Merging to gain muscle

The merger of HPCL, a marketing entity, with the oil giant ONGC, a downstream player, is to be welcomed as it will not only create an oil behemoth domestically but is a precursor to a much more exciting merger of several players in the exploration and marketing space in the foreseeable future. This could even mean Indian Oil taking over Oil India or BPCL taking over Gail. There are reportedly 11 players, four of them being big players, and it is evident that the name of the game today in the government’s playbook is consolidation, whether in the banking sector or in the oil sector. This, however, does not take away the fact that it will also bolster the government’s financials by at least Rs 20,000 crore in its efforts to meet its disinvestment target of Rs 72,500 crore.

However, whilst this merger will give ONGC muscle to compete with the global giants while acquiring hydrocarbon assets abroad, it will still be tough as the market value of the combined entity will be a mere $42 billion. Its global competitors, like Shell has a market value of $220 billion and ExxonMobil $340 billion. This only underscores the need to expedite the mergers in this space.

It is not impossible considering that the Narendra Modi government invariable always does what it says. This, therefore, is only the first step to mergers in this sector envisaged by Union finance minister Arun Jaitley in his Budget speech earlier this year. 

The merger is even more significant in this highly competitive business as it could prevent cartelisation by private sector players in case it should happen in the future. So far there has been no case of cartelisation but it is good that the government is seeing the much larger picture. It is hoped, however, that in chasing the creation of giants the focus on renewable energy is not lost. The future is in renewable energy and solar power.