The proposed merger of India’s state-owned oil companies would face significant execution challenges related to managing integration of employees, addressing overcapacity in the merged entity and winning the backing for the merger from private shareholders, according to Fitch Ratings.
The US-based credit rating agency, however, said the merger could reduce inefficiencies across the sector. “It would also create an entity that is better placed to compete globally for resources, and less vulnerable to shifts in oil prices,” the firm said in a statement.
The merger is likely to give the new entity much stronger bargaining power with suppliers, and greater financial clout to secure oil resources. Most Asian countries have only one national oil company integrated across the value chain. In contrast, there are 18 state-controlled oil companies in India, with at least six that can be considered key players – Oil India, Indian Oil, Bharat Petroleum, Hindustan Petroleum, GAIL (India) and ONGC.
Proposals to consolidate India’s oil & gas sector have been floated before but the idea was presented in a budget speech last week for the first time. The government has not provided details on which companies would be involved but the aim is to create an integrated public sector “oil major”.
The merged entity would have opportunities to save on costs and improve operational efficiency. “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,” Fitch said.
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, Fitch pointed out 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 these are listed companies with public shareholding ranging from 51 per cent to 70 per cent. That could cause some problems in obtaining approval from the 75 per cent of shareholders that is typically required to approve a merger, particularly if there are concerns over valuation,” the agency said.
Finally, there is a question of how the government will handle the likely decline in competition after a merger. Consumers have benefited 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. Derek Dorsett JerseyShare This