The Crude Plan

More than 12 years after a proposal to merge oil PSUs was first mooted by the then Petroleum Minister Mani Shankar Aiyar, Union Finance Minister Arun 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 global and domestic private sector oil and gas companies.

In conversation with BW Businessworld's Naina Sood, Aiyar shares his candid views on the impact of mega-merger of the public sector oil companies on petroleum sector in current economic scenario and why the idea did not materialise 12 years back.

I never introduced the bill to begin with. It wasn't even a proposal for that matter at that time. We had set up a committee with V Krishnamurthy, Vijay Kelkar and G V Ramakrishna to examine it so that in international market, we can raise huge capital and it could help us in securing the rights for oil worldwide.

There was resistance from the companies, however. In 1965, the companies were nationalised by then Prime Minister Indira Gandhi. And over the next 50 years, these PSUs faced several problems. The major problem was that they did not concentrate on their respective roles. For instance, Oil and Natural Gas Corporation (ONGC) was tasked with upstream exploration and others with downstream activities.

The public sector companies were also resistant to the idea with a view that their corporate culture is different from one to the other. I was able to comprehend what they were saying because whereas the Indian Oil Corporation (IOC) and ONGC were original creations of government of India, Hindustan Petroleum (BP) and Bharat Petroleum (BP) were the descendants of foreign companies that had been nationalised by Indira Gandhi after the 1965 war, with in deference to the respective national government which upheld the oil to the Indian army in 1965. So, therefore, they were all nationalised.

Now, my argument against it was that nationalisation had taken place 60 years earlier and at that time their corporate cultures were different. Currently, over a period of half a century all of them were surely required a similar big sector culture. So I was not impressed with that argument. Nevertheless, there was another major political argument put forward by the Krishnamurthy Committee. The political argument was that if we merge all our oil companies, it would become such a gigantic enterprise that it would completely overwhelm other PSUs and indeed pose a threat to the government itself.

The economic argument they put forward was of Ramakrishna, who had been arguing it for a very long time. He took the example of Temesak, a holding company of various public sector companies in Malaysia which completely isolates these companies from governmental interference. He proposed the same for these institutions in India but also argued that we shouldn't have the merger and produce a single entity that would be so overwhelmingly large and yet subject to political interference.

I thought it was a nonsensical argument because the only public sector companies in Malaysia, that are not part of Temesak, are they not complete? If you take the Temesak argument, as an argument against the merger, then please explain why is it that the oil companies in Malaysia are not included in the same? If any case, my fundamental point had not even been examined, which is what would be the result in the international market of our merging these companies. Would we or would we not be able to raise huge amounts of capital on the international market.

At that time, Indian Oil stood at position number 32 on the Forbes list. And I said that if we were to merge these companies, we could assume that from 32, maybe we could be at the 10th position. And what I had hoped was that this committee would examine that angle and give us the perspective on how much stronger we would become and raise capital, undertake investments, both in onshore and offshore exploration in India and properties abroad.

So because they took such negative attitude I was unable to move further because I thought some time should elapse between such a high power expert committee saying no and my revising these initiatives. But within a few months of the committee report, I was dropped from the Ministry of Petroleum. Therefore, I was not able to continue down this line.

So I was most intrigued when I read this Budget. They were reviving my old proposal but with no reference to me. There was nothing stated in the Budget which would indicate that they have any memory or record of this initiative being taken. So I do not know on what basis this proposal is being made.

Today we are in a very different era as compared to the era then. At that time we were in a rising oil market and the gas prices were linked to the oil prices and there was a huge shortage of LNG around the world. If we were to try and buy large quantities of gas abroad, we would not be able to access LNG at all, for the years to come. So in these circumstances, for us to have our own oil and gas fields from where we could supply ourselves and get into oil exploration abroad, when the idea of the Iran-Pakistan pipeline was very much alive. We could have gone and competed at various different places, it was a proposal for a rising market. Had we done it then, we would have been very well positioned around the world by now.

But today there is not only a declining oil market, but also a complete separation between oil and gas. The prices are no longer linked to each other. It is not the Henry hawk in America that set the index of the gas prices around the world. Thanks to the discovery and exploitation of shale gas, particularly in northern America and also in part of Eastern Europe and others, the gas prices are being set up independently of the oil prices. In fact, countries who were operating in the seller market, when I made my proposal, they are today operating in the buyer market with their LNG ships wondering in the ocean looking for buyer.

Secondly, the link between the oil prices in the world in Saudi supplies and oil prices in Asia under Saudi supplies have reversed. We had to pay an Asian premium then, now we are getting oil at lower prices than what prevailed in the US. America who was a major importer, has been converted into, not big, but an important net exporter, due to Shale.

So with the situation being very different today, I think for the move to speed ahead, they should look into all these aspects as well and think if the time is right to effect such a merger and if the international situation is not particularly attractive, then they need to put forward an alternative argument as to why should oil companies be merged.

I was saying fundamentally that the oil companies should be merged in order to give us the capacity to raise capital on international market to undertake exploration and exploitation ourselves and not be entirely dependent on the suppliers.

In a very brief conversation that I have had with some of my former colleagues in these oil companies, I understand that their view is that what I had proposed was very exciting prospect at that point of time. Today the situation is so different internationally that perhaps the same argument not valid.

So, therefore, before rushing in, where angels fear to tread, I think Jaitely and (Dharmendra) Pradhan would be much better advised to establish an expert committee on this matter and have its report. And then allow the report to be studied by the general public as well as by the special petroleum expert and then come to a mature decision.

Unfortunately, this government takes impulsive decisions and has not provided a single well thought out decision of its own. So I fear they may rush into this. But I would still advise them that instead to moving ahead on Jaitley's proposal without proper examination, they must set up an expert committee and take into account what the Krishnamurthy Committee had said a decade ago as well as the arguments that we made for the same. This also includes the issue of India Iran Pakistan pipeline which has now being dropped, talks on the Asian gas grids, Asian oil grids, which none of my successors are talking about.