The petroleum ministry has favoured an alternative plan for restructuring the state-owned oil companies in which Bharat Petroleum Corporation Ltd will be merged with Indian Oil Corporation and Oil India Ltd.

While endorsing the earlier proposal of creating two oil behemoths, it now proposes that Hindustan Petroleum Corporation Ltd will go with Oil and Natural Gas Corporation and Mangalore Refinery and Petrochemicals Ltd.

The logic of the alternative plan, now under discussion in the ministry, is that BPCL and HPCL cannot be part of one entity.

"Keeping HPCL and BPCL under the same umbrella does not make sense as their operations are very similar to each other," ministry officials said.

The ministry has argued that IOC's strength in retailing and its long relationship with international players will help OIL, which is short of resources, to focus on exploration. Similarly, ONGC will concentrate on exploration and production while HPCL will capitalise on its expertise in retail.

Last month, Petroleum Minister Mani Shankar Aiyar had discussed a proposal to create two oil companies, with ONGC, BPCL and HPCL forming one entity and IOC and OIL forming the second. The fate of Gail (India) Ltd is still to be decided under the new option.

"Gail can go either way. But a decision will be taken shortly," the officials said. In case Gail was not merged with either of the two entities, the ministry might look at merging it with BPCL to create a third entity, they said.

The merger proposal has, however, not gone down well with smaller companies like HPCL and BPCL though IOC and ONGC are in favour of the consolidation move.

The officials said the merger of the oil companies was necessary due to the entry of large domestic and foreign players in the Indian market. There was also a need to bid aggressively in overseas exploration ventures. "Indian oil companies need a critical mass to compete with international giants," the officials said.

There is more or less clarity on the IOC-OIL merger due to the synergy between the two companies. For instance, IOC owns the Numaligarh Refinery where crude is supplied by IOC.