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India wants to own an oil behemoth: considered before but not feasible

Neeraj Thakur | Updated on: 26 July 2016, 0:25 IST

Like it or not, the world is governed by oil companies. And some of the biggest oil companies in the world are owned by their national governments, giving them supreme power in the world of energy. Saudi Arabia's Saudi Aramco, Russia's Rosneft and Iran's National Iranian Oil Company are prime examples.

For long, India has also been considering the prospect of owning oil behemoth that dwarfs the size of the world's private sector oil companies like BP, Chevron and ExxonMobil.

Now, the proposal is on the NDA government's table. The Cabinet has to consider whether the government should merge 13 oil PSUs currently operating in the country into one oil-pumping mega firm.

But before the government attempts this exercise, it would be worthwhile to look at the recommendations of the V Krishnamurthy Committee, constituted in 2004 under the previous NDA government headed by Atal Bihari Vajpayee.

The problem with mergers

In its report, the committee had said: "Available examples of merger and acquisitions (M&A) suggest that just 29% of all M&A globally had succeeded in increasing returns for shareholders, and that lack of attention to the human side was a major cause of failed mergers".

The idea of merging 13 PSUs into one would lead to one company getting into all the businesses in the oil & gas sector's value chain.

This would mean that ONGC, for example, will have to explore, refine, as well as market the end petroleum product in the national as well as the international market.

On this issue, the Krishnamurthy Committee had elaborated: "Internationally, most of the companies which had merged were vertically integrated companies."

"In India, despite recent diversification, PSUs by and large function in distinct areas of operation across the hydrocarbon value chain, which, by and large, are also their areas of core competence. Any merger, in the Indian context, would result in the reduction of manpower, and shall not be feasible."

What about a holding company?

The alternative is to create a holding company like Coal India Ltd over several subsidiaries. But would this be an effective way to integrate all the PSUs?

The Krishnamurthy Committee, on this issue, had said: "The holding company concept for meeting the national and social goals can work well in a centrally-controlled single party political system (like China), but may not be feasible in a democratic society, which requires a consensus-based approach. The top down approach of the holding company, as in the coal sector in India, has been seen to have hindered entrepreneurship/response time in subsidiaries; as such, a company is just another layer in the structure."

Why it doesn't make sense for India

Despite all the criticism of the proposed model in the past, the current establishment would want to flirt with the idea of having an oil & gas juggernaut. Energy companies generate billions of dollars of revenue, which can add to the negotiating power of a government in the international arena.

Countries like China, Russia and Saudi Arabia wield power in the world on the back of billions of dollars generated by their oil companies. But a major difference between India and those countries is the existence of proven oil and gas reserves.

Take, for example, the case of Saudi Arabia. The country had proven oil reserves of 268 billion barrels in 2015. Russia on the other hand had 80 billion barrels of oil reserves. But India, till 2015, had only 5.7 billion barrels of oil reserves.

In such a scenario, it does not make much sense to undertake an exercise that requires laying off thousands of workers, which would create a political uproar.

Edited by Shreyas Sharma

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First published: 26 July 2016, 0:25 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two. Associate Editor at Catch, Neeraj writes on everything related to business and the economy. He has been associated with Businessworld, DNA and Business Standard in the past. When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.