while the other, IOC. The idea here was to merge BPCL, HPCL and ONGC on one had and IOC, IBP and OIL India on the other. These mergers, if they were to take place, would result in India's two major companies featuring in the prominent list of global 500 companies. Let us now analyze the various business parameters that would drive these mergers to success.

    Crude oil security: Both HPCL and BPCL are big marketing players with reasonable refining capacity but have little to write home about upstream exploration and development projects. On the other hand, ONGC accounts for nearly 80% of India's crude oil production and is vying for retailing business riding on its standalone refinery, MRPL. The marketing companies would benefit from ONGC's assured supplies. The same applies to IOC, which shall benefit from the marginal (small) fields of OIL.

    Win-Win situation: ONGC and MRPL have been eyeing the retailing market for some time now and have together got an approval to set up nearly 1,600 retail outlets. With the merger, ONGC would have access to over 10,000 well-established outlets spread across the length and breadth of the country. Further, with enhanced refining capacity in terms of HPCL, BPCL and MRPL, it would be able to reduce its dependence on external sources for refining products. On the other hand, IOC would be heading the marketing front without duplication of efforts post the merger of its subsidiary IBP.

    No duplication: Currently, all the oil-marketing companies are vying for exploration blocks within the domestic boundaries of the country as well as abroad. To put things in perspective, BPCL has allocated nearly Rs 20 bn towards exploration blocks while IOC has created a war chest of US$ 2 bn. At the same time, HPCL is active in certain marginal fields through its subsidiary, Prize Petroleum. Also, ONGC, which has rich experience in exploration, is aggressively eyeing external fields through its subsidiary, ONGC Videsh. We believe, in the current scenario, this would lead to the companies competing amongst themselves and resulting in lower benefits. However, the merger would result in concentration of the companies towards its strength rather than un-necessary competition.

    The above factors seem to be bringing in definite benefits to the country in general and the companies in particular. However, given the labour problems and red-tapism, we believe it is still early days for such a merger. However, it would be a step in the right direction as has been proved by global integrated majors such as Exxon Mobil, Royal Dutch/Shell and BP Amoco. The merger would help India move closer towards attaining oil security and at the same time, provide strong competition to private as well as the global majors, who now plan to enter the market, with Shell being the latest to plan setting up of retail outlets.

     

     

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