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Column: Invest & Integrate

The Finance Minister indicated that possibility of such restructuring is visible in the oil and gas sector and the government proposes 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

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Finance minister Arun Jaitley in his budget speech announced that the government sees opportunities to strengthen the Central Public Sector Enterprises (CPSE) through consolidation, mergers and acquisitions. The key consideration is to integrate the CPSEs across the value chain of the industry to enable them to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. The Finance Minister indicated that possibility of such restructuring is visible in the oil and gas sector and the government proposes 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.

The announcement of the government is a step in the right direction to ensure India’s energy security and it reflects deep understanding of the challenges faced by the sector with respect to volatility in prices, the need to invest in strategic E&P (exploration and production) assets outside India and issues with development of domestic E&P sector.

The integration across the value chain of E&P entity like ONGC, the distribution entity like GAIL, refining and OMC (oil marketing companies) entities like MRPL, IOCL, HPCL and BPCL will provide a comprehensive policy and direction to develop the oil and gas market in India and hold strategic assets in offshore jurisdictions where India is already lagging behind when compared to China.

In the international market, the Indian entities are competing with likes of Exxon Mobil, Shell, Chevron, BP, Rosneft, Petrobras and CNPC, and the Indian ‘oil major’ proposed by the government will provide much needed integrated approach and the technical and financial capability to compete with the international players.

In view of dependency of imports and decreasing domestic production currently affecting the oil and gas sector, the move will encourage and enable better leverage in import of crude and RLNG (regasified liquefied natural gas), and bring about efficiency in downstream value chain especially given the fact that demand for natural gas in India is likely to increase from 446 MMSCMD in 2016 to 606 MMSCMD by 2022, and power, fertiliser and CGD (city gas distribution) sectors have significant reliance on natural gas.

The move may also allow the government to achieve its target to expand the share of gas in the energy mix to around 20 per cent by 2025.

The main challenge for creating a true ‘oil major’ proposed by the government will depend on success of integration of PSUs, which though are under the common administrative control of Ministry of Petroleum & Natural Gas but have their own priorities and issue. For the move to be successful, seamless integration is critical and the government needs to facilitate and ensure that. The other challenge would be to see how the Competition Commission of India and the Petroleum and Natural Gas Regulatory Board perceive the move of the government to create the ‘oil major’ as there are only a few private players across the entire value chain of oil and gas sector. In order to counterbalance this and create adequate competition, the government should simultaneously provide impetus for investment in this sector by other large reputed international players who have the technology and expertise to develop domestic resources.

Both the steps taken together will provide the framework to enable the sector to finally achieve gas for the benefit of all the stakeholders.

The author is Partner (oil & gas practice), Khaitan & Co

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Dibyanshu Sinha

The author is Partner (oil & gas practice), Khaitan & Co

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