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Friday, Nov 19, 2004

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Public sector oil companies' merger — Need to rethink on basic premise

B. S. Raghavan

Each of the Indian oil companies can emerge as a giant provided it is allowed to go full steam ahead and take competition head on with best practices, up-to-the-minute technologies and timely business intelligence. Healthy competition will only toughen them to face obstacles and forge ahead. The least the Government can do is to enable the companies to become world-class multinationals through internal reforms and revitalisation, and not let talk of merger distract them from their goal, says B. S. Raghavan.

If it ain't broke, don't fix it

— American aphorism

THE merger of the Indian public sector oil and gas companies — Indian Oil Corporation (IOC), Oil India Limited (OIL), Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), Oil and Natural Gas Commission (ONGC) and the Gas Authority of India Limited (GAIL) — in viable permutations and combinations with state-owned refineries in Bongaigaon, Chennai, Kochi, Mangalore and Numaligarh has long been the Petroleum Ministry's hobby-horse.

Successive Ministers have taken it out of the stable, only to put it safely back after riding it for a while. During its canter in the open, it kicks up a lot of dust in the form of committees and working groups, their reports forming a massive, unread pile on the side tables of both the Minister and the Secretary.

Each Minister, though, is fired with the freshman's zeal to constitute yet another committee and make it look like his own original revolutionary brainwave. And so it was that Mr Mani Shankar Aiyar too, as the new incumbent, could not resist the temptation of forming an Advisory Committee on Synergy in Energy (no less) for restructuring and merging public sector oil companies with the aim of ending the inter se competition between them and helping them hold their own before the American and Chinese oil giants.

The National Advisory Council member, Mr V. Krishnamurthy, (also considered close to the Congress President, Sonia Gandhi), is to head the Committee which will have as its other members the former Finance Secretary, Mr G. K. Arora, former Disinvestment Commission Chairman, Mr G. V. Ramakrishna, former adviser to the Finance Minister, Dr Vijay Kelkar (who also did a stint as Petroleum Secretary), former ONGC Chairman, Mr B. C. Bora and former BPCL Chairman, Mr U. Sunderarajan.

Since nothing that Mr Aiyar does is without an element of the unusual, he reportedly went ahead and made the public announcement without taking the Prime Minister's approval to both the composition and terms of reference.

The Prime Minister's Office (PMO) was naturally miffed at coming to know of the move through the media.

In view of its far-reaching consequences, affecting perhaps the most sensitive sector of the economy and involving many thousands of crores of rupees in investment and turnover, the PMO is reported to have asked Mr Aiyar to put it on hold so that the proposal could be studied in all its aspects, including the need for giving it priority over all other commitments contained in the National Common Minimum Programme.

The New Delhi grapevine has it that such is Mr Aiyar's passionate conviction about the merits of the project that notwithstanding this embargo, and the absence of the PMO's clearance, he wants to start the Committee's work, at least by calling an "informal meeting" of the members.

He can as well save himself and the members of the proposed Committee all the trouble by rummaging through the records of similar exercises carried out in the Ministry earlier.

For instance, the report of the Committee set up in October 1998 with Dr Nitish K. Sen Gupta as the Chairman, and the former Chairman of Cochin Refineries, Mr J. Jayaram, the Managing Director of Eicher Counsultancy, Mr Anil Sachdeva, and the Finance Director of the Oil Coordination Committee, Mr A. K. Bide, as members, contains detailed recommendations on the various possibilities of mergers and strategic alliances among standalone refineries and public sector oil companies.

Its exhortation to have them implemented "immediately" in order to prepare the sector for global competition had remained unheeded for six years.

Merger plans

However, soon after Mr Aiyar took over, the Petroleum Ministry has once again begun toying with a number of merger plans. The latest thinking is to settle on two mega-entities — one made up of the merger of BPCL and OIL with IOC, and the other of HPCL and Mangalore Refinery and Petrochemicals with ONGC.

As regards GAIL, the opinion within the Ministry seems to be that there is no problem about its being integrated with either entity, or that it can even form a third entity in combination with BPCL.

There is thus ample material available on the pros and cons of various approaches and their operational and financial implications with reference to the past performance and core strengths of each organisation in respect of exploration and production capabilities, retail network, leverages in domestic and foreign markets, relationships with international players, openings for global competition and other relevant factors.

What is needed at this stage, if at all Mr Aiyar is hell-bent on merger, is not a Committee whose members, barring two, have no hands-on experience or expertise in managing oil companies and will need to brush up their knowledge and awareness of current technologies and markets, and the comparative features of the working of the oil industry elsewhere.

His purpose will be more than adequately served by entrusting the task to a group of professionals in touch with current trends and threats which will subject all the existing reports and proposals to a close technical scrutiny and give its final advice within a month or so.

There is a clear and imminent danger of a Committee of the kind envisaged by Mr Aiyar becoming a long-time fixture, laboriously plodding through the mass of documentation and data and working from first principles.

At the end, after spending a lot of time and money, it would be seen to have ploughed the ground already ploughed before, only to come up with a repetition of what is already self-evident from previous recommendations.

Merger not inevitable

All this effort will be justified only if merger is assumed to be inevitable as the only option left. But is it? This, in turn, hinges on a definitive finding (non-existent as of now) that the supposed inability of the individual oil companies to compete globally and make an impact is due to their size and scale, and not government interference crippling their capacity to take decisions in consonance with market forces.

True, there was at one time a merger wave sweeping the global oil sector, but that was prompted by a very different set of circumstances brought on by low ruling prices and a glut, when economies of scale and saving of costs were critical for survival.

There is no sense in picking up an idea whose time is long gone and causing disruption and discontinuity in the running of companies that have earned accolades all over the world.

Further, for a country of sub-continental dimensions, characterised by complexities and diversities unknown elsewhere, and with tremendous potential still waiting to be explored and tapped, the number of oil companies in the public sector is not too large.

Already, IOC and OIL India are confidently bidding for oil fields abroad, and ONGC Videsh has acquired stakes in over nine countries and is poised to reach the target of 20 million tonnes by 2020.

Each one of the Indian companies can emerge as a giant in its own right provided it is allowed freedom to go full steam ahead and take competition head on with best practices, innovative techniques, up-to-the-minute technologies and anticipatory action based on timely business and commercial intelligence focussed on opportunities and challenges.

There need be no fears either that they will be debilitated by competing with one another and with the private players such as Reliance, Essar Oil and Shell. On the contrary, such healthy competition will only toughen their corporate fibre and help hone their capabilities to overcome obstacles and forge ahead.

There are signs that the initial gung-ho spirit of private players is wearing down, opening up vast vistas for expansion for public sector oil companies. In fact, they may even derive an indirect benefit from the pressure mounted by private companies for a rational pricing policy in tune with laws of demand and supply.

At a time when technological advances combined with the lifting of tariff and non-tariff barriers in goods and services are making volumes possible, and the high speed and low cost of transport and communications are proving conducive to tie-ups and networking at the tap of the keyboard and click of the mouse, it is the intrinsic vitality and élan, and not the size, of organisations that will determine their competitiveness.

Hence, the least that the Government can do is to enable oil companies to press ahead with acquiring the status of world class multinationals through internal functional, operational and financial reforms and revitalisation, and not let distractions such as talk of merger come in the way of their performance.

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