By Nidhi Verma and Nigam Prusty
NEW DELHI (Reuters) - India has approved explorer Oil and Natural Gas Corp's (ONGC) plan to buy its 51.1 percent stake in state-refiner Hindustan Petroleum Corp Ltd (HPCL), a government source said on Wednesday, as New Delhi seeks to create a large integrated oil firm.
India has about a dozen state-owned oil and gas companies, with significant overlaps in operations. Alone they do not have the financial power to rival global oil majors in bids for overseas exploration and production assets.
India, the world's third-biggest oil consumer, imports about 80 percent of its crude needs and Prime Minister Narendra Modi has set a target to cut dependence on oil imports by 10 percent by 2020.
The proceeds from the HPCL stake sale will also help the government pay for welfare programmes. Asia's third-largest economy aims to raise 725 billion rupees ($11.24 billion) through government stake sales in various companies.
The finance minister Arun Jaitley announced in February the plan to form a giant national oil company by combining other state-owned firms.
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"The benefits of synergy would be huge," ONGC Chairman Dinesh K. Sarraf told Reuters.
"Today crude prices are down, so ONGC's profitability is down while gross refining margins and marketing margins of refiners are up so it makes a lot of sense for ONGC to make this acquisition," Sarraf said.
At current market prices, the government's 51.1 percent stake in HPCL is worth about $4.65 billion, according to Reuters calculations. At the end of March, state-run ONGC, the country's top explorer, had cash equivalents and bank balances of about 130 billion rupees ($2 billion), the company's website showed.
Sarraf said ONGC had yet to draw up a funding plan for the acquisition.
At a later date ONGC's refining subsidiary Mangalore Refinery and Petrochemicals will be merged with HPCL, the government source said.
"Though the idea is meritorious, a decision on this will be taken by the boards of HPCL and MRPL," Sarraf said, adding HPCL would continue to operate as a separate entity.
He said ONGC would not be required to make an open offer to buy HPCL's shares from the market.
HPCL control India's 11 percent refining capacity through its three plants, which can process 276,000 barrels of oil per day.
Oil minister Dharmendra Pradhan has said the merged oil company would have less risk and give it more leverage to go abroad as low oil prices hit producers' revenue and higher prices hurt fuel refiners.
In March, Pradhan said the integration of ONGC and HPCL was expected to be completed by the end of March next year.
(Editing by Susan Thomas)