While integration was long considered an important step in the oil sector, this is no longer strictly the case. The idea often is to create financial depth, for two main reasons. First, to allow for large bids. And second, to allow the companies to more easily ride out volatility in crude oil prices. However, in recent years, other considerations have become more important still. For one, mid-sized and independent oil companies have shown themselves considerably more nimble and able to exploit changes in technology. In the 2000s, the reserve-replacement ratio of large, integrated oil companies was considerably lower than that of smaller ones. This has been supplemented by the growth of large, independent trading houses. Together, this system has proved to be more resilient in an age of supremely volatile prices and swift technological advances.
There are major questions, thus, to be asked about the reasoning behind this planned unification of state-controlled companies. One major possible pitfall is the lack of synergy among the staff, since these are very different companies with incompatible hierarchies, organisational structures, and working styles. The merger of Air India and Indian Airlines is a case in point. Planned for similar reasons, the merger led to years of sub-par performance partly because of insufficient management of human resources. The personnel question is crucial; it is not clear how the merger process will answer it. Even if successful, such a merger means that a single oil company — and its employees’ union — will have disproportionate control over the country’s economy. Other developing economies, such as Mexico and Brazil, which have behemoth oil companies, have not benefited from this, and have sometimes suffered political disruptions as a result. Further, the implications for the national balance sheet are worrying. Currently, at least the complex web of cross-subsidies among oil marketing companies, upstream majors and the government is relatively transparent. This would not be the case if it were a single behemoth.
Thus few arguments remain in favour of a merger other than the creation of financial heft. The government should thus explain whether this is, in fact, a problem that the state-controlled oil majors are facing at the moment. Are there bids that they would like to make that they are failing to make? If so, is there any other way the government could provide financial depth? If one exists, that might be preferential to a merger with prospects that can be described as worrying at best.
