Public sector oil companies, which have to grapple with the huge losses imposed on them by the government policy not to free petroleum prices, now have another manmade problem to deal with. They are confronted with yet another attempt by their ministry to restructure them.

The first attempt to merge various public sector oil companies was rejected by the Synergy in Energy Committee (the ministry is still reviewing whether or not to accept the report).

Now the latest proposal being considered in the ministry is to separate ONGC [Get Quote] Videsh Ltd (OVL bids for foreign exploration and production contracts) from ONGC to form a new entity in which various oil PSUs will have a stake.

According to the ministry's note on the matter, the reason for this is that "OVL's attempts to buy into producing properties have failed universally" and "OVL has been entirely unsuccessful in award of exploration blocks in petroleum rich countries".

So what is needed, the presentation goes on to say, is use of "geo-political backing and sound international relations", among other things, and that is what the new body will supposedly deliver.

It is not clear why the diplomatic skills the ministry of petroleum is supposed to possess cannot be brought into play even while OVL is a subsidiary of ONGC.

Petroleum Minister Mani Shankar Aiyar publicly alleged foul play by investment banker Goldman Sachs after the OVL-Mittal combine failed to win the PetroKazakhstan bid. So the diplomacy and strategic clout of the ministry were either not used or were not enough in this case at least.

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Whatever the view of OVL's capabilities, other oil PSUs have even less exploration and production capabilities than ONGC. So it is not clear how the proposed new entity will have more of the skills needed. In any case, dismembering ONGC by removing OVL from under it will have huge financial implications since OVL's international foray has been funded by a Rs 15,000-crore (Rs 150 billion) interest-free loan from ONGC.

If there is a demerger, ONGC, which is publicly listed, will have to be compensated for the value of the equity oil OVL has in overseas fields as all these have been secured with ONGC's funds. The cost of the proposed restructuring can run into billions of dollars, while the additional benefits, which could accrue are not immediately obvious.

Indeed, the ministry would do well to ponder over the reasons why OVL is not able to get as many fields as it wants. Does it have enough autonomy? OVL's board itself has the power to clear bids only up to Rs 300 crore (Rs 3 billion). Anything over this has to be cleared by an empowered group of secretaries and then the cabinet committee on economic affairs.

So a lot of people are already in the know on the maximum bid that OVL can make in individual instances even before the company has begun bidding. Given the porous nature of the government, that is risky.