The planned merger of some of the 13 state-owned Indian oil companies will lead to problems on the domestic market, with consumers bearing the brunt of it, the Economic Times writes, citing a report from Fitch.
Right now, all these 13 companies are competing among themselves, ultimately benefiting end-consumers of their products, says Muralidharan R, the author of the Fitch report. After the merger, most of the local competition will be gone.
What’s more, the Fitch director said, the integration of these companies will be a handful: they have different “structures, operational systems, and cultures.” Overcapacity will also present a problem, as the government will likely be unwilling to agree to major job cuts after the deal. Private shareholders, on the other hand, are equally likely to have a different idea about how the resulting giant company should be run.
On a purely practical level, these companies, where state interest ranges between 51 and 70 percent, might find it hard to convince other shareholders to approve the merger: they need a 75-percent approval rate for the merger to go ahead.
The merger was proposed last year as an attempt to improve the international position of India’s state oil companies, enhance their competitiveness, and improve their chances of success in overseas projects. India has emerged as the next big consumer of crude oil, and according to the government, it would benefit from having a company capable of taking on the likes of BP, Shell, and Exxon.
Another reason behind the proposed merger is that a bigger company will be better able to weather the effects of oil price volatility, by combining E&P and downstream businesses, using downstream profits to offset potential losses in the upstream business.
India is pegged as the leading driver of global oil demand growth in the medium term, thanks to PM Modi’s initiative ''Make in India'', aimed at turning the country into a new global manufacturing hub at a time when China is slowly shifting away from manufacturing and into services. This transformation will require huge amounts of fuel, which is the driver behind Indian oil companies’ expansion plans abroad.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.