ONGC-HPCL: Will Merger Wake Up Sleeping Oil Giant India?

Mergers and consolidation of disparate Indian public sector companies into one monolith is expected to improve margins, capacities and efficiency

A few months after announcing the creation of a massive merged oil entity, the Indian government approved the sale of 51% of government owned stake in state refiner HPCL to explorer ONGC. Furthermore, mergers of state owned companies are also planned.

Further down the line, the government may ask IOCL to acquire Oil India as well. As per the government, consolidating PSUs will lead to better economies of scale, with increasing margins and a higher risk bearing propensity in addition to improving efficiencies. TechSci Research experts debate the various factors that may have played a role in the decision-making process:

 India: World’s Biggest Potential Oil & Gas Market

TechSci Research report “India City Gas Distribution Market Forecast & Opportunity, 2030”, pointed out that city gas distribution (CGD) market grew at a rate of 6.25% during 2013 – 2015. The report goes on to point out that power sector is the leading consumer of natural gas in India, capturing nearly 30% to 35% of the total supply.

Demand for natural gas in power sector is projected to grow at a CAGR of 10.69% during 2015-2020 due to implementation of a new policy reform known as “e-bid RLNG”. In addition to power sector, fertilizer sector is another major consumer of natural gas in the country with demand set to grow at 6.25% during 2015-2025.

This is just a small example used by TechSci experts to point out how growth in demand has been fairly steady, but infrastructure spending on CGD networks has not kept pace with the growing demand for gas. There are a variety of reasons behind this supply-demand mismatch, in lieu of upstream, midstream and downstream sectors. A smooth consolidation will ensure that capital is utilized in a smart and optimal fashion to ensure higher margins, better capacity utilization while providing adequate infrastructure for the ever-rising energy demand.

                                             

Consolidation: A Global Trend in Energy Markets

Another TechSci Research article “Global Oil & Gas Pipeline Market, Competition Forecast and Opportunities, 2012 – 2022” points out the global consolidation trend in the oil & gas market specifically. Most large companies like to have control over their upstream, midstream and downstream activities as it helps them streamline their operations in a manner where net profit growth is the highest.

For example, Gazprom handles upstream activities, where it actively produces (1.2 billion tonnes of oil equivalent as of 2012) mainly through its Yamburg, Urengoy, Nadym and Noyabrsk fields. Gazprom has an extensive network of pipelines called the Gazprom Unified Gas Supply System (UGSS) which includes over 158,200 kilometres of gas trunklines and branches. The UGSS is the largest gas transmission system in the world, which falls under midstream activities. Furthermore. Gazprom also handles the downstream sector; Gazprom sold 316 billion cubic metres of gas to domestic customers, 162 billion cubic to the rest of Europe and 101 billion cubic metres to CIS countries and the Baltic states.

Gazprom is not the only isolated example; companies such as ExxonMobil and Royal Dutch Shell etc. too have consolidated exploration, refining and retail operations. Only time will tell as to whether the decision to consolidate Indian oil giants was a smart one, but TechSci experts have suggested that on paper the move may be an excellent one, given that adequate decision-making processes are put in place.

 

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