By R. Sasankan

We propose 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.
— Arun Jaitley in his Budget Speech in 2017

The proposed Grand Alliance in India’s petroleum industry is finally in tatters.

Nirmala Sitharaman, current finance minister, is quietly sweeping the detritus from a collapsed plan – an ill-conceived attempt to meld two petroleum giants into a shambling behemoth – into the dustbin of poor ideas.

Samuel Johnson, the 18th century English critic, had once slammed the great poetic tradition of writing pastoral elegies that blended Christian and pagan images, singling out John Milton’s poem Lycidas as a vulgar creation of “irreverent combinations” by trying to juxtapose heathen deities with “sacred truths”.

Jaitley’s grand plan was a polluted concept on a similar scale: an attempt to create an irreverent combination of two very disparate entities without considering the founding principles that anchored the ambitions of a newly liberated nation.

The plan to create an oil behemoth that would match the power and pelf of global industry peers may have been well intentioned but experts in the industry were pretty aghast when it was unveiled. Petroleum minister Dharmendra Pradhan chose not to demur; bureaucrats and oil industry experts preferred to remain silent and not voice their misgivings about the merger.

As part of the plan, Jaitley managed to persuade ONGC to acquire the government stake in downstream major HPCL which, in turn, was supposed to acquire the former’s holding in MRPL. The government holds an 88.58 per cent stake in MRPL. Of this, ONGC holds 71.63 per cent and HPCL, a minority partner, has 16.96 per cent. Jaitley’s move had an ulterior motive: it was designed to reduce the Centre’s fiscal deficit.

The Modi government – in its Second Coming – has decided to dump the merger plan: lock, stock and barrel. But it wants to disengage from a faulty plan without too much to-do. And that means Nirmala Sitharaman will abandon the plan without actually saying so, careful not to cause great embarrassment to Mr Jaitley.

If the government has now realised that the plan is deeply flawed, there is no reason why it should only baulk at the merger of HPCL and MRPL. It ought to go the whole hog and unscramble the entire plan and ONGC ought to cede its stake in HPCL as well. ONGC was never comfortable with the plan to acquire a stake in HPCL. For a start, it depleted its cash reserves. HPCL, in turn, were mortified by the thought that there would be a clash of management cultures. HPCL officials have always believed that they are a cut above the rest in the petroleum pack and looked down on the others with some disdain.

The half-hearted roll back of the grand alliance has fostered another preposterous argument. The acquisition of the stake in HPCL is being justified on the ground that it would make ONGC an integrated oil company. This is a ridiculous argument and springs from an insufficient understanding of the history of ONGC.

ONGC was conceived with a single minded purpose: to create an Exploration and Production (E&P) company. The move to turn it into an integrated oil company is as spurious as it is muddle headed. Not many in the oil industry seem to know that the Gujarat refinery at Koyali in the state of Gujarat was set up by ONGC to process its crude produced in the state. It was the visionary petroleum minister, K.D. Malaviya, who advised ONGC to hand over the refinery to Indian Oil Corporation (IOC) so that ONGC could concentrate on E&P activities. Today, the Gujarat refinery is one of IOC’s largest refineries in terms of capacity. Many years later, the very same ONGC was persuaded to acquire MRPL when the Aditya Birla group wanted to divest its stake in 2002.

No wonder, ONGC’s performance in the initial two decades had been rated at par with the best in the world. Look at the performance of ONGC in recent decades: it hasn’t had a single commercial discovery since Bombay High. In the 1980s, India’s domestic crude output, after the adoption of the accelerated production plan in Bombay High, was able to meet close to 70 per cent of the country’s requirement. Now, domestic production by all players together meets only 16 per cent of the country’s energy needs.

Repeated political interferences over the years have weakened ONGC beyond measure. Faulty production practices have practically wrecked prospects at Bombay High – and it hasn’t been able to recover even after spending millions of dollars. If ONGC fails to discover at least one or two commercially viable oil and gas fields in the near future, its existence as an E&P company will be imperilled. The irony is that it in such a situation it may survive on the strength of its downstream operation, thanks to merger with HPCL.

The concept of creating an “integrated oil company” is being touted as a much-needed panacea for the problems that are plaguing the state-owned oil companies. India’s oil sector has had an integrated structure for many years and this has worked reasonably well. ONGC and Oil India are the two upstream companies; gas transportation and distribution major GAIL constitutes the midstream; and IOC, BPCL and HPCL are the highly successful downstream companies.

The solution to the present problem is precisely what Malviya prescribed for the oil sector. Permit them to operate in their originally conceived areas within the integrated structure. ONGC’s survival is crucial for the country’s energy security. The government should not allow it to fritter away its energy in refining and marketing. It requires cash to strengthen its exploration activities.

The Modi government should not hesitate to unscramble the merger between ONGC and HPCL. If this cannot be done on the ground that the fiscal deficit needs to be capped, the downstream entity should be handed over to either BPCL or IOC.

HPCL has been a reasonably efficient company with a fairly transparent management. Being a Mumbai-based company, it has consistently shied away from political lobbying in Delhi and that is probably why it could not scupper the merger plan. Like BPCL, it has a management culture which is distinctly different from other PSUs like IOC and ONGC. Culturally, the merger of HPCL with ONGC looks like an “irreverent combination”. A demerger is good for both HPCL and ONGC. If the government is brave enough to acknowledge its mistake and move on, it will only enhance its image.