|Bad idea to merge oilcos|
|Tuesday, 02 August 2016 05:27|
We need more competition in the oil sector, not less
Given that a Shell or a BP have a turnover that is at least 10 times as high as an ONGC, it is not surprising that petroleum minister Dharmendra Pradhan should be talking about examining the idea of merging the nationalised oil companies. A bigger balance sheet means the firm will be in a better position to raise capital—one of the reasons why GSPC, for instance, is so keen to sell part of its KG basin operations to ONGC is that it simply does not have the capital to be able to develop the oil field. To the extent crude oil and various refinery products have a different price cycle, an integrated oil company can have a smoother earnings cycle. There are synergies to be got from oil marketing companies merging—apart from those in terms of larger purchases of crude oil, retail outlets need not be duplicated across geographical territories and there is a possibility to make savings in terms of labour rationalisation as well. Given how oil refining-marketing companies like IOC have already acquired some oil exploration blocks, they are moving towards becoming integrated players, and so a merger makes even more sense.
Apart from the fact that, globally, more mergers end up in trouble than those that succeed, there are several reasons not to merge the oil PSUs—what makes things worse is that, unlike private sector firms that find it easier to amalgamate operations, each oil PSU has strong trade unions that will make an easy merger an impossibility; the incomplete/uneasy Air-India-Indian-Airlines merger makes this clear. More important, the biggest weakness of India’s oil sector is the near complete absence of competition with the current pricing of most products nearly identical across all PSUs—any oil merger will ensure that there is no possibility of competition in the future. Theoretically, this can be fixed since private firms like Reliance Industries Limited are likely to restart their retail outlets now that diesel prices are no longer controlled. Given there is no certainty the government will not revert to diesel subsidies once crude oil prices start firming up, it is unlikely firms like Reliance that burnt their fingers the last time the government promised this will invest in a big way quickly. Even if they do, given the best locations in existing cities have been taken up by existing PSU marketing companies, their ability to offer serious competition will be restricted.
And while even integrated players like Shell and BP have seen profits fall in the face of a sustained crude price downturn, it has to be kept in mind that upstream activities such as oil exploration tend to be riskier—in which case, a merger is necessarily forcing shareholders of downstream firms like IOC to take on a riskier profile. Also, while it is true that refining-marketing firms like Reliance have a high refining margin, this is mainly due to their vastly superior refineries—Indian PSU refiners, however, do not have the finances to be able to modernise as fast, so even that advantage is unlikely to accrue to them. Given the balance of advantages, the government would do well to try and privatise an HPCL or a BPCL to increase competition rather than spending time on trying to merge existing oil PSUs.