Mega merger: A state oil conglomerate in the works to compete with global biggies
NEW DELHI: The government plans to merge state oil companies to create an integrated oil major that could top $100 billion in market value and compete with global oil biggies. The Budget 2017 proposed such a merger though the government had been planning it for long.
After the Cabinet Secretariat suggested the idea to the oil ministry last year, it begun the process of evaluating the prospects of creating the conglomerate.
State-owned Oil and Natural Gas Corporation (ONGC), the top oil producer and one of the largest companies in the country, leads the pack of 13 state oil companies that are being considered for the merger.
Other companies include Indian Oil Corporation, the nation's largest refiner and fuel retailer, Bharat Petroleum CorporationBSE 0.41 %, Hindustan Petroleum, GAIL, Mangalore Refinery and Petrochemicals (MRPL), Chennai Petroleum and Numaligarh Refinery and Oil India.
The scale
The top eight listed state oil firms have a market value of $108 billion, which dwarfs the $71 billion of Reliance Industries, $70 billion of Russia's Rosneft and is closer to BP's $115 billion.
Why it is important
The merger would give these companies capacity to bear higher risks, benefit economies of scale and take higher investment decisions, giving much stronger bargaining power with suppliers, and greater financial clout to secure oil resources. It would also create more value for their shareholders and bring much-needed transparency. These conglomerates, post-merger, would be able to compete with domestic private sector oil and gas companies as well as with international players.
Leaner and meaner
The merged entity would have opportunities to save on costs and improve operational efficiency. For example, there would be less need for multiple retail outlets in a single area. Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own, as is the common practice now. It would also be able to share expertise for exploration and acquisition.
The challenges
Since the state-run oil companies are large, diverse, vertically integrated into operations and have overseas presence as well, the merger may face significant execution challenges.
The timeline
The Oil Ministry asked state-run oil companies to produce a road map for merger. As part of the plan, ONGC might purchase the government’s stake in either Hindustan Petroleum Corp., worth $4 billion, or Bharat Petroleum Corp., worth $7.7 billion. The planning and setting up of a merged entity will take two-three years and the results will begin to appear a few years later.
After the Cabinet Secretariat suggested the idea to the oil ministry last year, it begun the process of evaluating the prospects of creating the conglomerate.
State-owned Oil and Natural Gas Corporation (ONGC), the top oil producer and one of the largest companies in the country, leads the pack of 13 state oil companies that are being considered for the merger.
Other companies include Indian Oil Corporation, the nation's largest refiner and fuel retailer, Bharat Petroleum CorporationBSE 0.41 %, Hindustan Petroleum, GAIL, Mangalore Refinery and Petrochemicals (MRPL), Chennai Petroleum and Numaligarh Refinery and Oil India.
The scale
The top eight listed state oil firms have a market value of $108 billion, which dwarfs the $71 billion of Reliance Industries, $70 billion of Russia's Rosneft and is closer to BP's $115 billion.
Why it is important
The merger would give these companies capacity to bear higher risks, benefit economies of scale and take higher investment decisions, giving much stronger bargaining power with suppliers, and greater financial clout to secure oil resources. It would also create more value for their shareholders and bring much-needed transparency. These conglomerates, post-merger, would be able to compete with domestic private sector oil and gas companies as well as with international players.
Leaner and meaner
The merged entity would have opportunities to save on costs and improve operational efficiency. For example, there would be less need for multiple retail outlets in a single area. Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own, as is the common practice now. It would also be able to share expertise for exploration and acquisition.
The challenges
Since the state-run oil companies are large, diverse, vertically integrated into operations and have overseas presence as well, the merger may face significant execution challenges.
The timeline
The Oil Ministry asked state-run oil companies to produce a road map for merger. As part of the plan, ONGC might purchase the government’s stake in either Hindustan Petroleum Corp., worth $4 billion, or Bharat Petroleum Corp., worth $7.7 billion. The planning and setting up of a merged entity will take two-three years and the results will begin to appear a few years later.
