By Manish Vaid (*)
In his budget speech, Finance Minister, Arun Jaitley, proposed to merge state oil companies to create a conglomerate with a combined market value of $100 billion that can compete with global companies in financial heft, such as BP and Royal Dutch Shell. Such merger plans could also provide a strength to provide Indian conglomerate to consider proposals like acquiring stake in Rosneft, which can pump significant oil for India’s growing oil needs.
Last year, after the Cabinet Secretariat referred the idea of the integrated giant, oil ministry started the process of evaluating the prospects of creating such conglomerate through broader consultation.
However, when similar proposal was considered a decade ago in January 2005, the Advisory Committee on ‘Synergy in Energy’, chaired by V. Krishnamurthy submitted its report in July 11, 2005, decided against oil PSUs integration. Instead, in the report, specialised firms were preferred to a mega oil entity, given formers core competency and better performance.
Research studies on mergers and acquisitions (M&A) conducted till 2005 revealed very few successes, which created value for shareholders. A study report of November 2002 by A.T. Kearney Inc., pointed out that only 29 per cent of all global M&A have succeeded in increasing returns for shareholders.
V. Krishnamurthy Committee felt that despite their recent diversification, most of the Indian Oil PSUs function in distinct areas of operation across the hydrocarbon value chain, which are their areas of core competency. Therefore, the idea of bringing synergies in operations by bringing down costs by retrenchment of employees, assets and infrastructure and increasing profitability of the these oil PSUs would not be feasible in Indian context.
However, the Committee recommended restructuring of oil PSUs through policy changes and management/structural improvements. This included merger of stand-alone subsidiaries with parent companies, encouraging competition, technology upgradation, improving energy security, formulating integrated energy policy and strengthening the institution of DGH.
Besides, for upstream sector, the panel also suggested ways to intensify domestic oil and gas production, using latest technology in frontier and deep-water areas by forming separate joint ventures oil PSUs. It also recommended to increase overseas exploration and production (E&P) by targeting at least 15 per cent of crude oil imports.
For downstream units, given the vulnerability of refineries and marketing entities to the cyclical downturn and volatile oil prices, the committee suggested to merge these entities with their respective parent companies. Unbundling of supply and transport services of gas monopoly was also endorsed by the committee.
The idea behind such recommendations was not only to facilitate oil and gas PSUs to stay focussed on their core competency but also to improve performance of each segment of hydrocarbon value chain. Therefore, it is in this vein that the current idea of creating PSUs oil merger should be revisited by the government, which should be strategic in nature rather than getting involved in micro management of these PSUs.
Deliberations from the government should also in be the light of evolving global oil and gas scenario, characterised by low oil prices. Besides, government should prioritise its efforts through policy interventions to make upstream investments more attractive to boost domestic oil and gas E&P, gradually reducing its oil imports with attainable deadlines.
Notably, so far under low oil prices scenario, India’s domestic oil production has failed to keep the pace with its oil demand, stimulating increased oil imports. According to BP Statistical Review of World Energy, 2016, while India’s oil production in 2015 registered 18 per cent increase with 41.2 million tonnes since 2005, its oil consumption rose by 60 per cent during the same period with 195.5 million tonnes in 2015.
2035, BP Statistical Review of World Energy, projected India’s oil consumption growth to be the fastest among all major economies, while its natural gas demand too increasing by 162 per cent, highest among all the fossil fuel consumption growth, highest in the world.
There was a visible transformation in India’s oil and gas sector resulting from recent reform process. These reforms included decontrol of petrol and later diesel prices, introduction of new exploration policy (HELP), offering marketing and pricing freedom for gas discoveries and effective targeting of the poor for LPG subsidies through the direct benefit transfer scheme. However, before planning for mega oil PSUs merger, gauging of global energy scenario as well as internal dynamics of India’s oil and gas sector would be needed, including the understanding of the core objective behind the same.
Eventually, the whole idea behind creating oil behemoth has being to enhance competitiveness of Indian oil PSUs in the international market to facilitate their successful acquisitions of overseas oil and gas assets, besides weathering the effects of oil volatility.
However, the current oil volatility, characterised by prolonged spells of oil price slump started since mid-June 2014 is quite different from all the previous oil prices falls. The oil price fall is primarily due to feeble oil demand resulting from eoil conomic slowdown in Europe and China as well as growing concerns of the climate, which has prompted countries to embrace electric vehicles, as an alternative to oil guzzling vehicles. Such transition is pushing oil demand to its peak, wherein there would be consistent pressure on the oil prices to stay low.
Therefore, the discourse of PSU’s oil integration strategies should also factor in the trends of depressed oil and gas markets, wherein oil and gas companies would be under consistent pressure to seek improvements to return on their invested capital, cost reductions and raising capital efficiency to unlock value.
Besides, observing the fundamentals behind creation of M&A of oil PSUs to understand its proposition by way of seeking synergies between them, business cultures, traditions, work ethics, inefficiencies or other administrative issues along with flexibility to adapt the change would remain an important factor.
Thus, it is rightly said that ‘few business marriages are made in heaven’ and compatibility of merging companies should always be the driving force of any mergers. It is only then one can imagine synergy in energy in any M&A propositions.
(*) Manish Vaid is Junior Fellow with the Observer Research Foundation, having the research interests in energy policy and geopolitics.
Disclaimer: Views expressed are those of the author.