Oil Major - Disadvantages

Why in news?

In the budget 2017-18, Finance Minister has proposed to create an integrated public sector oil major, which would match the performance of international and domestic private sector oil and gas companies.

Why the merger was opposed in the past?

• In 2004-05, V Krishnamurthy committee recommended that rather than creating a mega entity in the sector, it would be better to strengthen the structure of the state-owned oil companies, through policy measures and improvement in managements.
• The rationale behind the idea of mergers was to achieve operational synergies and to trim costs. This would eventually mean cutting the jobs and boosting profitability.
• But the decision against mega merger was based on cases of restructuring and acquisitions in the global oil industry, where only 29% of such transactions has led to the higher returns for the shareholders.
• They also said, the major cause for the failure of mergers was the handling of people working in many of these firms.
• Then there is also the danger of monopolies and cartels being created in the industry - that would inhibit the competition.
• Each Indian PSU oil companies are operating in distinct areas such as process of refining or exploration. So, disturbing this goes against the normalcy.
• In 1995, a reform group gave a similar view. They said a giant entity in the sector wasn’t something desirable, since it could mean destabilisation of some of the companies and the industry besides creating problems for consumers.
• In 2014, another committee was tasked with working out a road map for reducing India’s import dependency in the hydrocarbon sector by 2020.
• It made out a case for empowering and strengthening national oil companies and to strengthen the board processes with greater accountability and autonomy.
• In short, the costs far outweighed the benefits which could arise from a possible merger.

Source: The Indian Express