Petroleum: Why two governments ruled against mega merger

An interesting finding was that one of the major causes of the failure of mergers was the handling of people working in many of these firms.

Written by Shaji Vikraman | Published:February 8, 2017 12:05 am
public oil sector, arun jaitley, budget 2017, oil budget. petroleum budget, diesel budget, petrol price, diesel price, private oil sector, BHEl, G V Ramakrishna, Vijay Kelkar, ONGC, oil companies, oil fight, domestic international oil merger, indian express news, india news, business news When Kelkar moved from the petroleum ministry to North Block as finance secretary during the NDA government headed by Vajpayee, the proposal which went through was that of the big oil companies buying into each other. (Representational image)

In the Budget for 2017-18, Finance Minister Arun Jaitley said the government proposes to create an integrated public sector oil major which would be able to match the performance of international and domestic private sector oil and gas companies.

That’s something two previous governments have taken a look at twice in the last 25 years. At the start of the UPA’s term in 2004-05, Mani Shankar Aiyar, the then petroleum minister, approved the setting up of a committee headed by former steel secretary and BHEL chairman, V Krishnamurthy, to take a broad look at the energy sector and to recommend an appropriate structure for India’s state-owned companies engaged in both refining and exploration.

The committee had as its members two former petroleum secretaries, G V Ramakrishna and Vijay Kelkar, the former ONGC chairman, B C Bora, the former chief of Bharat Petroleum, U Sundararajan, and the former finance secretary G K Arora. It came to the conclusion that rather than creating a mega entity in the sector, it would be better to strengthen the structure of the state-owned oil companies, as it was then in 2005, through policy measures and improvement in managements.

That would work rather than a merger, they said, when given the mandate to examine the core competence of these companies in the petroleum sector and to assess their competitiveness on the global scenario given the kind of changes which were underway.

And the recommendation that it wouldn’t make sense to opt for a mega merger was based on cases of restructuring or mergers and acquisitions in the global oil industry. The rationale then for such mergers was to achieve operational synergies and to pare costs in a competitive industry — which would mean cutting on jobs and boosting profitability. But the committee then felt that going by the case studies and data, only 29 per cent of all mergers and acquisition transactions led to higher returns for shareholders in those firms.

An interesting finding was that one of the major causes of the failure of mergers was the handling of people working in many of these firms.

Then there was the danger of monopolies and cartels being created in the industry. India’s PSU oil companies, the committee said, operated in distinct areas across the hydrocarbon value chain — be it refining or exploration — and in areas of competence, building a case for not rocking the boat.

There were other worries to be taken into account. A merger — or the emergence of a monolith would have meant reduction of staff in these firms — which would not have been politically feasible as all the committee members recognised, having worked with the government for decades. It would also have inhibited competition for sure. The presence of any mega entity dominating the energy market has ambiguous implications and it is the considered opinion of the committee that merger of oil PSU’s may not be an advisable opinion at present.

The Krishnamurthy committee’s recommendations in many ways mirrored the views of another group constituted by the petroleum ministry towards the fag end of the Narasimha Rao government. In 1994-95, the balance of payments crisis had been overcome with a fair measure of macro economic balance and unveiling of reform measures in many areas including the financial sector. By 1995, the government had started looking at the prospect of carrying out reforms in the oil industry. The ministry, then headed by Captain Satish Sharma, formed a R group (signifying reforms) driven by the then petroleum secretary, Vijay Kelkar, and the chairman of Bharat Petroleum, Sundararajan.

Over a few weekends, they and many of the industry stakeholders and experts often met in Mumbai and the capital to discuss various proposals, with a report being prepared in over six weeks involving several youngsters from the industry. Then too, the view was that a giant entity in the sector wasn’t something desirable given the Indian context. It could mean destabilisation of some of the companies and the industry besides creating problems for consumers. In short, the costs far outweighed the benefits which could arise from a possible merger, many of them felt. There could also be a collateral damage to ONGC too, policymakers felt.

Yet, when Kelkar moved from the petroleum ministry to North Block as finance secretary during the NDA government headed by Vajpayee, the proposal which went through was that of the big oil companies buying into each other. So under a cross-holding plan worked out by the government, oil exploration firm ONGC bought 9.1 per cent in IOC with the refining company in turn picking up 9.6 per cent in ONGC and 4.83 per cent in GAIL, the gas transportation company. The move came in for much criticism then, but over five years later, IOC sold part of its holding for over Rs 3,600 crore — a substantial return on its original investment.

Again in 2014, another committee headed by Kelkar, tasked with working out a road map for reducing India’s import dependency in the hydrocarbon sector by 2020, although it did not directly address the issue of a merger given its mandate, made out a case for empowering and strengthening national oil companies and to strengthen the board processes with greater accountability and autonomy. Given this backdrop, it will now be interesting to see the approach which this government adopts for a potential merger.

shaji.vikraman@expressindia.com
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