Decks are cleared for the ONGC-HPCL merger with the Cabinet giving the go-ahead on Wednesday. While the government mops up roughly Rs 26,000 crore, or 40 per cent of its FY18’s disinvestment target, ONGC-HPCL will now have presence in the entire value chain. Finance Minister Arun Jaitley and Oil Minister Dharmendra Pradhan have earned a mini victory lap for making the deal possible in record six months. The proposal for an integrated energy PSU giant was first announced during the FY18 Budget. But here’s the big picture.
The reason for combining state-run entities is to gain global scale and build enterprise muscle. It was first done in banking: SBI is now among the top 50 global banks. Interestingly, six out of the world’s top ten oil companies are state-run, but India has a long way to get there. The combined market capitalisation of five players namely ONGC, OIL, IOC, HPCL and BPCL is roughly $106 billion, lower than ExxonMobil, or Royal Dutch Shell or Chevron. But together they can be a formidable force.
India is the third largest oil importer, next to China, but the comparison stops there. State-run PetroChina is the world’s third largest oil and gas company. From the fifth position a few years ago, it is narrowing the gap pretty fast. Or take China National Offshore Oil Corporation, with operations in more than 40 countries. China is also the second largest holder of emergency crude stockpiles and is scooping up more.
Japan is the third-largest, followed by South Korea. India, despite its import dependency, is way behind, though a fifth slot is within its reach, provided its 2020 plans pan out. The newly-formed oil major can withstand fluctuations, and with a strong balance sheet, it can bid aggressively for oil fields competing with global majors, address energy security and strike good bargains for oil sourcing. With the first consolidation effort executed at lightning speed, more deals—IOC-OIL—aren’t ruled out, as it’s hard to foresee a halt to its progress.