Oil ministry is preparing the groundwork for the mega merger of public sector oil companies. As per recent reports, one proposal is for upstream giant ONGC to acquire retail major HPCL for Rs 44,000 crore. Energy expert Narendra Taneja believes that the merger will help ONGC gain more strength and will become a USD 100 billion plus company.
But, the acquisition poses an important question- will a merger of an upstream and downstream company work?
Former Oil Secretary, SC Tripathi in an interview to CNBC-TV18 said that an upstream and downstream integration avoids many intermediate steps and brings cost efficiencies.
“The oil sector is a highly volatile market, prices keep fluctuating… if companies are integrated then many of the shocks can be absorbed internally.”
He also pointed out that the international peers of the Indian oil companies are dominating the market because of their size. “They can access the oil resources in a better way and can also handle risk taking in a better way.”
Concurring with Tripathi, Energy Expert & National Convener-Energy Cell of Bharatiya Janata Party, Taneja said that size of ONGC is limited for it to compete with oil majors in the international market.
But, hopes that this integration will help the company het the acquired size to compete in the international market.
Taneja is of the opinion that HPCL should be able to maintain its own identity after the merger.
Below is the verbatim transcript of SC Tripathi & Narendra Taneja’s interview to Latha Venkatesh & Anuj Singhal on CNBC-TV18.
Anuj: The devils argument would be that why merge an upstream and downstream companies because in that case you are not giving shareholders the freedom to go with one part of the business? You may want to go with upstream at good times when crude prices are rising and you may want to go with downstream say for example over the last three or four years, your thoughts on that?
Tripathi: I cannot really talk much about the shareholders, but I can talk about the general economic benefits that are likely to accrue. I assume that over a period of time then the shareholders will also tend to benefit from there. To me there are four reasons and in fact in 2004 when I used to work in the ministry of petroleum and natural gas, we had mooted this idea for the first time. The reasons to my mind are number one upstream and downstream integration avoids many intermediate steps and brings cost efficiencies.
Number two, this is a highly volatile sector. Both availability and prices keep fluctuating. You have seen in the last 10-12 years the government had to intervene many times to take money from one and give to the other. So, if they are integrated as they are in many countries then many of their shocks can be absorbed internally and government intervention if necessary for bringing price stability and things like that would have to be much less.
Number three, this is a sector which is very capital intensive, high risk and high technology. There has to be a size to go forward. I would say that Oil India is the oldest company among all of them. But, it hasn’t gone beyond a certain stage because it lacks the size.
Lastly, all over the world it is a global sector, all over the world you see the competition is with very large companies whether from west they are some of the largest companies in the world ExxonMobil, Shell, BP or even the state companies whether it is Rosneft, Gazprom or Middle-east companies like Aramco, Abu Dhabi National Oil Company (ADNOC), National Iranian Oil Company or even take Chinese - the China National Petroleum Corporation (CNPC), Sinopec etc. they are all very large much larger than our companies. Therefore they are able to dominate the market, get better terms, access the oil resources in much better way than we do, are able to take the risk and also to that extent bring about energy security in their country.
Latha: Would you have any guesses on how this will happen? Will it be that ONGC will be a holding company or will it be that there will be a share swap, they will be merged into one entity, any views on what might happen and what ought to happen?
Taneja: My sense is their strategy or the thinking of the government at this stage is focused only on one thing that how can they help ONGC acquire more strength in terms of balance sheet and muscles in terms of sitting across the table and negotiate better deals, overseas acquiring exploration- production assets because our dependence on import is growing very much and at the same time the only company we have is state owned company ONGC. So, the government wants to strengthen ONGC. One idea was of course which was floated initially was to merge all companies under one and then create a kind of state owned super giant in India. I personally was against it. I don’t think that was a very good idea because each of these companies got his own DNA, history and all that that won’t have been a very smart idea. But I think this is limited agenda. This is a limited kind of a scope and therefore I think it is going to work very well.
In terms of whether HPCL would seize to have its own identity and so on so forth, I personally feel that ONGC may own it and balance sheet is fully integrated, but HPCL has its own history. I think it should be allowed to maintain its own identity. But the final decision on that to the best of my knowledge is not yet been taken. Idea is basically to strengthen ONGC and help ONGC to the extent possible because we have seen as SC Tripathi also pointed out when ONGC goes overseas with a very limited size, rather small size compared to CNPC of the world even PETRONAS of the world, and Saudi Aramco of the world they find very difficult to compete. But this would basically help ONGC to become USD 100 billion plus company and that would help ONGC to acquire the kind of strength it needs because in time to come our dependence on import is growing and we will need to go abroad even more aggressively acquire oil and gas.
Second thing trend which we have seen is like Rosneft big producer of oil in Russia buying into Essar Oil. Why did they buy into Essar Oils simply to secure demand for their oil, the same can go for ONGC also. So, that ONGC upstream side is better kind of more secured and in time of crisis they may likely to come in maybe couple of years from now ONGC is better product and at the same time HPCL. Pressure from renewable is growing, international sentiments again, fossil fuels are going very high. So, in the times to come these company have to come closer whether upstream and downstream.
Where the government can facilitate, government should be facilitating especially large economies like India and therefore see that how these companies can basically be put on a better pedestal so that they can go overseas, at the same time protect their both upstream and downstream. To me that seems to be the thinking of the government and also that seems to be the strategy. Another question is that how the whole thing is executed and how it is basically taken by the consumers as well as the investor? So, this is going to be also a little bit of challenging part of the whole exercise. My own sense the government is determined, government is keen to do it. At the end of the day I think it should work out well.
Anuj: Of course there will be employee issues as well these are some of the largest employers that we have right now. Do you think that would be a bit of an issue because now we are talking about creating a three companies ONGC with HPCL and BPCL, IOC with Oil India and may be GAIL heading a gas company, your sense of whether that could create a bit of an issue?
Taneja: I think this is probably the most important question because as I said HPCL is on DNA used to be so; BPCL is a very distinct DNA used to be Shell as we all know. Indian Oil has very different, ONGC has a completely different and distinct DNA so therefore I think it is important, in my view HPCL should be allowed to maintain its identity though its balance sheet and other things are completely merged with ONGC. But it can have its own identity. Therefore it is important for instance that Indian Oil if they plan to have some kind of integration there and eventually India going for let us say two integrated oil giants controlled by the government of India, I think that is not a bad idea. But, what is important to keep in mind that these companies have very distinct way of looking at themselves, also very different way at looking at their own business.
ONGC has a very different mind-set very different culture even from Indian Oil and that should be kept in mind. Otherwise we might end up in a kind of situation that we still see in Air India and Indian Airlines. They are still struggling merger has happened but the merger has not happened at the same time. My view HPCL should merge as far as the balance sheet is concerned but ONGC may be the holding company of HPCL but HPCL must be allowed to maintain its own identity.
Latha: Much will depend on how much synergies they are able to extract isn’t it? One big fear is that ONGC will be asked to pay cash to the government for that stake in HP and or BP, in which case, I mean where is all this strength argument? It would be an over leveraged company, the money would be gone, cash would be gone and the government of India perhaps will have a lower deficit, what if that is the end result?
Tripathi: Well, that maybe a short-term plan. Government of India’s finance ministry maybe thinking on those lines, but as Narendra Taneja also pointed out it will not be a one shot merger. It cannot be because these are all very large companies they have their own DNA, they have their own culture and that was a reason why the committee which was appointed in 2004 to look in to this question with Krishnamurthy, Ramakrishna and G K Arora suggested that we should continue the status quo for some more time. So, in fact ONGC and HPCL are being talked about because ONGC and HPCL are working together in MRPL, so they are already have a working relationship. Similarly, Indian Oil and Oil India can come together because they have been working very close to each other and in the north-east areas they are the only ones who are having presence there. So, the idea is that one should be strong in upstream and should also have downstream which will be led by ONGC and as has been pointed out ONGC and Indian Oil cannot work together, they have very strong DNA. So, others can be led by Indian Oil having Oil India in its ambit.
However, at operational level they can continue to have their own identity and over period of time the good thing is that all these companies have good personnel policies and they all have been making profits. Air India, Indian Airlines they were losing companies. In a loss making companies it become more difficult to adjust and accommodate. But in profit making companies it is not so difficult, it is difficult and therefore it will have to be two stage, three stage matter.
I would imagine BPCL and GAIL can be the third company in fact reason why we could not go ahead in 2004-2005 was that the minister at that point of time he thought that all of them should become one and going by the experience of Coal India, Steel Authority of India and others I felt that that would not be feasible to have all of them come together and form one integrated large company. But, if we go with three companies I think it is possible and let the three companies continue to work and then over period of time it can see whether further integration is necessary or not.