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Does India need a giant integrated PSU oil company?
Remember how it was for domestic air travellers when there was just the Indian Airlines? Even the air hostesses wouldn’t smile at you.

We may face such conditions while buying petrol and LPG if a government plan to merge six state owned oil companies (ONGC, Indian Oil, HPCL, BPCL, GAIL and Oil India ) materialises. It would mean there will be only one brand of petrol stations throughout India and also just one oil-company distributing LPG.

The Finance Minister unveiled this policy while presenting the Union Budget in February.  The ostensible goal is “to bear higher risks, to take large investment projects, to avail economy of scale and to create shareholder value.” 

 

Should we be concerned? 

This merger proposal is a monumental blunder of serious consequences and has sadly not yet caught the attention of the nation. Merger plans are hotly debated mostly in the financial media. PSU managements, investment bankers and financial analysts have expressed support. They have some reservations of the potential problem of blending of cultures as it happened while merging Air India and Indian Airlines. However some oil experts and even Mani Shankar Aiyer, who proposed the idea under UPA in 2004, have questioned the rationale of such a mega merger. 

To simplify a complex decision making process I have developed a self-assessment table  with eight criteria to analyse four alternatives. In the first alternative, all top six PSU oil companies will be combined to create one giant integrated oil company. In the second alternative there will be two integrated oil  companies one consisting of ONGC, BPCL and HPCL and the second consisting of the other three. In the third alternative there will be one upstream company consisting of ONGC and OIL and the second downstream consisting of the rest. In the fourth alternative, instead of merging oil companies, Indian Oil will be split into say five PSU marketing companies. 

Alternative four is my proposed suggestion. Presently the government is considering only the first three alternatives.  

Assessing the options

To assess the different alternatives, I have added four more criteria in addition to the four suggested by the government. When I evaluate each alternative giving scores on a scale of -10 to 10 to each criteria, the giant integrated oil company idea suggested by Finance Minister Jaitley gets the most negative score (-21) followed by the other two alternatives of multiple integrated companies (-16 and -14) hinted by Petroleum Minister Pradhan. Pradhan in a way contradicted Jaitley, by stating that he does not want to put all eggs in one basket. The alternative that gets the maximum score is the one that is not under in the government’s radar. Though this alternative of creating more marketing companies will result in more competition, the NDA government enamoured with large size is not interested. For them, ‘Big is Beautiful’. 

The goal claimed by the government is to create large size companies like Exxon, Shell and BP, to invest in risky projects, and to enhance shareholder value. Based on market reality, this strategy will not work. In oil industry even the largest oil companies handle risk by forming consortiums and our oil companies are already pursuing such strategies.  Many integrated oil companies like ConocoPhillips, Marathon and Hess were split recently to enhance shareholder value. Earlier UPA also had considered mega merger and dropped the idea when experts argued against it. 

The real force for merger is to monetise political power.  Politicians all over the world find it easy to milk one large company as happened in countries such as Venezuela, Brazil, Indonesia and Mexico. It is surprising how a government that wears fight-corruption on its sleeve is likely to help future oil ministers to milk the giant company. This will be the unintended consequence of the mega merger.

It is unfortunate that our government is going to create a modern day Bhasmasura. Once such a monster is created it will be difficult to destroy him. Let’s hope Prime Minister Modi would shoot down this diabolical proposal. 

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