State-owned Oil and Natural Gas Corporation (ONGC) is set to acquire India's third-biggest fuel retailer HPCL in an about Rs 44,000 crore (USD 6.6 billion) deal as part of the government's plan to create an integrated oil giant.
Following up on Finance Minister Arun Jaitley's Budget announcement of creating an integrated oil company, India's biggest oil and gas producer ONGC may buy all of the government's 51.11 per cent stake in Hindustan Petroleum Corporation Ltd (HPCL).
This will have to be followed by an open offer to acquire additional 26 per cent from other shareholders of HPCL.
"The government is looking at creating an integrated oil company and the idea is to merge an oil producer with a refiner," a top source said.
There are only six major companies in the sector - ONGC and Oil India Ltd being the oil producers, Indian Oil Corp (IOC), HPCL and Bharat Petroleum Corp Ltd (BPCL) in refinery business and GAIL in midstream gas transportation business.
The rest such as ONGC Videsh, Chennai Petroleum Corp (CPCL), Numaligarh Refinery Ltd and Mangalore Refinery (MRPL) are already subsidiaries of one of these six PSUs.
"So, the options are very limited. One option is to merge refiners HPCL and BPCL with ONGC and merge IOC and OIL. Now this would create two large vertically integrated oil companies. But this would also mean limiting the choice for consumers to just two companies for buying fuel," he said.
The possible way out is to merge HPCL with ONGC while keeping BPCL separate. BPCL already has a flourishing upstream arm in Bharat PetroResources Ltd which can be strengthened further.
"This way consumers will continue to have three fuel retailers in IOC, ONGC-HPCL combine and BPCL," he said.
HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, making it the third-largest refiner in the country after IOC and Reliance Industries.
ONGC already is majority owner of MRPL, which has a 15-mt refinery. The source said ONGC buying HPCL will require two sets of Cabinet approval - one where the government approves sale of its all or part of its 51.11 per cent stake to ONGC, and he other for allowing ONGC to spend the money on stake buy.
Considering today's trading price of Rs 561, ONGC will have to pay the government Rs 29,128 crore for 51.11 per cent stake. It will then have to buy another 26 per cent from the open market for Rs 14,817 crore, taking the total acquisition price to about Rs 44,000 crore.
The merger will help the world's third-largest oil consumer better compete with global majors in acquiring foreign assets.
More than 12 years after a proposal to merge oil PSUs was first mooted by the then oil minister Mani Shankar Aiyar, Jaitley in his Budget for 2017-18 proposed 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".
The behemoth so created will not just compete globally, but withstand oil price volatility by using profits the refining business make in low oil prices to make up for losses in upstream and vice versa.