Union Cabinet today approved the plan to sell government's 51 per cent stake in state-refiner HPCL BSE 0.

74 %
to explorer ONGC BSE -0.21 %.

The HPCL-ONGC deal is a major step towards India's efforts to build a mega company that can compete with
global majors. Below are the main reasons why the deal is important for the country:

1. Mergers and consolidation of state-owned companies are the only way to create an oil giant. HPCL-ONGC
deal is the first step towards that goal. It will pave way for further consolidation. The government might ask IOCL
to acquire the smaller Oil India.

2)State-run oil PSUs consolidated into a single major company will create economies of scale and have higher
capacity to bear risks, improved margins and more efficiency.

3) Consolidation in oil sector is a globally acknowledged practice. International oil giants such as ExxonMobil and
Royal Dutch Shell too have consolidated exploration, refining and retail operations. HPCL is a refining company
while ONGC is an oil explorer. Consolidation of different operations will give ONGC control over value chain
leading to strengthening of balance sheets.

4) A bigger Indian oil company will be able to better withstand the volatility in the global oil market.

The domestic companies are increasingly scouting for overseas assets in a bid to protect themselves from
volatility in crude prices. A bigger company will have better bargaining power.

5) The HPCL-ONGC deal will help the government meet more than a third of its divestment target for the current
financial year without losing control over the company. The disinvestment target is of Rs 72,500 crore and the
deal is valued at nearly Rs 28,000 crore.

HPCL is likely to take over Mangalore Refinery and

Petrochemicals Ltd (MRPL) to bring all the refining assets of
ONGC under one unit.

ONGC currently owns 71.63 percent of MRPL while HPCL has

16.96 percent stake in it.

HPCL controls India's 11 percent refining capacity through its

three plants, which can process 276,000 barrels of oil per day.

The Rs 30,000 crore that ONGC shells out for HPCL stake "will
reduce the flexibility of ONGC's books to acquire or develop
upstream assets", they note. It has to be remembered that
ONGC already has Rs 56,000 crore debt on its books.