India looks at creating
oil giant to take on global rivals
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[February 01, 2017]
By Nidhi Verma and Promit Mukherjee
NEW
DELHI/MUMBAI (Reuters) - India plans to create a giant oil company by
combining state-owned firms, finance minister Arun Jaitley said on
Wednesday, as the world's third largest oil consumer looks to better
compete with global majors in acquiring foreign assets.
New Delhi is struggling to raise local oil production and imports about
80 percent of its oil. Prime Minister Narendra Modi in 2015 set a goal
of cutting that to 67 percent by 2020.
India is replacing China as the driver of global oil demand growth and
the International Energy Agency expects it to account for a quarter of
global energy use by 2040.
"We propose to create an integrated public sector oil major which will
be able to match the performance of international and domestic private
sector oil and gas companies," Jaitley said in his budget speech.
India has about a dozen state-run oil and gas companies - including
Indian Oil Corp <IOC.NS>, Oil and Natural Gas Corp <ONGC.NS>, Hindustan
Petroleum Corp <HPCL.NS>. But alone they do not have the financial power
to rival global oil majors in bids for overseas oil assets.
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Combining them "will give them capacity to bear higher risks, avail
economies of scale, take higher investment decisions and create more
value for shareholders," Jaitley said.
It was not clear if Jaitley was talking about combining all state-run
oil companies or just some of them.
MULTIPLE MAJORS?
"India has capacity to create not only one, we may create two, three
more companies," Oil Minister Dharmendra Pradhan told television channel
CNBC-TV18. "It will not be wise to put all eggs in one basket".
He said the government had announced the policy but it would be up to
companies to determine the details of any mergers.
He said creation of oil giant would "de-risk" the firm and give it more
leverage to go abroad as low oil prices hit revenue of producers and
higher prices hurt fuel refiners.
The combined market cap of India's key oil and gas companies -- Oil and
Natural Gas Corp, Oil India Ltd , IOC, HPCL, and Bharat Petroleum
Corporation Ltd -- is around $106 billion.
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![](../images/020117pics/busine29.jpg)
Finance Minister Arun Jaitley (C) arrives at the parliament where he
is due to present the federal budget, in New Delhi, February 1,
2017. REUTERS/Adnan Abidi
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While
this is less than the top oil companies such as Exxon Mobil Corp., Royal Dutch
Shell Plc> or Chevron, it still gives India a formidable standing among
companies such as Russia's Rosneft with a market cap of around $70 billion
or the UK's BP Plc which has a market cap of $115.57 billion.
BIGGER NEGOTIATION POWER
Oil industry executives welcomed the plan.
"A much bigger entity will give us bigger negotiating power in almost all
activities globally such as the purchase of crude, technology, R&D (research and
development) expertise...and faster decision making," said D K Sarraf, chairman
of ONGC said.
"A merged entity can give the benefit of a sheer size of resources which is so
far not available to any of the oil and gas companies individually," said M K
Surana, chairman of HPCL.
However, analysts were a little wary as they felt the process could be lengthy
and problematic.
"I think the motivation is right but the government has to be very careful in
going ahead with the merger as that can take a lot of time in integrating
cultures of various companies and the market conditions could also change," said
Anish De, partner and head of oil and gas at KPMG in India.
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India planned a similar move in 2005 but the proposal was turned down by a
government-appointed panel.
"(The) key challenge will be integration issues, especially on the human
resources side," said K Ravichandran, group head, corporate sector ratings, at
ICRA Ltd.
(Editing by Elaine Hardcastle and Jason Neely)
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