A proposed merger of Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp will reduce inefficiencies across the sector and result in enormous savings, ratings agency Fitch said.
It would also create an entity that is better placed to compete globally for resources, and less vulnerable to shifts in oil prices and give it much stronger bargaining power with suppliers, and greater financial clout to secure oil resources it said.
Between these three companies, they control nearly 98% of India’s diesel, petrol and LPG market.
Most Asian countries have just one national oil company integrated across the value chain.
In India, there are 18 state-controlled oil companies, including the above three engaged largely in distribution, Oil India and ONGC — engaged in exploration and production — and GAIL, a natural gas specialist.
Proposals to consolidate India’s oil & gas sector have been floated before, but last week the idea was presented in a budget speech for the first time. No details have yet been provided on which companies would be involved.
“A merged entity would have opportunities to save on costs and improve operational efficiency,” Fitch said.
“For example, there would be less need for multiple retail outlets in a single area. Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own – as is currently the common practice. A merged entity would also be able to share expertise for exploration and acquisition of resources.
“The integration of upstream, refining and retail companies would have the additional benefit of spreading the impact of oil prices movements across the various parts of the value chain, which would reduce volatility in cash generation.”
However, said the ratings company, 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.
“There will be considerable difficulties involved in merging a number of entities with differing structures, operational systems, and cultures. Political sensitivities are likely to limit job cuts, and personnel-related issues are likely to arise from the need to manage hierarchies and potential overcapacity in the integrated entity. Moreover, all are listed companies, with public shareholding ranging from 51%-70%. That could cause some problems in obtaining approval from the 75% of shareholders that is typically required to approve a merger, particularly if there are concerns over valuation,” it said.
There is also a question of how the state will handle the likely decline in competition after a merger,” it added.
“Consumers have benefitted from competition among the state-controlled retail companies, which has supported improvements in service standards. Private companies are increasing their market share from a low base, but could find it even harder to compete with a single large state-controlled company.”