The Cabinet approves Prime Minister Modi’s PSU plan to establish a vertically integrated oil giant by selling a 51% government stake in HPCL (Hindustan Petroleum Corporation Limited) to upstream behemoth, ONGC (Oil and Natural Gas Corporation). The consolidated supply chains will serve to minimise risk, increase capacity and catapult India’s recently deregulated oil market to secure a pronounced global competitive edge.
1. Hedging market price volatility
ONGC, a venerable oil and natural gas exploration unit, set up shortly after India’s independence from the British Raj, is an upstream gateway to the oil market supply chain. The high-risk, high return exploration model is platooned by groundswells of public and private sector investments that suffer frequent, inevitable losses due to falling crude oil prices. Conversely, HPCL, an oil refinery, stationed downstream on the supply chain, consumes crude oil and therefore, profits from low prices. Integrating these diametrically polarised constructs partially negates price fluctuation risks by offsetting upstream losses with downstream profits and vice versa. A third member of the supply chain, retail operators, will then directly benefit from stable pricing trends. Ultimately, high volume fuel consumers such as the public transportation and industrial sector will accrue compounding fuel costs savings.
2. Building economies of scale
Minimising the risk of market price volatility results in mammoth cost savings, thereby improving margins. Higher profits combined with increased supply chain visibility will allow the oil giant to optimise operations, detect anomalies and increase utilisation to ultimately scale production.
Historically, international market gorillas, ExxonMobil and Royal Dutch Shell have undertaken similar explorer, refiner and retailer consolidations to increase market share, leverage condensed industry infrastructure to sustainably boost capacity. An underlying benefit facilitating economies of scale is, of course, data. Poly-laterally amalgamating information between key market entities exponentially increases analytical potential, including the ability to predict trends and pre-empt, rather than navigate, risk. The compound benefits to internal operations and market facing strategies can establish the new oil giant as a dominant global player, thereby, stirring boons for interconnected industries including, Indian transporters and logistics solution providers.
3. Increased bargaining power
In an ongoing bid to minimise market volatility, mega-oil companies continually evaluate acquisitions of international assets. As separate entities, the explorer and refiner may compete against one another on the international stage to secure prime targets, ultimately cannibalising potential profits for the broader market and Indian consumers. Uniting ONGC and HPCL not only sharpens their purview of potential market acquisitions, it also deepens bargaining power and multiplies consequent benefits across a larger, consolidated consumer base.
The acquisition, which ensures HPCL maintains an independent brand identity after the integration, is valued at INR 28,000 crore of USD 4.3 billion and is estimated to cover more than a third of the government’s divestment budget for the current financial year. Consolidating mega-oil supply chains to compete in increasingly dynamic markets is not only desirable but essential. In the wake of India’s predicted 7% annual GDP growth, industry and infrastructure require unprecedented supply chain visibility to remain competitive. The urgency is not lost on the Indian government, who have already lined up two more mega-oil acquisitions. According to the Financial Express, “Indian Oil Corporation (IOC), the country’s largest company by revenue, is likely to acquire the government’s 66.13% stake in upstream firm Oil India (OIL) while another oil marketer, Bharat Petroleum Corporation (BPCL) is likely to acquire the government’s 54.88% stake in GAIL (India), the dominant gas transporter and marketer.
The IOC-OIL and BPCL-GAIL transactions could fetch the government close to Rs 31,600 crore as in each case its share in one company will be sold to the other. The proposed ONGC-HPCL consolidation is expected to enrich the exchequer by Rs 29,000 crore as 51.11% government stake in HPCL will be bought by the explorer.”
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