Merger of HPCL, BPCL and ONGC : Benefits and Challenges..

The Finance Minister in his Budget Speech proposed the merger of oil major PSUs into an integrated behemoth oil major, which will be able to match and outperform it’s international counterparts. But is such a merger even possible in the first place?

Let’s answer three key questions to understand the impact of this merger..

Firstly, why the merger of oil companies is necessary?   Most Asian countries have just one national oil company integrated across the value chain. In contrast, there are 18 state-controlled oil companies in India, with at least six that can be considered key players – Oil India Limited, Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and GAIL (India) and ONGC. Merging of few of these national oil companies, would  make functioning and operations much more simpler.

So, what could be the benefits of the merger of HPCL, BPCL and ONGC?  

  • It would create an entity that is better placed to compete globally for resources, and less vulnerable to shifts in oil prices.
  • The merger will give the new entity much stronger bargaining power with suppliers, and greater financial clout to secure oil resources. 
  • There would be less need for multiple retail outlets in a single area. Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own. This would lead to overall cost-savings.
  • The integration of upstream, refining and retail companies would have the additional benefit of spreading the impact of oil prices movements across the various parts of the value chain, which would reduce volatility in cash generation.
  • A merged entity would also be able to share expertise for exploration and acquisition of resources.

 

But, why this merger is difficult to achieve?

  • Each entity has a different structure, operational system, and culture. Hence, it would be really difficult to merge all them together and come to a common consensus.
  • Personnel-related issues are likely to arise from the need to manage hierarchies and potential overcapacity in the integrated entity.
  • The major roadblock for these listed companies is with public shareholding ranging from 51 per cent-70 per cent, there could be some problems in obtaining approval from the 75 per cent of shareholders that is typically required to approve a merger. Private shareholders, may protect their own interests and resist this merger.
  • Private companies are increasing their market share from a low base, but could find it even harder to compete with a single large state-controlled company. Hence, they will try their best to oppose this merger.

The Final verdict..

While the merger will lead to the formation of a major oil behemoth, capable of competing with international oil majors. What remains to be seen, is how the state will handle the likely decline in competition after a merger. Consumers have benefited from competition among the state-controlled retail companies, which has supported improvements in service standards. After a merger, if the cost benefits are not passed on to the end consumers, then this single large entity could be a big failure.