Integration of oil & gas majors is best avoided: |ForumIAS

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.