Oil firms' mergers may save Rs 25,000 crore

Govt to set aside almost Rs 5,000cr to fund VRS following mergers.

The petroleum and natural gas ministry estimates that the proposed mega-merger of state-owned oil companies to create two oil behemoths will result in a total savings of Rs 25,000 crore over a period of 3-4 years. This is equivalent to 10 per cent of the total assets of the companies being merged.

Petroleum Minister Mani Shankar Aiyar is consulting directly with the oil companies and related sector experts on ways to squeeze savings from the proposed mega-merger of HPCL and BPCL into the ONGC and Oil India into Indian Oil.

Sources said the government would set apart almost Rs 5,000 crore to fund a golden handshake for the staff rendered surplus following the merger and the voluntary retirement scheme would be "in line with the global standards".

This is expected to make the mega-merger palatable to the powerful oil unions. At the same time, to address any political opposition to the merger, the ministry has calculated that the retail fuel prices can easily be pulled down by 7-8 per cent as a result of the cost savings to the oil companies.

Further, the third element in the strategy is to hive off the real estate and physical assets that will be rendered surplus following the merger. The ministry has not put a value to the sums it can collect from the sale of assets, but ministry officials have reportedly made a strong pitch for scheduling the sale of surplus assets to coincide with multinational companies' foray into petroleum retailing.

The argument for pushing the merger now hinges on the entry of oil multinationals into the retailing. "The assets will only fetch a good value before these companies set up their own infrastructure. Afterwards, the PSUs assets are wasted," these sources added.

Executives said with two former petroleum secretaries in the top rungs of power, the mega merger proposal, which had been talked about endlessly, was now taking a concrete shape, with the ministry asking each oil company for detailed notes.

Sources added that "this time, the ministry is building its case on numbers rather than intangible gains, though the process was set in motion after some oil companies raised the fear of losing business once multinational are allowed into petroleum retailing."

The ministry has been drawing a parallel with the deregulation earlier in the case of lubricants. "After the lube business opened up, IOC's market share fell from 60 per cent to as low as 35-40 per cent", sources add.

Mega merger

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• Total savings of Rs 25,000 crore over a period of 3-4 years is equivalent to 10 per cent of the total assets of the companies being merged
• The government will set apart almost Rs 5,000 crore to fund a golden handshake for the staff rendered surplus following the merger
• The retail fuel prices can easily be pulled down by 7-8 per cent as a result of the cost savings to the oil companies