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Read more about Will ONGC\'s HPCL acquisition lead to long-awaited integrated supply chain? on Business Standard. This acquisition could be followed by the acquisition of Mangalore Refinery and Petrochemicals Limited (MRPL) by HPCL

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will ongc s hpcl acquisition lead to long awaited

Will ONGC's HPCL acquisition lead to long-

awaited integrated supply chain?

ONGC will buy 51.1 per cent of the government's equity in HPCL for Rs 369.15

billion ($581 billion) to stem the fiscal deficit and boost disinvestment -- a year

after the Modi government mooted a much-needed initiative to create an

integrated supply chain in the oil sector. The government will exceed its 2017-18

disinvestment target by Rs 200 billion after the "strategic sale".

Oil and Natural Gas Corporation Ltd (ONGC) Chairman Shashi Shankar confirmed

that it will use debt, cash reserves and proceeds from sales of its stake in IOC and

GAIL to fund the Hindustan Petroleum Corporation Ltd, India (HPCL) acquisition. It

owns 13.77 percent stake in Indian Oil and 4.86 per cent in GAIL that is worth an

estimated Rs 300 billion.

This could be followed by the acquisition of Mangalore Refinery and

Petrochemicals Limited (MRPL) by HPCL (HPCL currently holds 16.96 per cent

equity of MRPL). Chairman Shankar said: "That is a logical step. We see an

advantage in that but cannot give a time frame

advantage in that but cannot give a time frame." The merger will help in creating

the first of the two fully-integrated oil and gas producers that India needs to

create, so as to improve supply chain efficiency.

For a nation that still relies on imports for over 80 per cent of its oil and gas, India

lacks a comprehensive energy strategy that costs it billions of dollars each year.

Both the earlier United P{rogressive Alliance (UPA) and the current National

Democratic Alliance (NDA) governments have previously failed to realise that the

30 largest oil-consuming nations have invested significantly in the integrated

supply chain to improve efficiency and reduce costs. India fails to do that math

despite repeated prodding by the International Energy Agency (IEA).

The talk of an integrated supply chain is not new. The proposal to integrate oil

companies first came up in 2004 under the UPA. "It was then struck down by an

expert committee, Sushil Chandra Tripathi, a former Petroleum Secretary, told

this correspondent during a discussion on Lok Sabha TV last year.

"In the Western world we have Exxon Mobil, Shell, BP and Total; in Russia we

have Rosneft and Gasprom, in Saudi Arabia we have Aramco and in China we have

Sinopec. They are all large, integrated oil majors very unlike Indian companies,"

Tripathi added.

India has six separate entities, all very small by comparison: ONGC the oil

producer, GAIL the gas producer, MRPL a refiner, and IndianOil Corporation Ltd

(IOC), HPCL and BPCL that are refining and marketing companies. Strangely, the

integrated supply chain concept does not exist in the Indian subcontinent.

After the ONGC-HPCL merger, the integrated supply chain created by ONGC as a

producer could add both "supply planning", including crude buying, storage and

refining, as well as "distribution planning" that would have networked pipelines,

transport and marketing infrastructure, and sales outlets like petrol pumps for

retailing all petroleum products.

there are two major advantages of having

There are two major advantages of having integrated supply chains. Oil is an

intensely volatile commodity. The production price of oil or gas is fairly high for

Indian companies when compared to that of Saudi Arabia, Kuwait, Iran, Russia or

the US. When crude prices are low, integrated oil companies import heavily.

When international prices are high they raise their domestic production. This

gives them better control over their profits -- which are high for the marketing

arm when international prices drop and high for the producing unit when the

prices surge.

Besides, the size of the company matters, as oil is a capital intensive industry.

While the IEA recommends 90 days oil storage to stem crude oil volatility, India

has just around 15 days storage capacity, mostly developed by the marketing and

refinery units. When ONGC, with a net worth of Rs 221,900 crore, takes over HPCL

(net worth Rs 21,070 crore) it automatically gives the latter fiscal muscle to

improve its storage and pipeline capacities.

So, though the current acquisition is primarily to meet the government's

disinvestment target, the process should be taken forward to ensure that India

has two major integrated oil and gas majors -- the other one would be GAIL-IOC-

BPCL -- that can compete on a global scale.

Article By - Business Standard