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Oil giant in the making

Oil giant in the making
Highlights

In trade and industry, economies of scale help all stakeholders. Companies benefit significantly as they enjoy more bargaining power with vendors and raw material suppliers because they procure in massive quantities. 

In trade and industry, economies of scale help all stakeholders. Companies benefit significantly as they enjoy more bargaining power with vendors and raw material suppliers because they procure in massive quantities.

That makes them more competitive in market and also enables them to offer products at reduced prices, thus benefiting customers. Investors also benefit as higher turnover churns out higher profits. The advantages are far higher if a company has operations of global scale.

The best example of an Indian company that pursued the concept of economies of scale assiduously is Reliance Industries. The diversified conglomerate founded by Dhirubhai Ambani owes its success to this strategy and it is now India’s second largest petroleum refining company with a capacity of 60 million tonnes per annum (MTPA).

India recently witnessed the power of this strategy when Dhirubhai's elder son Mukesh Ambani, who now owns RIL, disrupted the country's telecom landscape through Reliance Jio, dubbed by some as the world's largest startup with Rs 1.5 lakh crore in seed capital.

Now, the Indian government wants public sector undertakings in petroleum sector (oil PSUs) to reap the benefits of economies of scale. It made the first step in that direction when Finance Minister Arun Jaitley announced plans in the Union Budget 2017-18 to create an integrated oil behemoth that could be in the same league as global oil giants.

It is not a new idea, though. A merger plan of oil companies first emerged during the Atal Bihari Vajpayee government in late 1990s, but it did not move forward. In 2002, the then oil minister Mani Shankar Aiyar revived the plan during the UPA’s first term.

However, an expert committee appointed by that government in 2005 did not favour the merger, putting brakes on the plans. Instead, the Advisory Committee on Synergy in Energy headed by V Krishnamurthy batted for more autonomy to oil companies.

Nonetheless, the current dispensation at the Centre seems to be serious on creating a few public sector entities of global scale in banking and oil. The government exhibited that seriousness when it gave nod for the merger of five associate banks and Bharatiya Mahila Bank with State Bank of India recently.

Now, the government has put the merger plan of oil PSUs on fast-track with reports indicating that public sector oil and gas major ONGC would acquire HPCL, another oil PSU, for Rs 40,000 crore. Post the acquisition, ONGC will become third largest petroleum refining company with a capacity of 41.9 MPTA.

IOC leads the pack with 69.3 MPTA, followed by RIL. There is also indication that another state-owned oil major BPCL will be merged with ONGC, while OIL (Oil India Corporation) will go into IOC fold, thus resulting in two PSU oil giants which will have muscle to compete with bigger players in India and abroad.

They can also handle oil price volatility better. People in general will also benefit from these mergers as ONGC and IOC will pass on any benefits to their customers. Time for global oil giants of Indian origin, indeed!

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