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HPCL-ONGC deal: Why is it important?

By Vikas

The Union Government on Wednesday approved the sale of 51 per cent stake in the state-refiner Hindustan Petroleum Corp Ltd (HPCL) to the Oil and Natural Gas Corp's (ONGC).

HPCL is the second largest refiner-retailer after Indian Oil and the deal will increase the government's disinvestment proceeds by about Rs 30,000 crore.

An oil tanker

This deal is a major step forward to create a large integrated oil firm that can take on global oil giants. Speculations are rife that northeast explorer Oil India Ltd may by aquired by country's largest state-owned refiner retailer Indian Oil next.

India is the world's third-biggest oil consumer and the present regime under Prime Minister Narendra Modi wants to reduce dependence on oil imports. This vital for India to be self-reliant as 80 percent of country's crude needs are imported.

HPCL is a refining company while ONGC is an oil explorer, which means the consolidation will streghthen the value chain that will create economies of scale. This in turn will result in improved margins and more efficiency.

Finance Minister Arun Jaitley, had in his budget speech, hinted at plan to form a giant national oil company by combining other state-owned firms. This behemoth plan is in line with PM Modi's target to cut dependence on oil imports by 10 percent by 2020.

India has about a dozen state-owned oil and gas companies whose domain of operations often overlap. Being small entities thay also do not have financial power to rival global oil majors. There are reports that ONGC's refining subsidiary Mangalore Refinery and Petrochemicals may also be merged into this emerging entity.

A bigger entity is also favourable as it can better withstand the volatility in the global oil market and have higher capacity to bear risks.

This would also give a major boost to India's bids for overseas exploration and production assets.

After this deal, ONGC will become the third-largest refiner in the country after Indian Oil and Reliance Industries Ltd, said reports.

The cash generated from the disinvestment will allow the government to implement itsa social welfare schemes better.

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