Finance minister Arun Jaitley, while presenting the Budget for 2017-18, made an interesting announcement that will have far-reaching consequences for the petroleum sector. He expressed the Centre’s desire to develop an oil giant in the public sector, which will be able to match the performance of international and domestic private sector oil and gas companies.
His rationale for this decision was the creation of new opportunities to strengthen CPSEs (central public sector enterprises) through consolidation, mergers and acquisitions. Jaitley argued that the creation of a giant oil major would help integration across the industry’s value chain and develop capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for stakeholders.
In principle, one cannot argue against the idea of making CPSEs stronger. It is, however, prudent to develop these ideas only after considering the past experiences of such efforts in the government. The proposal to have a holding company of STC, MMTC and PEC in the eighties did not succeed. It did not add any value and the experiment had to be finally given up.
On similar lines, the effort to create a large company like Air India by bringing Indian Airlines into its fold has not been a happy one. There are a large number of issues relating to personnel and the new company is financially weak and there has been no creation of additional value to stakeholders. The Centre had to provide about Rs 20,000 crore to save the company.
Much of the current enthusiasm in the oil sector, however, emanates from seeing international oil companies. In China, there are three integrated oil majors: CNPC, Sinopec and Petro China. All have a turnover of about $400 billion. Apart from Saudi Aramco, these companies are amongst the largest in the business. In addition to these three majors, China also has an offshore oil company.
Indian Oil is our largest company with a turnover of about $80 billion. ONGC is a profitable company, but with annual revenue stream of less than $15-20 billion. The desire to match some of the global oil majors has driven this idea in the oil sector. What we must realise though is that to match any global oil major, we would need large investment and revenues from operations in other countries and take upon other activities like gas and oil pipelines, technical operations of oil drilling and petrochemical business. This may take time, will almost certainly need resources and will involve a number of risks. Read more