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After a gap of more than two years, the government may again revive the plan for further consolidation in the public sector oil companies by allowing mergers between producing, marketing, gas transportation and consultancy companies, leaving just few large integrated entities in operation.

The move follows the design of the new privatisation policy unveiled in this year's Budget. As per the policy, only a bare minimum presence will be maintained in the strategic sectors, including petroleum, while other entities would be privatised.

With the government already proceeding with the privatisation of Bharat Petroleum Corporation Ltd (BPCL), it is felt that the bare minimum principle would allow for consolidation in the sector through mergers and amalgamations.

So, after the 2018 merger of PSU oil refiner and retailer Hindustan Petroleum Corporation Limited (HPCL) with upstream major Oil and Natural Gas Corporation (ONGC), sources said the government may now look at creating another public sector integrated 'oil behemoth' by considering the merger of upstream oil producer Oil India Ltd (OIL) with Indian Oil Corporation (IOC).

Moreover, after the proposed split of gas transportation company GAIL into two, one of the entities in gas marketing may also be considered for merger with IOC.

"Nothing is off the table. And not all or most companies in the strategic sector would be privatised after reserving the bare minimum presence. Consolidation will be pursued so that stronger integrated entities are built even as number of PSUs will fall," said a top official from the Department of Investment and Public Asset Management (DIPAM), not willing to be named.

Public sector oil refiner IOC has also in the past shown interest to buyout government equity in BPCL, but PSUs are not allowed to bid for BPCL that is currently being tried for strategic sale to the private sector global companies. Sources indicated that IOC's case for BPCL may also be considered if the proposed bidding for BPCL fails to evince requisite interest.

Petroleum had been included in the strategic sector as it ensures energy security for the country. But there are around 12 oil PSUs, ranging from upstream oil producers like ONGC and Oil India to downstream oil refining and fuel marketing firms IOC, BPCL and HPCL to gas transporter GAIL India Ltd and engineering firm Engineers India Ltd. This leaves consolidation through further mergers and strategic sale is the only route to restrict the number of PSUs to a bare minimum.

While consolidation may be looked at once again, care will be taken to ensure that such mergers only happens where there are synergies, and the mergers do not result in addition to the debt burden on the companies. ONGC's acquisition of government's share in HPCL had pushed the upstream oil major from debt-free status into one where debt levels reached closer to unsustainable levels.

In one of the most expensive buys, ONGC paid Rs 36,915 crore to buy the government's entire 51.11 per cent stake in HPCL. But the deal brought down ONGC's cash reserves to Rs 1,013 crore as of March 31, 2018, from Rs 10,799 crore as of March 31, 2014, and saddled it with Rs 25,593 crore debt in FY18.

Things could get worse if an M&A is pushed onto IOC that already has limited cash balance. Though the company is showing relatively fair financial performance, a consolidation exercise would push it to add debt to its books that could weaken its operations.

The company is in the midst of an expansion diversification exercise that could suffer if debt gets added to its books. The IOC is sitting on special oil bonds (liquid holdings) of value running into a few thousand crores, but this could only part-finance any M&A deal.

The proposal to merge oil PSUs was earlier mooted during the time of Mani Shankar Aiyar. It was identical to the one that was explored by the current government - to merge HPCL and BPCL with ONGC, and OIL with IOC to create two large integrated oil and gas corporations.

However, Aiyar's idea was spiked by an official committee that studied the matter in 2005 but felt that a merger or formation of the holding company was not advisable at that juncture.

The proposal was again revived in 2014 by the BJP-led government, but again in September 2015 a high-level panel on the recast of public sector oil firms did not favour mergers to create behemoths and instead suggested greater autonomy by transferring government shareholding in oil PSUs to a professionally managed trust.

The talk of a merger once again started after then 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 international and domestic private sector oil and gas companies".

(Subhash Narayan can be contacted at subhash.n@ians.in)