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India plans to merge oil and gas SOEs into $100bn behemoth

Seeks to take on global oil giants in exploration and production assets

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Oil and Natural Gas Corp. is India's largest state-owned energy company.   © Reuters

NEW DELHI -- With the aim of taking on major global energy companies, the Indian government has spelled out an ambitious plan to set up an oil and gas behemoth by merging existing state-run companies.

India has about a dozen such state-run companies, including Oil and Natural Gas Corp., the biggest of them. Other major energy companies are Indian Oil Corp., Gas Authority of India, Bharat Petroleum Corp. and Hindustan Petroleum Corp.

If the top eight of these companies -- which have a combined market value of over $100 billion -- are merged, it will create a conglomerate able to compete with international players such as BP and Royal Dutch Shell. 

"We see opportunities to strengthen our CPSEs [central public sector enterprises] through consolidation, mergers and acquisitions. By these methods, the CPSEs can be integrated across the value chain of an industry," Finance Minister Arun Jaitley said in his annual budget speech on Wednesday.

"It will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders," he said.

There are possibilities of such restructuring, Jaitley said, in the oil and gas sector. "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," he added.

In India, Reliance Industries is the biggest private sector player in the field. It owns the world's largest oil refinery complex in Jamnagar in western Gujarat state with a production capacity of 1.24 million barrels a day.

Oil Minister Dharmendra Pradhan pointed out that the merger process would not simply fold all the companies into one. "It will not be wise to put all eggs in one basket. There will be multiple companies," he told the Economic Times, adding that the state-run companies will decide on mergers and acquisitions on their own. "The government will not micro manage [the merger]."

Each new company will be engaged in the entire value chain -- exploration and production, refining and marketing -- the minister told the newspaper, adding that he expected the Indian companies to enter the league of BP and Shell.

The oil and gas sector contributes about 15% to India's gross domestic product. A country of over 1.25 billion people, India is the third largest consumer of crude oil and petroleum products globally, accounting for 4.5% of world oil consumption in 2015, behind the U.S. and China.

India imports around 80% of its crude oil and 35% of its natural gas requirements. Despite its hydrocarbon deficiency, it has invested heavily in refining and processing capacity.

The country's refining capacity is 230 million tons per annum. It has 635 million tons of proven oil reserves, 54 trillion cubic feet of proven natural gas reserves and 96 trillion cubic feet of estimated shale gas reserves. With 48% of the country's sedimentary area yet to be explored, the government feels the oil and gas sector offers huge opportunities for investment.

The idea of merging state-run oil companies was discussed back in 2005, but a committee set up to study the proposal did not favor it. The panel said at the time that there was a need to strengthen the structure of the oil companies through policy and management improvements rather than via a merger.

The creation of an integrated state-run oil major is expected to provide "greater flexibility for investments and acquisitions, and potentially provide cost synergies," analytics company Crisil Research said of the latest proposal.

In the budget for the financial year starting in April, several other measures were also announced to give a fillip to the oil and gas industry. These include a reduction in the import duty on liquefied natural gas from 5% to 2.5%; the setting up of two strategic underground crude oil reserves in eastern Odisha and north-western Rajasthan states that would help protect the country from volatility in the international oil market; and encouraging digital payments through the creation of appropriate infrastructure across all fuel stations.

"For strengthening our energy sector, [the] government has decided to set up strategic crude oil reserves," Jaitley said. The plans to build two more storage caverns at locations in Odisha and Rajasthan will take the country's reserve capacity to 15.33 million tons.

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