By R. Sasankan
We propose to create an integrated public sector ‘oil major’ which
will be able to match the performance of international and domestic
private sector oil and gas companies.
— Arun Jaitley in his Budget Speech in 2017
The proposed Grand Alliance in India’s petroleum industry is finally in tatters.
Nirmala Sitharaman, current finance minister, is quietly sweeping the
detritus from a collapsed plan – an ill-conceived attempt to meld two
petroleum giants into a shambling behemoth – into the dustbin of poor
ideas.
Samuel Johnson, the 18th century English critic, had once slammed the
great poetic tradition of writing pastoral elegies that blended
Christian and pagan images, singling out John Milton’s poem Lycidas as a
vulgar creation of “irreverent combinations” by trying to juxtapose
heathen deities with “sacred truths”.
Jaitley’s grand plan was a polluted concept on a similar scale: an
attempt to create an irreverent combination of two very disparate
entities without considering the founding principles that anchored the
ambitions of a newly liberated nation.
The plan to create an oil behemoth that would match the power and pelf
of global industry peers may have been well intentioned but experts in
the industry were pretty aghast when it was unveiled. Petroleum minister
Dharmendra Pradhan chose not to demur; bureaucrats and oil industry
experts preferred to remain silent and not voice their misgivings about
the merger.
As part of the plan, Jaitley managed to persuade ONGC to acquire the
government stake in downstream major HPCL which, in turn, was supposed
to acquire the former’s holding in MRPL. The government holds an 88.58
per cent stake in MRPL. Of this, ONGC holds 71.63 per cent and HPCL, a
minority partner, has 16.96 per cent. Jaitley’s move had an ulterior
motive: it was designed to reduce the Centre’s fiscal deficit.
The Modi government – in its Second Coming – has decided to dump the
merger plan: lock, stock and barrel. But it wants to disengage from a
faulty plan without too much to-do. And that means Nirmala Sitharaman
will abandon the plan without actually saying so, careful not to cause
great embarrassment to Mr Jaitley.
If the government has now realised that the plan is deeply flawed, there
is no reason why it should only baulk at the merger of HPCL and MRPL.
It ought to go the whole hog and unscramble the entire plan and ONGC
ought to cede its stake in HPCL as well. ONGC was never comfortable with
the plan to acquire a stake in HPCL. For a start, it depleted its cash
reserves. HPCL, in turn, were mortified by the thought that there would
be a clash of management cultures. HPCL officials have always believed
that they are a cut above the rest in the petroleum pack and looked down
on the others with some disdain.
The half-hearted roll back of the grand alliance has fostered another
preposterous argument. The acquisition of the stake in HPCL is being
justified on the ground that it would make ONGC an integrated oil
company. This is a ridiculous argument and springs from an insufficient
understanding of the history of ONGC.
ONGC was conceived with a single minded purpose: to create an
Exploration and Production (E&P) company. The move to turn it into
an integrated oil company is as spurious as it is muddle headed. Not
many in the oil industry seem to know that the Gujarat refinery at
Koyali in the state of Gujarat was set up by ONGC to process its crude
produced in the state. It was the visionary petroleum minister, K.D.
Malaviya, who advised ONGC to hand over the refinery to Indian Oil
Corporation (IOC) so that ONGC could concentrate on E&P activities.
Today, the Gujarat refinery is one of IOC’s largest refineries in terms
of capacity. Many years later, the very same ONGC was persuaded to
acquire MRPL when the Aditya Birla group wanted to divest its stake in
2002.
No wonder, ONGC’s performance in the initial two decades had been rated
at par with the best in the world. Look at the performance of ONGC in
recent decades: it hasn’t had a single commercial discovery since Bombay
High. In the 1980s, India’s domestic crude output, after the adoption
of the accelerated production plan in Bombay High, was able to meet
close to 70 per cent of the country’s requirement. Now, domestic
production by all players together meets only 16 per cent of the
country’s energy needs.
Repeated political interferences over the years have weakened ONGC
beyond measure. Faulty production practices have practically wrecked
prospects at Bombay High – and it hasn’t been able to recover even after
spending millions of dollars. If ONGC fails to discover at least one or
two commercially viable oil and gas fields in the near future, its
existence as an E&P company will be imperilled. The irony is that it
in such a situation it may survive on the strength of its downstream
operation, thanks to merger with HPCL.
The concept of creating an “integrated oil company” is being touted as a
much-needed panacea for the problems that are plaguing the state-owned
oil companies. India’s oil sector has had an integrated structure for
many years and this has worked reasonably well. ONGC and Oil India are
the two upstream companies; gas transportation and distribution major
GAIL constitutes the midstream; and IOC, BPCL and HPCL are the highly
successful downstream companies.
The solution to the present problem is precisely what Malviya prescribed
for the oil sector. Permit them to operate in their originally
conceived areas within the integrated structure. ONGC’s survival is
crucial for the country’s energy security. The government should not
allow it to fritter away its energy in refining and marketing. It
requires cash to strengthen its exploration activities.
The Modi government should not hesitate to unscramble the merger between
ONGC and HPCL. If this cannot be done on the ground that the fiscal
deficit needs to be capped, the downstream entity should be handed over
to either BPCL or IOC.
HPCL has been a reasonably efficient company with a fairly transparent
management. Being a Mumbai-based company, it has consistently shied away
from political lobbying in Delhi and that is probably why it could not
scupper the merger plan. Like BPCL, it has a management culture which is
distinctly different from other PSUs like IOC and ONGC. Culturally, the
merger of HPCL with ONGC looks like an “irreverent combination”. A
demerger is good for both HPCL and ONGC. If the government is brave
enough to acknowledge its mistake and move on, it will only enhance its
image.
To download the latest issue 'Volume 30 Issue 24 - March 25, 2024', click here |