Cover Story

Personal Copy of Suresh Babu Korangi

THE MEGA OIL PSUs MERGER

An Investors Perspective
Joydeep R Ray speaks to the key faces
involved with the proposed merger of the oil
PSUs and brings this report on the progress of
creating India's largest corporate entity while
Lohit Bharambe does the number crunching
for the investors

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...Possibilities of such
restructuring are visible in the oil an gas sector now and we propose to create an integrated public
sector oil major that will be able to match the performance of international and domestic private
sector oil and gas companies. (It will give them the) capacity to bear higher risks, avail economies
of scale, take higher investment decisions and create more value for the stakeholders. India has 18
state-owned oil and gas companies at present. The top six include large exploration and production
players, namely, Oil and Natural Gas Corporation (ONGC) and Oil India, and refining and marketing
companies, namely, Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and
Hindustan Petroleum Corporation (HPCL), besides the gas giant Gas Authority of India
(GAIL).
 -- Finance Minister, Arun Jaitley
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W
hen Arun Jaitley, the country's Finance
Minister and one of the trusted lieutenants
of Prime Minister Narendra Modi, uttered
these words during his budget speech this
February, speculations kicked off across
various quarters of the industries, pressure groups, lobbying
entities, employees' associations, as also among experts and
analysts. Even before Jaitley or his colleague in the cabinet,
Dharmendra Pradhan, country's Petroleum & Natural Gas
Minister, could further clarify on the not-so-exclusive idea of
merging oil PSUs, stocks of various oil PSUs listed on the bourses
started moving, some upwards and some others downwards.
Broking firms started coming up with their 'well-researched' thick
reports on oil PSUs' merger and its probable impact on the stocks
of government-run entities like Oil and Natural Gas Corporation
(ONGC), Hindustan Petroleum Corporation (HPCL), Bharat
Petroleum Corporation (BPCL) as most of them started believing
that a merger of ONGC with either HPCL or BPCL was going to
happen very soon.
As the industry has started considering the Narendra Modi-led
government as pro-reforms and also being in favour of creating
a petroleum monolith, not too many questions have been asked
about how this is going to happen, which of the companies are
under active consideration of the government, how the
shareholders (read retail investors) of these companies will be
taken care of, how much government will have a say in the
whole process and will the oil PSUs under consideration be
given a complete free hand to decide the entire course of action
leading to the creation of an oil behemoth. Since February, till
the time of filing this report in April, the government did not
share much information with the media or the industry bodies,
and if sources close to the power corridors in the national
capital are to be believed, the oil PSUs too have not been given
much information about this plan by Shastri Bhavan or even
North Block. Knowing the leadership of this government, one
can only be sure of the fact that Jaitley's musings on the subject
during his budget speech may not be empty, and the plan might
have already got a clearance from the highest office of the
government located in the South Block. But the Prime Minister
also so far has remained tight-lipped ever since this has been
talked about, and you cannot create an Exxon or British
Petroleum in India merging PSUs without a nod from the
PMO. But does this kind of silence of the government mean
that Jaitley's utterances were premature? Well, not necessarily.
Taking into consideration the market sensitivity of the subject
as most of the prominent oil PSUs are listed on the bourses,
some say that the work on the much-awaited and much-hyped
merger has already begun. Pradhan, another trusted man of the
Prime Minister, who is at the helm of affairs in the Ministry of
Petroleum & Natural Gas, reveals the plan sketchily, thus: The
entities getting integrated will complement each other in
different economic cycles. The nitty-gritties of the process will
be decided by the companies. It will not be one company. It will
not be wise to put all eggs in one basket. There will be multiple
companies...but all these will be integrated. He does not wish
to share any further information on this. As Pradhan still
46 DALAL STREET INVESTMENT JOURNAL I APR 17 - 30, 2017
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remains grounded and media-savvy, Pradhan is ready to share
information related to some other fresh developments in his
Ministry but when it comes to the context of merger of oil
PSUs, he avoids taking further questions. Being tight-lipped on
this issue even reaches up to the office of Niti Ayog Chief
Executive Officer (CEO), Amitabh Kant, the man who has
already recommended set of actions against a bunch of ailing
PSUs in three separate recommendations so far while making
the fourth one ready. Kant does not divulge much during a
Saturday afternoon interaction at his office near Sansad Marg,
when he told this writer, "This will definitely create a massive
power while doing business globally. As our Finance Minister
Arun Jaitley spoke about it during his budget speech, I strongly
believe this kind of a super company in the oil and petroleum
sector is much-needed and shortly a decision will be taken on
this.". So, will it be a merger of ONGC and HPCL or ONGC
and BPCL or any other formula the government has been
The entities getting integrated will complement each
other in different economic cycles. The nitty-gritties of the
process will be decided by the companies. It will not be
one company. 
- Dharmendra Pradhan, Petroleum Minister
working on? Faced with the question, the man known for his
proximity with the face of the government, Kant denied to offer
any further comment on the issue. He just emphasised, "shortly
a decision will be taken on this as work has already begun
towards the direction."
Going by market speculations and also information collected
from various government sources, one can safely believe that
ONGC will be one of the two entities to be merged and, among
oil marketing companies, the candidature of HPCL and BPCL
are being actively considered. So what does the man who is at
the helm of ONGC these days has to say? Dinesh K Sarraf,
Chairman and Managing Director of the exploration major,
seems to be the happiest following the development. "See no
doubt India needs an Exxonrather I will say India needs a
couple of Exxon-type companiesgiants. The country
deserves at least two or three such big integrated companies in
this sector competing with each otherit will not only protect
the interests of consumers, but also such merged mega entities
and investors. Today, there are many companies in this sector.
The integration may be both horizontal and vertical. Not just
one of it, I will rather say," he said sitting at the comfort of the
swanky Deendayal Upadhyay Urja Bhavan in Delhi's Vasant
Kunj area. Sarraf is the man to be followed during these days of
heightened merger talks. Will it be with HPCL or BPCL? Sarraf
ducks the question and picks up the cup of tea. At this time it
seems, to break the news of merger, the beat reporters and
editors closely following the sectorial developments will have
to wait for at least a couple of weeks, if not more.
Let us here also try to understand why the merger is needed
and what must have pushed the government to talk about it in
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the Parliament. This was not the first time someone from Total Net Latest Market
the government spoke about working out an appropriate Company Assets Revenue Profit Market Cap Cap
structure for the state-run oil and gas companies. Way back Name (` Crore) (` Crore) (` Crore) (` Crore) ($Billion)
in 1994-95, Captain Satish Sharma, the then Petroleum and BPCL 57556.74 190392.25 8463.98 92301.70 14.27
Natural Gas Minister at the Centre, sensed the necessity of HPCL 49345.54 188738.20 4846.91 52658.23 8.14
creating a large oil entity by merging some of the oil PSUs in IOCL 128271.20 361894.03 11605.72 185155.66 26.63
India. But nothing much happened after Sharma himself ONGC 295582.94 139426.57 14300.93 238377.34 36.81
subseqently rejected the idea of forming a giant entity. For Proposed Merged
530756.42 880451.05 39217.54 568492.93 87.91
the next 10 years, not much was talked about on this subject. Entity
In 2004, the then Petroleum and Natural Gas Minister,
Total Market Market
Mani Shankar Aiyar raised the subject again, bringing it out
Company Assets Revenue Net Profit Cap Cap
from the back burner. A committee was formed under
Name (` Crore) (` Crore) (` Crore) (` Crore) ($Billion)
leadership of V Krishnamurthy but it did not advocate a
merger. Though Aiyar was reportedly in favour of creating a HPCL 49345.54 188738.20 4846.91 52658.23 8.14
giant entity, apparently some of the bosses of the oil PSUs ONGC 295582.94 139426.57 14300.93 238377.34 36.86
backed out. Twelve years later in 2016, Pradhan, the HPCL+ONGC 344928.48 328164.77 19147.84 291035.57 45.00
successor of Aiyar again raised the subject, which finally got
Total Market Market
a significant space in Jaitley's budget speech.
Company Assets Revenue Net Profit Cap Cap
But why is the merger needed? For two reasons; firstly, a Name (` Crore) (` Crore) (` Crore) (` Crore) ($Billion)
large entity close to the shape and size of one of the top 10 BPCL 57556.74 190392.25 8463.98 92301.70 14.27
petroleum majors in the world will enjoy more advantages ONGC 295582.94 139426.57 14300.93 238377.34 36.86
while negotiating prices in the global market; and secondly, BPCL + ONGC 353139.68 329818.82 22764.91 330679.05 51.13
if the merged entity led by an exploration major like ONGC
bids for assets beyond India, it may have advantages in the Total Market Market
bidding process sheerly because of its size. This oil Company Assets Revenue Net Profit Cap Cap
behemoth will have both upstream and downstream Name (` Crore) (` Crore) (` Crore) (` Crore) ($Billion)
advantages and can simply handle the entire process under IOCL 128271.20 361894.03 11605.72 185155.66 28.63
one roof, right from exploration down to retail sales. "Think ONGC 295582.94 139426.57 14300.93 238377.34 36.86
of a situation, ONGC explores and brings out oil, refines it, IOCL + ONGC 423854.14 501320.60 25906.65 423533.00 65.49
brands it and markets it--is it not easier than one company
being engaged in just exploration and another buys the (USD Billion)
material and refines it before selling it to customers. And Company Name Total Assets Revenue Net Profit
Market
both are run by the government--so why do we need Cap
multiple companies if we can have all these operations Exxon 330.30 218.6 7.84 345.03
concentrated under one roof," said a former chief executive Rosneft 1937.53 77.20 3.00 60.00
of an oil PSU. "It will also help us to showcase our British Petroleum 263.3 183.00 1.15 91.64
petroleum major on the global platform and we will end up ONGC+HPCL 53.33 50.74 2.96 45.00
enjoying price advantages too while negotiating deals with ONGC+BPCL 54.60 51 3.52 51.13
global players," he justifies further. "The consolidation will ONGC+IOCL 65.54 77.51 4.01 65.49
provide scale and value chain integration. It is unlikely to ONGC+HPCL+BPCL+IOCL 82.07 136.13 6.06 87.91
disrupt any global order. However, it will strengthen India's
ability to avail global acquisition opportunities," Anish De, majors in the world. If all the eight listed oil PSUs are merged into
Partner & Head of Oil &Gas, KPMG. Taking a cue from one entity, then the company will have a market value of around
what De says, we can surely agree with what government US $ 110 billion (at the time of sending this to press), larger than
wants to do--the behemoth may ensure better and cheaper India's Reliance Industries Limited (RIL) pegged at US $ 71
global acquisition opportunities. billion, but smaller than British Petroleum, with its market value
pegged at US $ 115 billion. If only ONGC and HPCL are merged,
So what is the size we are talking about at this time then the combined entity may have a market value of US $ 45
considering a merger of ONGC with an OMC such as billion and a merged entity of ONGC and BPCL may have a
IOCL, HPCL or BPCL. The biggest single entity can be market value of US $ 51.13 billion. Will that really help while
created by merging HPCL with ONGC and that company slogging it out against players like Exxon having a market value of
can be close to the total asset size of British Petroleum, but US $ 345 billion. So the big question remains unanswered
much lower than that of Rosneft and even Exxon. If BPCL here--how big will be really big? Rather than merging oil PSUs,
or IOCL is merged with ONGC, definitely it may create a should the government focus on hiking their efficiencies,
bigger entity than today's standalone ONGC, but the productivity and professional efficiency--a million-dollar question
merged entity will not be anywhere close to the top five oil that is now being posed by certain quarters. Former Chairman and

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Cover Story
LEADERSPEAK
Modi govt should take nimble steps before
finalising the merger
Being the former Union Cabinet Minister of Petroleum
and Natural Gas, how do you interpret the present
climate of the global oil and gas market?
The conditions have changed with the passing time. The
previous hurdles have been bulldozed with technological
advancements such as fracking and by the timely waking of
shale oil and gas. Soaring oil prices have been tamed with the
help of technology and apt measures undertaken by some of
the major oil-producing nations such as Saudi Arabia. China is
the biggest threat to the domestic oil market. Rather than
locking horns with the dragon economy, we must resort to oil
diplomacy, which might bring in peace and stability in the
entire oil and gas market flanking the South East Asia region.
Both the regional Superpowers must open a robust diplomatic
channel to reduce the competition in the region, which I
believe is filling the treasuries of the western countries.
Mega oil and gas merger was proposed earlier, but it
never became a reality. What are the challenges that
you think have stalled the birth of the oil behemoth?
The previous governments have mooted this idea of merging
the oil and gas PSUs into a single large entity, but it never came
into being because of multiple reasons. During my tenure,
V Krishnamurthy, Vijay Kelkar and G V Ramakrishna were
appointed to examine the overall situation so that in the
48 DALAL STREET INVESTMENT JOURNAL I APR 17 - 30, 2017
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Way back in 2004, the then Petroleum and
Natural Gas Minister, Mani Shankar
Aiyar had thought of restructuring the oil
PSUs--but later the idea did not get
materialise. Twelve years since Aiyar's idea,
this time his political opponent, Arun
Jaitley raised the same context and even
mentioned it in his budget speech. In an
exclusive interaction with Subhajit
Bhattacharya, Aiyar speaks on various
aspects of the possible merger. Excerpts:
international market, we could raise huge capital, and it could
help us in securing the rights for oil worldwide. The oil and gas
PSUs bear the traits of different cultures.Wherein the Indian
Oil Corporation and ONGC were conceived by the
government of India; and Hindustan Petroleum and Bharat
Petroleum were created by foreign companies, and later
nationalised by Indira Gandhi after the war of 1965. This
characteristic difference is a major roadblock in the merger I
believe. Apart from this, there is always a fear of creation of
Frankenstein, which could later pose a threat to the democratic
skeleton of the country. Though the scene has changed, the
government still must take nimble steps before jumping into
the climax.
What steps government must initiate before finalising
this proposal?
The government should take nimble steps and must consult
experts before taking a final call on this issue. Though the scene
has changed in the last 12 years, but still we must stay alert by
keeping in mind the present geopolitical scenario of the South
East Asian region.
Indian oil and gas companies must try to induct technology
and carve out valuable natural resources such as gas hydrates,
which could change the face of the Indian economy as shale oil
transformed the US economy.
DSIJ.in

Managing Director of ONGC, R S Sharma believes, a merger of
ONGC with HPCL will not only create a gigantic petroleum
entity but will also fetch upfront cost savings for the company, at
least by 10-15 per cent.
But then, if the merger happens in line with Jaitley's budget
speech, there will be a series of hiccups. However, a merger
would face significant execution challenges, particularly in terms
of managing the integration of employees, addressing
overcapacity in the merged entity, and winning the backing for
the merger from private shareholders, rating agency, Fitch said
in a statement recently. India does not have a history of such a
mega merger of PSUs, except that of Indian Airlines and Air
India that happened years ago. Another issue that may crop up
here and can pose a serious threat to the merger plan is related
to huge public shareholding in these listed oil PSUs. That could
cause some problems in obtaining approval from the 75 per cent
of shareholders that is typically required to approve a merger,
particularly if there are concerns over valuation, Fitch had said.
Aiyar, a Member of Parliament now and former Petroleum and
Natural Gas Minister, believes, The government must take
nimble steps before jumping into a concrete decision. The global
oil market fabric has changed drastically in the last few years.
The mega oil-gas PSU merger will place India amongst the
league of the top oil exporting countries. The newly formed oil
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and gas Goliath can be a massive challenge for our neighbour
China. The cultural differences between the PSUs can make the
task of the government harder. The evolved oil behemoth might
turn into an invincible entity by further influencing the
democratic skeleton of the nation.
But braving all these odds, the government wants its PSUs to go
ahead with the merger plan. PSU chiefs believe this may even
help the retail investors having interest in the stocks of these
PSUs under consideration. Meanwhile, it is reliably learnt that
the Petroleum Ministry has already asked the oil PSUs to work
out a road map to make the merger a reality--the formula may
well be ONGC buying out government's stake in HPCL at a cost
of around US $ 4 billion, and in case it goes for a merger with
BPCL, it may cost cash-rich ONGC upto US $ 7.5 billion. The
merger process is definitely going to be a long-drawn one and
investors will have to wait for a period of three to five years for
the merger process to get over and to enjoy the rich fruits of the
gigantic entity. No wonder, ONGC's Sarraf says, "Investing in
ONGC is a long-term one. Stay invested, you will get your
returns, even if it takes time."
As the government goes about creating the largest company of
the country, keep a watch and stay tuned with us--for more.
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DS I J E XC LUS I V E

India needs not just one Exxon, but at

least two merger to benefit investors too
A
t the fifth floor corner office of Dinesh K Sarraf,
Chairman and Managing Director of Indias most
valuable public sector enterprise, Oil and Natural Gas
Corporation Limited (ONGC), on a Friday afternoon, popular
face of a business news channel was beaming on the huge LCD
television talking about much-talked about merger of oil PSUs
in India. In front of me, choices of crispy cookies have been just
kept with a cup of freshly-brewed black tea. Outside this swanky
new headquarters of ONGC, the summer approaches steadily in
the national capital. The news anchor now takes a breath
courtesy commercial break.

T
ime to catch up with the tea and cookies and also the
man at the helm of affairsenters Sarraf, much sought
after by the media across the nation these days, ever since
the countrys Finance Minister, Arun Jaitley talked about
creating a mega oil PSU in his last Budget speech. Serving
ONGC since 1991, Sarraf known for his inclination towards
adopting best operational and cost practices, asks me to switch
off the recorder. He picks up his cup of tea and we started talking
about his company, investors interests, possible mega merger,
GSPC deal and also my stories as a petroleum beat reporter long
back. An exclusive conversation with Joydeep R. Ray

HOW DO YOU JUSTIFY THE GSPC DEAL AND SUCH A

HUGE CAPITAL INVESTMENT? WILL IT WORK TOWARDS
GOOD RETURNS FOR ONGC SHARE-HOLDERS?

This is one of the best opportunities we had in our hand. There

are two ways to value this opportunity firstly, considering future

We are all looking forward to

witness, what shall be a momentous
occasion for ONGC when the first gas
flows from 98/2 in 2019.
Development of this Block is ONGCs
first foray in deep waters and is all
set to considerably reduce
hydrocarbon import dependence
and help the nation to move closer
to being a gas based economy.

50 DALAL STREET INVESTMENT JOURNAL I APR 17 - 30, 2017 DSIJ.in


outflow and inflow and secondly, strategic benefits for
integrating with other operations of the company.
ONGCs acquisition of GSPCs block ranks excellent
on both.
We have already declared US $ 5 billion investments for
cluster-II of KG basin and please note here, if some difficulty
happens to cluster-II evacuation system, we can use the GSPC
evacuation system in place. Further, in 98/2 block, there is
cluster-I where we have this long-standing disputes with
Reliance Industries Limited and we also may not be able to
justify capex for a new infrastructure as balance gas reserves
may be very small. But then if you look at it, you will find that
GSPC has its own full infrastructure already in place here. It
has costed them US $ 1.5 billion which we will be able to use
without spending any money for development of this cluster I
reserves. In addition, we also get the underground reserve in
GSPCs block as well. We are all looking forward to witness,
what shall be a momentous occasion for ONGC when the first
gas flows from 98/2 in 2019. Development of this Block is
ONGCs first major foray in deep waters and is all set to
considerably reduce hydrocarbon import dependence and help
the nation to move closer to being a gas based economy. GSPC
We have asked the government to
reconsider the pricing formula.
Actually, gas pricing and marketing
needs to be deregulated as the
market forces decide the gas
pricing.
asset acquisition will add tremendous value to ONGC
share-holders.
Also through the acquisition of GSPCs 80 per cent stake in
KG-OSN-2001/3 block in the shallow waters of KG basin,
ONGC can integrate development of its nearby HP-HT
discoveries. ONGC is geared up to work hard to exploit the
resources with HP-HT, high CO2, high H2S, low porosity and
permeability.
YOU ARE PLANNING TO RAISE FUNDS FOR OPALHOW
IS THE PROJECT DOING NOW?
The idea of raising funds for OPaLs Gujarat project is to fill the
gap in equity condition. The US $ 4+ billion petrochemical plant
has already emerged out of the project phase and dual feed
cracker unit and all the downstream units of OPal has already
been commissioned. OPaL will have Indias biggest dual feed
cracker, which is also one of the biggest in Asia. At Dahej, the
worlds first LNG-based C2-C3 plant which will supply the
feedstock to OPaL commenced operations two years back during
May 2015.
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The return to investment will start
coming now over a period of few
years. Stay invested, I will tell them
as ONGC has taken several initiatives
to accelerate exploration and
production activities.
ONGC HAS BEEN ASKING FOR GAS PRICE REVISION
AND ALREADY REQUESTED THE GOVERNMENT TO
WORK TOWARDS IT. WHAT IS THE STATUS AT THIS
TIME?
See, the gas price presently is very low and it does not cover even
the cost of production. It is tough to sustain with the price now.
We have asked the government to reconsider the pricing
formula. Actually, gas pricing and marketing needs to be
deregulated as the market forces decide the gas pricing.
WHAT WILL YOU SAY TO THE RETAIL INVESTORS
HOLDING ONGC SHARES? HOW DOES THE FUTURE
EVOLVE FOR THEM?
Our share-holders are mostly long-term investors in the
markets. ONGC is a long-term stock due to its nature of
business. The return to investment will start coming now over a
period of few years. Stay invested, I will tell them as ONGC has
taken several initiatives to accelerate exploration and production
activities. We are also conservative with it comes to taking capex
decision. We very much keep in mind interests of the retail
investors whenever we take any major decision that may impact
their interests. I will say again, stay investedthings will look
better from here.
NOW THE BIG QUESTIONOUR FM HAD TALKED ABOUT
CREATING A MEGA OIL & GAS ENTITY MERGING
PETROLEUM PSUS. THE MARKET BUZZ IS ONGC MAY
SOON GET MERGED WITH AN OMC, SAY HPCL. WHAT IS
THE GROUND ZERO SITUATION?
See no doubt India needs an Exxonrather I will say India
needs a couple of Exxon type companies, giants. The country
deserves at least two or three such big integrated companies in
this sector competing with each other it will not only protect
the interests of consumers, but also such merged mega entities
and investors. Today, there are many companies in this sector.
The integration may be both horizontal and vertical. Not just
one of it, I will rather say. This will take care of upstream
volatility and downstream volatility vis--vis crude pricesthis
will also help the investors. I cant really comment on ONGCs
preference towards any particular OMC in terms of a merger..
Here, companies through their respective boards would decide
and Governments role would only be facilitation if Govt. equity
is involved.
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DS I J E XC LUS I V E
Amitabh Kant
CEO, Niti Ayog
Oil PSUs merger decision will be taken shortly
D
uring the last two-and-half years, we have opened up
opportunities in almost every sector of the economy,
other than multi-brand retail. If there is any other
sector you think to be opened up, you let me know, otherwise
all the sectors have been opened. Secondly, the FDI regime has
been well-promoted and marketed across the world,
particularly by the prime minister during his visits abroad.
The perception is that India will do well, several parameters
are doing well, so investors have continued to invest in
India. Investors from across the world have come to
invest here.
FDI:
The FDI is also a function of the performance of the investment
which have been made in India. They should continue to do well
and that should be the model for further awareness. Secondly,
we must make India a very easy and simple destination.
Our focus should be on ease of doing business and there has to
be continued predictability and consistency and clarity of
policies.
PSU STAKE SALE:
There are two things here. Niti Ayog was asked to recommend
action on loss-making and sick PSUswe submitted a report
of the 26 loss-making PSUs. We are also asked to function as
the Disinvestment Commission and make recommendations
for strategic disinvestment inpublic sector enterprises. We have
submitted three reports and have made recommendations for
disinvestment in 45 PSUs. We are now considering coming up
with the fourth list of such PSUs where disinvestments need to
be done.
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OIL PSUS' MERGER
This was an announcement during the Budget. Detail study on
integration of public sector enterprises in the oil sector is being
examined and a final decision on this will be taken shortly.
DIGITAL INDIA
Our strategy has been that there are 450 million smartphones
on which you can do Bhim, you can do wallets, you can do
internet banking. There are another 400 million GSM phones
which can use *99# services. Yet another 300 million people
dont have phones. For them, we have decided to let them use
ration shops to use Aadhar-enabled payments. This will help
Aadhar-enabled payment systems to growcash in, cash out, in
ration shop dealers, as it is happening in Krishna and Godavari
districts. I think it will take another year to spread across the
country. A change of mindset is also required in this respect.
RURAL INDIA
Wherever pilot projects are done, we get good feedback. People
in rural India are picking up Aadhar-enabled payment systems
much faster than people in urban areas. People have accepted it
well in rural areasfaster than the urban population. We have
already got 1.1 billion people with Aadhar and linking up
Aadhar with mobile payments is a simple and easy technology.
It is far easier than using debit and credit cards.
MAKE IN INDIA
We should continue to develop FDI in Indiawe should continue
to grow at a higher pace and we should continue to come up with
administrative and governance reforms in India. We need to make
India a nation with clear policies. Clarity of policies will make India
a preferred destination for doing business.
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INVESTORS GUIDE
OIL PRICE MOVEMENT
Currently, the crude oil price is trading at
USD 50 per barrel. Though, the price of crude
increased from its historic lows of USD 27 per
barrel, going forward, the oil prices will trade
in a narrow band width. The reason behind
lower oil price is output cut from OPEC as
well as non-OPEC members. There is enough
oil supply to cater to the global demand. The
lower oil prices lead to vertical integration
due to the inability of oil companies to
market their oil during times of surplus crude
oil. Since oil prices are extremely volatile, it is
claimed that integrated operations give better
earnings stability.

PRESENT GLOBAL SCENARIO

Indian oil industry is going to experience a

massive integration, as PSUs will be merged

and will form a bigger entity.
Considering global presence, it is a fact that
mergers and acquisitions have been the norm
in the oil industry. Most of the global oil
giants, including Exxon Mobil,
ConocoPhillips, Royal Dutch Shell, BP,
Grazprom, Rosneft, Sinopec and China
Petroleum are all results of mergers. Out of
these majority are currently state owned,
except a few big ones in the US and Europe.
China and Russia moved towards
creating a consolidated oil and gas giant
in the 1990s, but they gradually
backtracked. Nevertheless, both countries
have at least half a dozen large oil and gas
companies.
If we consider the case of Venezuelas
experiment of a single State-owned
entity, we learn that the experiment has
been a costly failure, as the State
monopoly has actually started seeing a
drop in production.
Interestingly, the reason behind countries
not creating a single entity is efficiency.
Monopoly always becomes inefficient
over a period of time, and leads to poor
productivity. Even within the State
sector, competition between companies

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E X P E R T TA K E

Consolidation of oil
PSUs will provide
scale and value chain
integration
Anish De,
Partner and Head of Oil and Gas, KPMG in India

process of integration and adjustments which will potentially

be fairly demanding.

What are the key risks and considerations coming with

How do you think the consolidation of public sector oil
companies will empower or disrupt India's position in
the global oil and gas market?
The consolidation will provide scale and value chain
integration. It is unlikely to disrupt any global order. However
it will strengthen Indias ability to avail of global acquisition
opportunities.
In your opinion, what impact will the public sector oil
and gas companies' mergers have on the companies'
stakeholders?
If the merger goes well and the synergies are realised, there will
be positive value for the shareholders. However, at the level of
the organisations and internal stakeholders, there will be a
the consolidation of public sector oil companies'?
The key risks are that the efficiency benefits of the
consolidation are not realised because of integration challenges.
Simultaneousl,y there is a risk that the companies will get
focused internally in the integration process and take their eyes
off the market which is witnessing massive disruptions.
What are the challenges that are likely ahead of
consolidation in oil & gas sector?
The main issue is integration of cultures. All the companies
have different histories and lineage, and sometimes in a PSU
environment, those factors are rather difficult to align.
Can you throw some light on impact of oil PSUs'
mergers on government's expenditure or subsidies,
etc?
There is no direct impact on subsidies that can be foreseen.
However any stake sale by the government to a PSU in the
course of the merger will benefit government finances.

is universally considered to be a better
option.
The NDA governments rationale behind
the proposal to combine oil PSUs into
one major entity is that it would give
them the financial ability to bid for
major exploration and production assets
in India and overseas.
Since India is keen to acquire oil assets in
international regions for energy security,
it certainly needs to have globally
competitive oil entities that can compete
with foreign giants.
Indias oil products demand increased
by 8.8 per cent to 192.80 million MT in
2016 as compared to the previous year.
The combined entity will have an upper
hand to compete globally with BP
Global, Rosneft and Shell, among others,
as well as in the domestic market in
India with Reliance Industries, Cairn
India and Essar Oil.
The governments decision to build
emergency storage sites in underground
caverns in the country is aimed at
hedging against energy security risks.
Its two new planned reserve facilities
along with the existing three reserves
will take up the countrys strategic
reserve capacity to 15.33 million metric
tonnes. India currently meets more
than 80 per cent of its energy

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Positives and Negatives of consolidation

Investors point of view
Positives Negatives
Co-ordination of synergies of employees It is very premature to
Global competence in all oil companies to take time predict what will be
Enables merged entity to withstand the exchange ratio for the
international volatility in the oil and
gas segment Integration will face challenges due to companies which are going
differing HR policies of varied PSUs
Enhances the capacity of oil PSUs to to be merged into the
bear higher risks integrated massive oil firm.
Oil business will avail economies of Government is working
scale and create value for the
stakeholders, further improving towards consolidation of oil
efficiency Integration of oil PSUs will take about PSUs. How they will proceed
Consolidation gives government a 4-5 years
leverage to tackle fiscal deficit of the for integration will be
country as oil is one of the major clarified in near future. The
imports
merchant bankers and oil
Being a major company in oil & gas With 50 per cent to 70 per cent shares
having presence from backward to being held by the public in oil PSUs, the
companies will discuss and
forward integration will enable companies might find it difficult to fix the exchange ratios. The
reduction in import of oil in future obtain approvals from the 75 per cent of
shareholders that is typically required to cut-off date for valuating
A merged entity would have
opportunities to save on costs and approve a merger, particularly if there are these oil firms will also be
improve operational efficiency concerns over valuation.
notified in future. We at DSIJ
The newly formed oil major with a would guide reader
strong balance sheet can also plan for
big ticket global acquisitions of oil investors that, those
fields to reduce import dependency investors who have invested
Oil & Gas sector may face job cuts
The new entity will have a much in these firms should wait
stronger bargaining power with
suppliers, and a greater financial punch and watch till further
to secure oil resources
clarification comes from the
The integration of oil PSUs would Oil PSUs may offer optional VRS to
reduce volatility in cash generation employees for curbing manpower of government and the
merged entity respective oil companies.
( ` in Crore)
Company Name Total Assets Revenue Operating Profit Integration of oil companies
Balmer Lawrie & Company 1288.11 3229.16 321.22 into a single strong company
Bharat Petroleum Corporation 57556.74 188651.36 16154.61 will give an extra-advantage
Chennai Petroleum Corporation 4488.32 26283.96 1403.7 to compete with global
Engineers India 3136.58 1524.99 425.17 firms. Being a big firm it will
GAIL (India) 52774.41 54887.66 5924.05
be in a position to
Hindustan Petroleum Corporation 49345.54 187078.79 12297.12
concentrate on a greater
number of oil fields globally
Indian Oil Corporation 128271.2 355926.62 25442.79
and also to acquire
Oil & Natural Gas Corporation 295582.94 131517.33 49109.04
companies across the globe.
Oil India 32698.03 9884.11 4701.32
Going forward, investors
Proposed Merged Entity 625141.86 958983.98 115779.02
may be benefitted as the oil
From the above table, we can see that the proposed public sector oil & gas merged sector prepares for a mega
entity, will have most overwhelming financials, and will grab entire stakeholders
attention. We have taken financials of 9 listed PSUs from oil & gas sector for FY16.
merger.

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Cover Story
requirements through imports. So the
government has now set a goal of
reducing this import dependence to 67
per cent by 2020.
PROPOSED MERGED ENTITIES'
FINANCIALS
The governments plan to merge 11
government oil companies would not
only give these companies capacity to
bear higher risks, but will also benefit
economies of scale, and help take higher
investment decisions, giving much
stronger bargaining power while dealing
with suppliers, and will provide a greater
financial clout to secure the oil resources.
Moreover, at the same time, the
conglomerate would create more value
for their shareholders, and bring in the
much-needed transparency. Post-
merger, the bigger entity would be able
to compete with domestic private sector
56 DALAL STREET INVESTMENT JOURNAL I APR 17 - 30, 2017
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oil and gas companies and with
international players.
Government's move to create an oil
major' would enable India, world's third
largest oil consumer, to meet its energy
requirements to some extent. It will also
help mitigate the rising oil prices in India,
and at the same it would bring down the
price of other commodities too.
The list of proposed companies to be
merged include Balmer Lawrie &
Company, Bharat Petroleum Corporation,
Biecco Lawrie Company, Chennai
Petroleum Corporation, Engineers India,
Gas Authority of India, Hindustan
Petroleum Corporation, Indian Oil
Corporation, Numaligarh Refinery, Oil
India and Oil & Natural Gas Corporation.
The big oil firm will have market
capitalisation of `678123 crore. The
consolidated entity could compete with
rivals like Russia's Rosneft (`358380
crore) and UK's BP Plc (`729792 crore)
in terms of market capitalisation and
financial power.
Integrated firms total assets size will grow
to `625142 crore. At the same time,
liabilities of these companies will be taken
forward or settled as per cash available
with them. Now, we are not in a position
to comment on the liability side of these
companies due to lack of clarity from the
government. The process of merging the
entities is prolonged, and the criteria will
be clarified gradually in the time to come.
Post-merger, the top line of the company
will be more than `9.5 lakh crore,
operating profit of more than `1 lakh
crore and bottom line of around `44,311
crore. The operating profit margin of the
merged entity will be 12.07 per cent as
well as it will attain a net profit margin of
4.62 per cent. DS
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