The government is prodding ONGC to buy HPCL (both are PSUs) to improve efficiency in the oil and gas sector.
But the move seems to lack logical thinking and a vision
What are the issues with this integration?
Many of the world’s oil majors are integrated companies that are involved in extraction as well as refining.
While integration does offer advantages, merely merging PSUs isn’t going to significantly change anything.
Large mergers are always tricky and many have failed.
Also, merger would’ve made sense if either ONGC or HPCL was more efficient than that of their private sector rivals, which isn’t the case.
Significantly, they are bound by various rules and procedures that restrict their performance, just like all other PSUs.
What are the contradictions?
Disinvestment - There is very little competition in the oil marketing space and hence, privatising HPCL would have been a much better idea.
But the government hasn’t considered it, as ONGC’s buying program will itself help to meet the disinvestment targets without actual privatisation.
HPCL’s Valuation - Significantly, ONGC has done an internal evaluation of HPCL that values it at 45% more than what its market capitalisation is.
This effectively means that ONGC’s valuation experts think that HPCL is more valuable than Reliance Refineries, which is odd.
Notably, apart from its more modern refineries that have better processing capabilities, Reliance also has a robust crude sourcing profile.
ONGC’s Profile - While the government is asking ONGC to acquire HPCL, it is taking away some of ONGC’s oil/gas fields and giving them to private firms.
Thus, while the government thinks that an ONGC takeover will increase HPCL’s profitability, it also feels that ONGC isn’t doing its current job well.
