The petroleum ministry’s plan for more privatisation of OMCs seems to be driven more by short term needs of meeting disinvestment targets than to promote competition.
Aramco and Abu Dhabi National Oil Company [ADNOC], both national oil companies (NOCs) have shown interest in investing in India. We must find other NOCs to invest in oil companies to ensure oil supplies. The way petroleum ministry is driving privatisation of OMCs shows a lack of strategic vision.
In 2018, ONGC was forced to buy a 51.1 per cent stake in HPCL at Rs 36,915 crore. For 18 months, HPCL did not recognise ONGC as its major promoter; and finally, when it was forced by SEBI, it did, and ONGC got to nominate only one director. Before the purchase, ONGC was cash-rich and after they bought, it became debt-ridden. Selling HPCL to ONGC was not privatisation as ONGC is still a public sector company.
Reliance has found partners to buy shares in its refining and marketing companies. Indian Oil, HPCL and BPCL have been negotiating with Aramco and ADNOC since 2015 to invest in a mega refinery on the west coast.
India is likely to record above-average growth in petroleum demand. Influenced by this optimistic forecast, the Government of India assumes foreign oil companies will be eager to invest in OMCs.
Investment from global oil companies
Rosneft, along with partners Trafigura and Russian Fund UCP, have already bought Essar’s Vadinar Refinery at an investment of $12.9 billion. Shell’s presence in retail marketing is minuscule though it has licence to operate in 2000. BP has invested Rs 7000 crore to buy 49 per cent into Reliance’s fuel retailing network with 1400 outlets. It is unlikely any other MNCs from the US, France, or the UK will be interested in investing in downstream operations for the reasons discussed below.
The idea of vertical integration came into vogue when the world had plenty of oil supplies, and oil companies needed downstream operations to dispose of their crude. A few years back, because of UPA’s populist policy of forcing oil companies to sell petrol and diesel below cost price, Reliance, Shell, and Essar closed their retail outlets.
NOC and their role
National oil companies like Aramco, ADNOC, and Kuwait Oil Company may be interested in investing in India’s downstream operations. Their economics are different than those of MNCs: they earn well selling crude oil. For MNCs, return on investment (ROI) is paramount. For NOCs, revenue by selling oil itself is the driving force, and ROI is of lesser interest. This was the situation faced by the giant oil companies in the 1960s, which led them to expand downstream operations.
Future of oil business in INDIA
When the Prince Mohammad Bin Salman visited India in February 2019, he had announced the desire to invest $100 billion over the next two years. In August 2019, Aramco had agreed to enter into an agreement to buy 20 per cent interest in Reliance’s oil business for $15 billion. After these, will Aramco notice BPCL and HPCL?
In 1948, the Indian government passed the Industrial Policy Resolution, which stated that its oil industry should be state-owned and state-operated. This was followed by the nationalisation of Esso and Caltex forming HPCL and BPCL, by taking over Burmah Shell in the 1970s. With the government now ready to hand over these ‘jewels’ back to any foreign oil company prepared to invest in India, we have come a full circle. But this welcome development has still no strategic vision to improve operations and competition.
Aramco and ADNOC have shown interest. If these also acquire BPCL and HPCL, they will become dominant players. India needs to find other NOCs to invest in the oil sector to remain independent. For the same reason, IOC purchasing BPCL must be avoided.