The government plans to form a major oil company by merging some of the existing firms in the oil and gas sector to take on international and domestic players, finance minister Arun Jaitley said in his Budget speech on Wednesday. The government also announced setting up of two new strategic oil reserves in Chandikhole in Odisha and Bikaner in Rajasthan.
Merging the existing oil and gas companies will give them “capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” Jaitley said. Indian Oil Corporation, ONGC, Hindustan Petroleum Corporation and GAIL, are among the existing state-owned players operating in the energy sector.
Combining some or all of these into one major entity would give them the wherewithal to bid for major exploration and production assets in India and overseas. PSU oil companies compete with Reliance Industries and Cairn India in the domestic market. Post consolidation, the Indian PSU conglomerate would be able to compete with global players such as the UK’s BP Plc and Russian state-owned giant Rosneft.
“Possibilities of such restructuring are visible in the oil and gas sector. 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.
Shares of oil companies rose up to 4.15 per cent on the announcement. At the NSE, HPCL stock rose 4.15 per cent and IOC increased 2.35 per cent. Reliance Industries stock ended up 0.46 per cent, while Cairn India rose 2.48 per cent at Rs 283.
To hedge against energy security risks, the government is building emergency storage sites in underground caverns in the country. Along with the existing three reserves, the two new planned reserve facilities will take up the country’s strategic reserve capacity to 15.33 Million Metric Tonnes.
“This will increase our storage capacity to meet the consumption requirement of about 90 days which is at par with the international benchmarks,” Petroleum minister Dharmendra Pradhan said.
In another relief to the energy sector, the government also halved the custom duty on liquefied natural gas (LNG) to 2.5 percent from 5 percent. India meets more than 80 per cent of its energy requirements through imports and the government has announced the target of reducing this import dependence to 67 per cent by 2020.
While the government reduced import taxes on LNG, the oil and gas sector has not got the necessary impetus in the budget, said Raju Kumar, tax partner, oil and gas at Ernst & Young. “Some policy announcements with respect of supporting the strengthening of the transmission and distribution network for natural gas could have supported this cause even better,” he said.
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