India plans merger of state-run firms to create oil giant

Saket Sundria and Debjit Chakraborty February 01, 2017

MUMBAI (Bloomberg) -- India is planning to create a state-owned oil giant through mergers to match the might of international companies and billionaire Mukesh Ambani’s Reliance Industries Ltd.

“We see opportunities to strengthen our central public-sector enterprises through consolidation, mergers and acquisitions,” Finance Minister Arun Jaitley said in Parliament while presenting the federal budget for the year beginning April 1. “It will give them the capacity to bear high risk, avail economies of scale, take higher investment decision and create more value for stakeholders.”

India is overtaking Japan as the world’s third-largest oil consumer and will be the center of global growth through 2040, according to the International Energy Agency. Its upstream production is dominated by Oil and Natural Gas Corp., which operates independently of the biggest refiner, Indian Oil Corp. Bharat Petroleum Corp. and Hindustan Oil Corp. are the two other state-owned refiners, while Oil India Ltd. is a smaller oil and gas producer. GAIL India Ltd. is the country’s largest gas pipeline operator.

India oil and gas companies are small compared with some of their global peers. The combined market capitalization of India’s top eight state-owned oil and gas companies is about $105 billion. Such an entity would rank seventh among global oil firms, according to data compiled by Bloomberg.

While size matters in the global oil and gas industry, ensuring governance will be equally important so that an inefficient behemoth isn’t created, said Debasish Mishra, a partner at Deloitte Touche Tohmatsu LLP in Mumbai.

Shares of Indian Oil closed 2.5% higher at 375.45 rupees in Mumbai. ONGC fell 1.2% to 200.20 rupees.

Such an integration would require political and administrative will, said Deepak Mahurkar, leader India oil and gas industry practice at PricewaterhouseCoopers Pvt. Attempts at merging Indian oil companies have been made in the past, he said.

In an interview in August, Oil Minister Dharmendra Pradhan had said the government is seeking an appropriate model for combining India’s state-run oil companies.

“Creating an integrated oil major will help achieve the goal of increasing India’s energy security,” said ONGC Chairman Dinesh Kumar Sarraf. “A bigger entity will have bigger resources and a bigger appetite for acquisitions.”