Just a few months after indian Finance Minister announced creating an oil behemoth, the Union Cabinet on July 20, 2017, approved the $4.6 billion plan to sell government's 51 % stake in state-refiner Hindustan Petroleum Corporation (HPCL) to explorer Oil and Natural Gas Corporation (ONGC).
The HPCL-ONGC deal is a major step towards India's efforts to build a mega company that can compete with global majors.
Below are the main reasons why the deal is important for the country:
1. Mergers and consolidation of state-owned companies are the only way to create an oil giant.
HPCL-ONGC deal is the 1st step towards that goal. It will pave way for further consolidation. The government might ask IOCL to acquire the smaller Oil India.
2. State-run oil PSUs consolidated into a single major company will create economies of scale and have higher capacity to bear risks, improved margins and more efficiency.
3. Consolidation in oil sector is a globally acknowledged practice. International oil giants such as ExxonMobil and Shell too have consolidated exploration, refining and retail operations.
HPCL is a refining company while ONGC is an oil explorer. Consolidation of different operations will give ONGC control over value chain leading to strengthening of balance sheets.
4. A bigger Indian oil company will be able to better withstand the volatility in the global oil market.
5. The domestic companies are increasingly scouting for overseas assets in a bid to protect themselves from volatility in crude prices. A bigger company will have better bargaining power.
6. The HPCL-ONGC deal will help the government meet more than a 3rd of its divestment target for the current financial year without losing control over the company.
