Consolidation in public sector oil firms back on table

<br>The expected move is in line with Finance Minister Nirmala Sitharaman's announcement on Sunday to privatise most non-core public sector enterprises while leaving just one or maximum of four in core strategic sectors and allow private investments in all areas.

So, after 2018 merger of PSU oil refiner and retailer HPCL with upstream major ONGC, sources said, the government may now look at creating another public sector integrated ‘oil behemoth' by considering merger upstream oil producer Oil India Ltd (OIL) with Indian Oil Corporation (IOC). Moreover, after proposed split of gas transportation company GAIL into two, one of the entities in gas marketing may also be considered for merger with IOC.

Public sector oil refiner IOC has also in the past shown its interest to buyout government equity in Bharat Petroleum Corporation Ltd (BPCL) but PSUs are not allowed to bid for BPCL that is currently tried for strategic sale to the private sector global companies. Sources indicated that IOC's case for BPCL may also be considered if proposed bidding for BPCL fails to evince requisite interest.

Sources said that oil may be included in strategic sector as it ensures energy security for the country. But there are around 12 oil PSUs ranging from upstream oil producers like ONGC and Oil India to downstream oil refining and fuel marketing firms IOC, BPCL and HPCL to gas transporter GAIL India Ltd and engineering firm Engineers India Ltd. This leaves consolidation through further mergers and strategic sale the only route to restrict the number of PSUs to at least four as the news PSU policy is likely to state.

While consolidation may be looked at once again, care will be taken to ensure that such mergers only happens where there are synergies and mergers does not result in addition to debt burden on companies. ONGC's acquisition of government's share in HPCL had pushed the upstream oil major from debt-free status into one where debt levels reached closer to unsustainable levels.

In one of the most expensive buys, ONGC paid Rs 36,915 crore to buy the government's entire 51.11 per cent stake in HPCL. But the deal brought down ONGC's cash reserves to Rs 1,013 crore as of March 31, 2018, from Rs 10,799 crore as of March 31, 2014 and saddled it with Rs 25,593 crore debt in FY18.

The things could get worse if an M&A is pushed onto IOC that has already has limited cash balance. Though the company is showing relatively fair financial performance, a consolidation exercise would push it to add debt in its books that could weaken its operations. The company is in the midst of an expansion diversification exercise that could suffer if debt gets added to its books. IOC is sitting on special oil bonds (liquid holdings) of value running into a few thousand crores, but this could only part-finance any M&A deal.

The proposal to merge oil PSUs was earlier mooted during the time Mani Shankar Aiyar. It was identical to the one that was explored by the current government — to merge HPCL and BPCL with ONGC, and OIL with IOC to create two large integrated oil and gas corporations.

However, Aiyar's idea was spiked by an official committee that studied the matter in 2005 but felt that a merger or formation of the holding company was not advisable at that juncture.

The proposal was again revived in 2014 by the BJP-led government, but again in September 2015 a high-level panel on the recast of public sector oil firms did not favour mergers to create behemoths and instead suggested greater autonomy by transferring government shareholding in oil PSUs to a professionally managed trust.

The talk of a merger once again started after then Finance Minister Arun Jaitley in his Budget for 2017-18 proposed to “create an integrated public sector ‘oil major' which will be able to match the performance of international and domestic private sector oil and gas companies”.

(Subhash Narayan can be contacted at


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