Curbing competition in the past has adversely affected the aviation and the banking sectors. Therefore, any decision which creates a monopoly structure in the oil and gas sector must be very carefully thought through
In his fourth Budget speech, Union Minister for Finance , Arun Jaitley re-visited the concept of an integrated oil and gas sector. The idea first made its appearance during the Atal Bihari Vajpayee Government in 1998. The proposal was then rejected for encouraging a monopolistic scenario in the distribution of goods such as lPG, petrol, kerosene etc.
In 2005, the V Krishnamurthy committee, formed by the then UPA Government, debunked the idea of integration as it would reduce competition and manpower in oil and gas. Why then did the idea of an integrated oil major resurface again this year, even as it was rejected twiceIJ
The Finance Minister stated five major reasons for the same — better capacity to bear higher risks, avail economies of scale, create more shareholder value, make better investment decisions, and be more competent globally.
From the chart (top), it is apparent that Indian companies are smaller in size when compared to top international oil firms. An integrated entity formed by merging top public sectorundertakings (PSUs) will be the 11th biggest oil company globally, with a market cap of $100 billion.
The Indian Government’s past track record of trying to consolidate state-run firms has not fetched good results. The aviation sector suffered a major setback post Air India and India Airlines merger in 2007, and has not yet fully recovered. In the oil and gas sector, minimum political interference and liberalisation have proved better in creating more shareholder value.
The Oil and Natural Gas Corporation’s decision to bail out the debt-ridden Gujarat State Petroleum Corporation, has been seen as the result of political interference. With major oil firms facing such allegations and inefficiencies, giving complete autonomy to one entity can risk the country’s energy security.
Another concern is employment generation in the oil and gas sector. A look at graph (below) will show that the sector has seen a continuous decline in manpower since 2010-11. The Krishnamurthy panel had earlier deduced that such integration will result in manpower reduction. At a time when the Government is struggling with job creation, it will be difficult to justify job losses due to restructuring.
The ability of a company to take higher risks depends on the amount of capital a firm has. A look at the financials of all the six major oil PSUs makes it clear that they have more than the minimum amount of capital required. A bigger size is also not the only factor which facilitates in the acquisition of offshore projects.
The Irish oil company, Tullow Oil, with a small market capital of $3.62 billion, has expanded in several countries by forming consortiums with domestic oil companies. Therefore, companies should focus on better strategies, techniques and management practices to overcome the shortcomings of their size. Indian oil market hardly has any competition and is dominated by Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum.
Curbing competition in the past has adversely affected the aviation and banking sector. Therefore, any decision which creates a monopoly structure in the oil and gas sector must be very carefully thought through. An important question here is whether a bigger oil company will help achieve the objectives stated by the Finance Minister in his Budget speech. Or, will it create new problems for the Indian people at largeIJ
(The writer is a lok Sabha Member of Parliament)