Framework at work to extract synergies between OMCs: Pradhan

For the merger of Indian oil manufacturing companies (OMCs) the government is developing a framework with respect to synergies between integrated public sector undertakings (PSUs), says Oil Minister, Dharmendra Pradhan.

Speaking to CNBC-TV18's Malvika Jain from the sidelines of his visit to US, Pradhan said that the oil companies are hiring consultants to discuss merger and acquisition opportunities.

He said that Chevron is looking to market oil in India whereas British Petroleum (BP) and Shell have already got licence.Below is the verbatim transcript of Dharmendra Pradhan's interview to Malvika Jain on CNBC-TV18.Q: You are on this trip to US and you are in Boston today, you will be travelling to Houston to attend CERAweek. You are scheduled to meet a whole host of petroleum ministers, CEOs of multinational companies, what would be your key message to the international community?A: I am here in the US to invite investors to bring new technology, to bring new idea to our oil industry, to our gas industry. Houston is an epicentre of new technology, new business model. We want to align with world trade and we want to invite all the who's who of oil industry to our country. Q: Would you also be sharing the modalities that has been approved by the Cabinet?A: We are going to have a programme of help in CERAweek. Recently, we have successfully completed a Discovered Small Field (DSF) bidding round. For that I had been also to Houston two months back and response is very enthusiastic in the Indian market with this kind of price also. So I am hopeful that the kind of market that is emerging in India, everybody is looking for Indian market.Q: There were also plans of the government to offer oil blocks for auctioning in the month of June.A: As I said, DSF round has been started in June, that has been completed successful by mid of January. So, we are confident now. Now, they all are small blocks, they are tiny blocks and they have to discover. Now the big round will start and I am very kind of preliminary formations are coming, preliminary indications are there. We are very hopeful and very enthusiastic.Q: But initially the response from foregin investors has been rather lukeward, so are there any steps that the government has taken to encourage foreign investments? Is it at all a priority for the government or you are complacent with the present state of affairs?A: You will appreciate India is the favoured destination of foreign direct investment (FDI). We do not want to tum-tum our market. If you have the capacity, the potential in the market, we do not have to persuade anybody. Let the people who are coming, domestic big players are also emerging, 2-3 big players have emerged in the DSF. It is not mattered whether anybody with a big banner, they are coming or not. Investment is coming, that is important. Let me input one example of American shale gas revolution. None of the big companies had started investing in any shale. Later on, they joined. So it does not matter who is the big men coming to our market or not. Certainly, we are focused on technology, we are focused on new ideas, we are focused on the investment.Q: By when do you expect India to become competitive in the energy space?A: Actually, today we are competitive. For a long period, we have to depend on input. Let us accept the reality in our scenario. The incremental energy requirement we have and the potential we have in our domestic background, we have to have a balance. We want to augment our production. We know the limitation of our geology. We are also focusing on the alternative energy. India is focusing on renewable energy. India is, in our transportation sector, we are focusing on bio energies. All these initiatives are there, but India will be importer for a long period, but simultaneously, we want to augment our domestic products.Q: In terms of the few retail norms, would this be an issue that you will be bringing up during the CERAweek?A: In the marketing area?Q: Yes.A: we have already opened up our marketing field to any big player and recently, British Petroleum has taken licence from us. Shell is operating and a company like Chevron, they are also looking into our market and Rosneft, the biggest Russian company is also already come to Indian market. They have invested in refineries, they have invested in marketing area. So India is going to everybody now.Q: Going forward, are there any other areas of collaboration that you have identified in terms of international players and their participation in the Indian energy space?A: In energy space, there is a lot of scope for the collaboration – collaboration in technology, collaboration in investment, especially the two areas we want collaboration, in our gas infrastructure, we are investing a huge capital expenditure in our gas grid network. We are building up new terminals. We are going for a big City Gas Distribution(CGD Network) in our country. In that area, we need collaboration. In the bio energies area, it is a very technology centric area and we are talking to some of the world majors in this area. We need collaboration in that area. India is abundant of thermal coal, low grade coal. But now, technologies are available. We want to create synthetic gas of our abundant coal. In that area, in all these area, we need collaboration, we need technology.Q: Are there any proposals under the government's consideration?A: We are talking to so many people in public sector companies, private sector companies. Both of them are talking to world technology players and some of them are in the final stages. Q: President Trump has said that the USA is likely to deregulate the American oil sector and this has the potential to increase supply of crude oil from the United States. What kind of implications you see for India and if you expect them to be negative, what steps we are taking to combat the situation?A: After a long period America has lift the ban and embargo on their exports. India is a consuming country. Consumers need more windows, consumers need more avenues to purchase its requirement, so more players will come and a player like America will start exporting their resource to the world market. It will certainly have a positive impact in the market and on consumer; consumer need reasonable price.Q: What about the oil public sector undertaking (PSUs)?A: They will earn money. There will be low price and our requirements will increase, they will earn money. For India, reasonable price suites us.Q: Across the value chain?A: Certainly. In India, we are moving towards integration. Sometime it's a uniqueness of the industry; somewhere you have to earn low money, somewhere you can earn good money, so in India, PSUs are primarily responsible for marketing plan. So, reasonable oil price suites Indian market.Q: Would you like to give me a figure of what you would consider as reasonable?A: All these are hypothetical price. It is a very sensitive issue. Reasonable means it should be affordable.Q: You mentioned about integration and this is something that was mentioned in the Budget speech by our Finance Minister, Arun Jaitley. You have said that there is a potential in India, not just to create one integrated public sector enterprise, but potentially, two to three. Then you have the Oil and Natural Gas Corporation (ONGC) Chairman saying that horizontal mergers between ONGC and ONGC Videsh is something that does not seem feasible. What kind of integration do you think is potentially possible? You have said that across the value chain, you are looking at mergers, but is there any ground work that the government is doing in this direction?A: What the government has announced is not mere lip service. The government is very focused and very keen to develop some models. As there is a discussion, the merger should be vertical, it is end-to-end, from exploration and production (E&P) to marketing, we want to create. Some few minutes ago, you raised one issue. We will take the hit at a different oil price. So, when there will be integration, sometime E&P will complement to marketing area and refining area and sometime refining, petrochemical, market will complement to E&P area also.So, in India, now we want to create some verticals, we may create few verticals to have more integration looking into the new emerging oil price in the oil market.Q: Certainly this is likely to make larger enterprises likely to be more competitive at a global scale but what about issues of competition domestically? And the other point I want to ask you about is creating synergies between these companies. Yes, in terms of finances there is going to be a merger, the financial balance sheets of these enterprises might look a little better in the short-run but when you think one company will be making losses and it will be offset by the profits of another company and vice versa, so no real synergies are going to be created from shareholder's perspective?A: Don't be too judgemental on this. Certainly there are two opinions and consciously we have taken the stand and I am hopeful that we will come out with a very successful model.Q: Is there a model in your mind at this point in time?A: My newspaper and media friends have an anxiety to have a model readymade and in hand. Certainly governance and synergies are hard businesses; a lot of issues are involved in between that. We will be completing our due diligence and soon it will come out.Q: Will it be possible for any of these mergers and any kind of acquisition to go through by the end of this fiscal year?A: We will inform.Q: Do you see a complementarity between INGC and Hindustan Petroleum Corporation (HPCL). There is a buzz in the market that that is a potential merger. A: It is purely business issue. Competent companies are talking to each other. They are hiring consultant for their own assessment. Government's role is to create a framework, who will merge with whom, how it will be done, when it will be done, this all are linked to due diligence and they are doing all such things. Government has given them a direction.Q: The framework is work in progress at this point in time?A: Yes.Q: Moving forward, I wanted to ask you that do you think it will set and precedent that cash rich PSUs are being asked to buy in stake in companies which are not making as much profit?A: Your information is inadequate and let us wait.Q: The Government had decided or had actually proposed that there will be a policy regarding ethanol production from various agricultural resources. I wanted to check with you if there was any development on that front.A: Lot the things we are doing in second generation ethanol production and on a pilot basis, we are putting 12 second generation ethanol plant in different part of the country very soon we will come out with a policy, Petroleum Ministry and Renewable Energy Ministry, both of them are working together hand-in-hand. They are bringing out some policy and we are giving some optic guarantee. So in the near future, there will be new economy in agricultural area, in the rural area of India on this second generation of ethanol.Q: I wanted to ask you, could you identify for me three key priority areas for your ministry?A: Basically, we are a consumer centric ministry. Mine and Prime Minister's very clear cut idea, we must have energy justice. These countries deserve to get energy in affordable price. This should be accessible. Energy accessibility should be there. And simultaneously, energy security should be there for a longer period. These are our priorities. Consumer is the centre of all such initiatives and in the welfare state, in a developing state, energy is the first prerequisite of development.