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Published:February 13, 2017 5:59 PM
During the union budget 2017 declarations felicitated by Mr. Arun Jaitley, few possibilities were proposed under the development of oil and gas sector in India. The major areas of action would be: 1.Merger of Oil Sector PSUs into One Mega Integrated Oil Major 2.Creation of 2 more underground Crude oil storage 3.Reduction in Customs Duty on LNG 4.Chandigarh and Eight Districts of Haryana were made Kerosene free Merger of Oil Sector PSUs into One Mega Integrated Oil Major Discussing upon the most major announcement of creating a mega major of all oil sector PSUs, there could be 3 possible options for Integration Option 1: Merger of all Oil sector PSUs into One Mega Integrated Oil Major that would compete with world class global oil majors. After evaluation, the move would mean coming together of all the 13 Public sector units that are currently under the Ministry of Petroleum and Natural Gas. The potential issues or concerns that may arise with this option could be: a)Implementation Issues. b)All existing companies to lose identities. c)Cultural and HR Issues. d)Co-ordination Issues. Similar option was examined in 2005 as well through a committee headed by Dr. V. Krishnamurthy and the committee recommended the outcome that was against the Merger. Option 2: Creation of 3 or 4 companies out of 13 Oil PSUs that means segmentation of the sector and integrating the combination of companies that share the common portfolios of business.For Example: Integrating the Oil Marketing Companies (HPCL, BPCL and IOCL) into one company; likewise, for ONGC, OIL, GAIL into one. This can be a model where the similar synergies can be utilized for a profitable venture. Taking an account of issues and concern in context to this option, by and large it would be identical to the option 1 but will be of lesser dimensions. Option 3: Creation of a Holding Company (HoldCo.) with existing companies as subsidiaries:This is by far the most distinct model proposed so far. The creation of a Holding Company (HoldCo.) will be based on the similar pattern as of Temasek Holdings of Singapore. I.e.: a)Entire Government Equity holdings in all PSUs to be divested to HoldCo. b)Government of India may retain 50% plus the equity in HoldCo. c)Government’s ownership and control in existing PSUs to stay, which is very much desired in the Indian context. The Implications of this model would include: a)Total Market capital of listed Oil sector PSUs is Rs. 7,00,000 crore plus. b)Strategic control of Government of India over these companies through HoldCo. c)Minimum disruptions to existing corporate structure i.e. •Chairman/CMDs will get re-designated as Managing Directors •Success of ONGC-OVL-MRPL is an existing case in point. d)Chairman of these companies will be Non-Executive chairman to be nominated by HoldCo. e)The sole function of HoldCo. will be to oversee the operations of these companies and drive synergies. The Benefits of Implementing option 3 may be: : a)Optimization of resources sharing may result in upfront cost savings of 10-15% b)Huge disinvestment proceeds to the government. c)Market dynamics and volatility will be well addressed by this structure. d)This is the least disruptive model for implementation. e)Slowly the companies will get aligned to the culture of parent company. This seems to be the most practical option and to finalize the contours and structure, Government should engage a strategic advisor of global repute who can bring international experience and moderate it to suit Indian conditions. Now that the policy decision has already been taken, Implementation needs to be fast tracked. Creation of 2 more underground Crude oil storage Talking about the Creation of 2 additional Underground crude oil storages, the implications that can be drawn out of this is the fact that it will strengthen the Energy sector thereby securing the country’s energy needs and take India’s strategic reserve capacity to 15.33 Million Tonnes. Reduction in Customs Duty on LNG The implications that can be drawn out of this is the fact the LNG will replace polluting fuels like Fuel oil and Naptha thus helping to reduce the carbon footprint of the economy. This is a welcome step by the Government in moving towards a gas based economy. Chandigarh and Eight Districts of Haryana were made Kerosene free This is a bright outcome and a positive step in the direction of UJJWALA. Few of the Unmet Budget 2017 Expectations 1)Reduction of Cess on Crude Oil. a)The Sharp rally in oil prices over the past couple of months has seen the fuel rise to $55-60 a barrel. At these levels, the 20% Cess translates into excess burden to the oil producers. b)Since the oil prices are already high, 20% Cess is highly excessive. 2)Removal of Service tax on Cash calls and Royalty. a)Industry continues to feel anxious about paying service tax on cash calls to the operators. New players will feel subjected to unreasonable demands from the taxation authorities. Likewise, service tax on Royalty is unwarranted. 3)Exemption of Service Tax on Oil and Gas Exploration. a)Exploration is not a revenue generating activity. To attract large investments for exploration, it will be appropriate to exempt the exploration activity from levy of service tax. 4)Inclusion of petroleum products and Natural Gas under GST a)Since inputs into the petroleum sector are under the GST regime, non-inclusion of petroleum products outputs cannot be taken by the petroleum sector. b)Adverse impact on the government’s mission to increase the PNG penetration to 1 crore households and increase the share of gas to primary energy to 15% 5)Providing Import parity price to domestic producers of natural gas, in conformity to the pricing mechanism for crude oil. Infraline Energy’s Viewpoint: The Union Budget 2017 appears quite promising in context to the integration of major oil sector PSU’s. As per the evaluation of the possibilities of how this integration could possibly happen in future, option 2 and 3 suggested above, should fit well in the current Indian scenario. This is because after integration, the behemoth will have a huge market capitalization that would restfully compete with the other global oil giants. However, the amalgamation of option 2 and 3 could also be a way forward that policy makers can look upon. Instead of one holding company, three holding companies, each for Upstream, Refining & Marketing and Transportation sector can be formed so that the challenges like operational, techno- economical and human resource can be better managed for the homogeneous companies. Disclaimer: The above article is being prepared with the help of taking the views from a webinar, where Mr. R. S. Sharma, Chairman- Hydrocarbon Committee, FICCI was the speaker. InfralineEnergy Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
During the union budget 2017 declarations felicitated by Mr. Arun Jaitley, few possibilities were proposed under the development of oil and gas sector in India. The major areas of action would be:
1.Merger of Oil Sector PSUs into One Mega Integrated Oil Major
2.Creation of 2 more underground Crude oil storage
3.Reduction in Customs Duty on LNG
4.Chandigarh and Eight Districts of Haryana were made Kerosene free
Merger of Oil Sector PSUs into One Mega Integrated Oil Major
Discussing upon the most major announcement of creating a mega major of all oil sector PSUs, there could be 3 possible options for Integration
Option 1: Merger of all Oil sector PSUs into One Mega Integrated Oil Major that would compete with world class global oil majors.
After evaluation, the move would mean coming together of all the 13 Public sector units that are currently under the Ministry of Petroleum and Natural Gas. The potential issues or concerns that may arise with this option could be:
a)Implementation Issues.
b)All existing companies to lose identities.
c)Cultural and HR Issues.
d)Co-ordination Issues. Similar option was examined in 2005 as well through a committee headed by Dr. V. Krishnamurthy and the committee recommended the outcome that was against the Merger.
Option 2: Creation of 3 or 4 companies out of 13 Oil PSUs that means segmentation of the sector and integrating the combination of companies that share the common portfolios of business.For Example: Integrating the Oil Marketing Companies (HPCL, BPCL and IOCL) into one company; likewise, for ONGC, OIL, GAIL into one. This can be a model where the similar synergies can be utilized for a profitable venture. Taking an account of issues and concern in context to this option, by and large it would be identical to the option 1 but will be of lesser dimensions.
Option 3: Creation of a Holding Company (HoldCo.) with existing companies as subsidiaries:This is by far the most distinct model proposed so far. The creation of a Holding Company (HoldCo.) will be based on the similar pattern as of Temasek Holdings of Singapore. I.e.:
a)Entire Government Equity holdings in all PSUs to be divested to HoldCo.
b)Government of India may retain 50% plus the equity in HoldCo.
c)Government’s ownership and control in existing PSUs to stay, which is very much desired in the Indian context.
The Implications of this model would include:
a)Total Market capital of listed Oil sector PSUs is Rs. 7,00,000 crore plus.
b)Strategic control of Government of India over these companies through HoldCo.
c)Minimum disruptions to existing corporate structure i.e.
•Chairman/CMDs will get re-designated as Managing Directors
•Success of ONGC-OVL-MRPL is an existing case in point.
d)Chairman of these companies will be Non-Executive chairman to be nominated by HoldCo.
e)The sole function of HoldCo. will be to oversee the operations of these companies and drive synergies.
The Benefits of Implementing option 3 may be: :
a)Optimization of resources sharing may result in upfront cost savings of 10-15%
b)Huge disinvestment proceeds to the government.
c)Market dynamics and volatility will be well addressed by this structure.
d)This is the least disruptive model for implementation.
e)Slowly the companies will get aligned to the culture of parent company.
This seems to be the most practical option and to finalize the contours and structure, Government should engage a strategic advisor of global repute who can bring international experience and moderate it to suit Indian conditions. Now that the policy decision has already been taken, Implementation needs to be fast tracked.
Creation of 2 more underground Crude oil storage
Talking about the Creation of 2 additional Underground crude oil storages, the implications that can be drawn out of this is the fact that it will strengthen the Energy sector thereby securing the country’s energy needs and take India’s strategic reserve capacity to 15.33 Million Tonnes.
Reduction in Customs Duty on LNG
The implications that can be drawn out of this is the fact the LNG will replace polluting fuels like Fuel oil and Naptha thus helping to reduce the carbon footprint of the economy. This is a welcome step by the Government in moving towards a gas based economy.
Chandigarh and Eight Districts of Haryana were made Kerosene free
This is a bright outcome and a positive step in the direction of UJJWALA.
Few of the Unmet Budget 2017 Expectations
1)Reduction of Cess on Crude Oil.
a)The Sharp rally in oil prices over the past couple of months has seen the fuel rise to $55-60 a barrel. At these levels, the 20% Cess translates into excess burden to the oil producers.
b)Since the oil prices are already high, 20% Cess is highly excessive.
2)Removal of Service tax on Cash calls and Royalty.
a)Industry continues to feel anxious about paying service tax on cash calls to the operators. New players will feel subjected to unreasonable demands from the taxation authorities. Likewise, service tax on Royalty is unwarranted.
3)Exemption of Service Tax on Oil and Gas Exploration.
a)Exploration is not a revenue generating activity. To attract large investments for exploration, it will be appropriate to exempt the exploration activity from levy of service tax.
4)Inclusion of petroleum products and Natural Gas under GST
a)Since inputs into the petroleum sector are under the GST regime, non-inclusion of petroleum products outputs cannot be taken by the petroleum sector.
b)Adverse impact on the government’s mission to increase the PNG penetration to 1 crore households and increase the share of gas to primary energy to 15%
5)Providing Import parity price to domestic producers of natural gas, in conformity to the pricing mechanism for crude oil.
Infraline Energy’s Viewpoint:
The Union Budget 2017 appears quite promising in context to the integration of major oil sector PSU’s. As per the evaluation of the possibilities of how this integration could possibly happen in future, option 2 and 3 suggested above, should fit well in the current Indian scenario. This is because after integration, the behemoth will have a huge market capitalization that would restfully compete with the other global oil giants. However, the amalgamation of option 2 and 3 could also be a way forward that policy makers can look upon. Instead of one holding company, three holding companies, each for Upstream, Refining & Marketing and Transportation sector can be formed so that the challenges like operational, techno- economical and human resource can be better managed for the homogeneous companies.
Disclaimer: The above article is being prepared with the help of taking the views from a webinar, where Mr. R. S. Sharma, Chairman- Hydrocarbon Committee, FICCI was the speaker.
InfralineEnergy Disclaimer:
The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
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