April 01, 2020
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Hypercarbon Prospects

India plans to create a single oil supermajor to face competition

Hypercarbon Prospects
Hypercarbon Prospects
A giant is being born. A team of powerful bureaucrats spread across ministries is giving final shape to the blueprint for creating an energy supermajor by merging Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC) and Gas Authority of India (GAIL).

Says an ONGC director: "The idea is to have an integrated oil and gas company with a strong presence—both in Indian and international markets—in upstream, downstream and midstream sectors. The scenario in the country will undergo a drastic change after the administered price mechanism (APM) is dismantled next year, with Indian companies having to become competitive enough to match international giants." The director, who spoke on condition of anonymity, further said that the decision will be formally announced early next year and that the behemoth has been tentatively named PetroIndia. The new company would have a market capitalisation of more than $22 billion (Rs 103,400 crore) and annual sales exceeding $32 billion (Rs 150,400 crore) in its first year. Hypothetically speaking, this would place PetroIndia 118th on the 2001 Fortune Global 500 list, 13th among all petroleum companies, and fifth among energy companies (4th, if you take the bankrupt Enron out).

Highly placed industry sources say the PM's principal secretary Brajesh Mishra, finance minister Yashwant Sinha, disinvestment minister Arun Shourie, minister of state for external affairs Omar Abdullah, who is in charge of energy issues in the MEA, and petroleum minister Ram Naik are involved in the exercise, first mooted in 1996 by the then petroleum secretary Vijay Kelkar. Kelkar, however, had to drop the plan after vociferous protests from almost everyone in the industry. When contacted in Washington DC, where he's currently employed with the IMF, Kelkar refused to comment.

The sources say that besides the PMO, which is strongly backing the idea, two officials favouring the merger are ONGC chairman Subir Raha and IOC chairman M.A. Pathan. According to Upstream, the prestigious oil and gas newspaper, there are indications that Raha will head the new entity.

Pro-merger experts cite marriages such as Exxon-Mobil and BP-Amoco and a host of state-owned international companies like Petronas BNP (Malaysia), Petromina (Indonesia), Petronas (Brazil) and Sonatrack (Algeria) and argue it's time New Delhi creates its own supermajor, for domestic stronghold and international operations.

Says former ONGC chairman Colonel S.P. Wahi: "The global oil and gas industry is on a roller-coaster ride. Prices are fluctuating and margins are reducing. The famed seven sisters of the West have been reduced to just three through mergers. India needs to develop a behemoth to reduce costs in every possible way." He adds that the new company must have global presence in all areas—from exploration and production (E&P), midstream and downstream to power generation. Many analysts agree with Wahi, citing, as an example, the fact that both ONGC Videsh and IOC Videsh pursue E&P projects (in Iran, Indonesia, Central Asia and Russia), and aver that a consolidated company will handle the work much better.

"The future belongs to big, integrated oil companies or very, very niche players," says Wahi. "Medium-sized players like IOC and ONGC will find it increasingly difficult to survive as dwindling margins force all companies to reduce expenses and consolidate."

But like all government mega plans, this one is also not free from tensions.Trade unions of the three companies have jointly written to the prime minister and the peotroleum minister, protesting the move which, they claim, will reduce the workforce by a third. ONGC has over 42,500 employees while there are over 30,000 and 4,000 in IOC and GAIL respectively.

There is another problem. The unions fear the government is contemplating the merger so as to disinvest up to 49 per cent of its equity in the merged entity and use the funds to reduce the burgeoning fiscal deficit. But not many observers are ready to buy this, because the prevailing low-market sentiments may last for some time and, worse, not many global energy majors may be interested in PetroIndia with the government holding a controlling 51 per cent stake.

Clearly, PetroIndia is an idea whose time has come. But the workforce issue has to be resolved carefully.

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