Oil PSUs Eye Diversification

Every business, however protected and monopolistic, will always feel the heat of wrong economics. The best example of this is the Oil & Gas sector. While it gives a feeling that it is among the best, given the monopoly that these companies enjoy. The reality is far from what it seems. With rising under recoveries in prices, the oil marketing companies as well as upstream oil companies have been facing a lot of heat. On one hand are, rising crude oil prices and on the other a whole lot of pressure from the government to keep fuel prices at so called lower and affordable levels is straining these companies beyond repair. In a bid to loosen this squeeze, companies like ONGC, IOC, HPCL and BPCL are scouting for opportunities to diversify which will minimize their losses going forward.

For instance, the board of ONGC has approved investment and foray in the nuclear power domain. With this in mind, it’s discussion with NPCIL is slated to start shortly. The management has been candid enough to admit that it is lacking in the technical wherewithal in this field, but with its expertise in the engineering and maintenance it is quite confident of excelling in this field too.

This phenomenon, of companies in the oil & gas sector looking out at diversifying their business interest in a bid to mitigate the risk of volatile crude oil prices is not just here but is being witnessed globally too.

HPCL has already diversified into ethanol making, and has two wind power projects at Dhule in Maharashtra and at Jaisalmer in Rajasthan. It also plans to foray into the solar power segment. On the other hand BPCL, has recently tied up with Korea’s LG Chem for setting up a Rs 4000 crore petrochemical complex in Kochi. It has already a firm presence in the upstream segment through Bharat Petro Resources. Gas reserves from the company’s fields in Mozambique, where it is an investor along with Videcon Industries, may be in the region of 100 trillon cubic feet. Gas from the oilfield is expected to flow by 2017-18.

If companies succeed in implementing these plans, they would certainly go a long way in helping them build a cushion against rising losses. But more importantly their success will help the government bring down its subsidy cost and thereby help in bridging the fiscal gap. This is probably one of the most important factors today. It will probably be a step in the right direction to support the Government’s other efforts of raising product prices and reducing subsidized supplies.

Hiking diesel prices is expected to reduce under-recoveries by Rs 29700 crore, while capping of subsidized LPG cylinder supplies will lower under recoveries to Rs 10800 crore. Before the policy move, total under-recoveries for FY 2012-13 was pegged at R1.88 lakh crore. This figure is certainly going to go down with the proactive measures that the government has started. Going forward, there will certainly some improvement in the numbers of these companies and these diversifications will also help them to a great extent. Now isn’t that a good move by state-owned companies. Tell us your take on it!