Integration of oil & gas majors is best avoided:

Integration of oil & gas majors is best avoided:

Context

• In the recent budget, the idea of an integrated oil and gas sector was rediscussed

Background

• The idea first made its appearance during Atal Bihari Vajpayee’s government in 1998.
• The proposal was then rejected for encouraging a monopolistic scenario in distribution of essential goods like LPG, petrol, kerosene etc.
• In 2005, the Krishnamurthy committee formed by the UPA government debunked the idea as it would reduce competition and manpower in the oil and gas sector.

Why the Issue was Revisited ?

• Finance Ministry stated five major reason for rethinking over the potential prospects of oil and gas
• Integration of gas and oil will lead to better and increased capacity to bear high risks
• Merging of two major sectors will provide with the benefit of economies of scale
• An obvious reason, integration of the oil and gas sector will create more shareholders.
• A collaborated sector will imply more detailed and efficient decision making and thus better investments
• Last, but not the least, the joint production of the oil and gas sector would enstrengthen the whole sector and make it more competent globally.

Unsuccessful Merger Incidence

• Indian firms are much smaller in size compared with top international oil companies
• The Government’s track record of consolidating state run firms has not borne good results.
• The aviation sector suffered a major setback following the merger of Air India and India Airlines in 2007 and has not yet fully recovered.

Positive Merger Incidence

• In oil and gas, minimum political interference and liberalization have proven better in creating more shareholder value compared with integration.

Related Issues

• ONGC’s decision to bail out debt-ridden Gujarat State Petroleum Corporation has been said to be the result of political interference.
• With oil firms facing such allegations and inefficiencies, giving complete autonomy to one entity can risk the nation’s energy security.
• Another concern is employment generation. Oil and gas sector has seen a continuous decline in manpower since FY11
• Integration will result in manpower reduction. At a time when the government is struggling with job creation, it will be difficult to justify job losses due to restructuring.

Factors be taken into Consideration

• The ability of a company to take higher risks depends on the amount of capital it has.
• The financials of all major oil PSUs show that they have more than the minimum amount of capital required.
• Size is also not the only factor that facilitates acquisition of offshore projects

What should be the Next Step?

• Companies should focus on better strategy, techniques and management practices to negate shortcomings of their size.
• The Indian oil market today has hardly any competition and is dominated by IOCL, HPCL and BPCL.
• Curbing competition in the past has already adversely affected the aviation and banking sectors
• Optimum efficiency has to be reached and with it the competitiveness of the sector has to be regained.

Conclusion

• Any decision that creates a monopoly in the oil and gas sector must be carefully thought through.
• And whether a bigger, extended and merged oil and gas sector will actually achieve the aims as stated by the Government of India has to be critically analyzed.