ONGC-HPCL deal should boost India's energy security efforts

HPCL's shareholders are disappointed that acquisition is unlikely to be accompanied by an open offer

The Union Cabinet’s decision to set in motion the creation of a mega public sector undertaking (PSU) in the oil and gas sector took a while in coming, but could go a long way in reducing inefficiencies across the sector and creating an entity better placed to compete globally for resources. This was necessary as while most Asian countries have just one national oil company integrated across the value chain, India has 18 PSU oil firms. The sale of the government’s 51 per cent equity in Hindustan Petroleum Corporation (HPCL), the country’s second largest fuel retailer, to Oil and Natural Gas Corporation (ONGC), the country’s largest oil producer, is in line with the Budget announcement in February, which outlined the government’s vision of strengthening central public sector enterprises through consolidation, mergers and acquisitions. Reports suggest a strong possibility that this decision may be followed by mergers between refiner Indian Oil Corporation (IOC) and exploration PSU Oil India Ltd or another oil marketer Bharat Petroleum Corporation Ltd (BPCL) merging with gas utility GAIL. 

There are many reasons why this decision to consolidate PSUs in the oil and gas sector should be welcomed. The primary reason has to be an improved handle on energy security for the country. Even though India is the world’s fastest growing major economy, it is still one of the poorest in that elite bunch. As such, it has a long distance to go in terms of achieving economic growth and well-being for its citizens. And this growth will require a steady supply of energy resources. At present, India imports 80 per cent of its crude oil demand, 50 per cent of its liquefied petroleum gas (LPG) demand, and 35 per cent of its natural gas requirement. In another couple of decades, as India hopes to turn into a global superpower, estimates by the International Energy Agency suggest this import dependency is likely to rise to a crippling 90 per cent. There is, then, merit in having fewer but bigger oil majors and equipping them with both the financial resources and technological expertise to not only manage international fuel price uncertainty and strike strategic deals across the world but also acquiring the capacity to explore the domestic oil potential.

Of course, there are several concerns as well with Wednesday’s decision and this was reflected in the over 4 per cent slippage in HPCL’s share price on the BSE. HPCL’s shareholders are disappointed that the acquisition is unlikely to be accompanied by an open offer. That could be unfair as they, too, should be offered a chance to exit at the same price as the government. Then there are concerns about assimilating employees from very different work cultures, given the vertical integration of an upstream and a downstream company. Some have also claimed that the proposed gains from economies of scale are overstated and have warned against consumers losing out due to lack of competition. These should be the key concerns for the government going forward. That this deal helps in meeting a huge chunk of the government’s annual disinvestment target will not be enough.