The finance ministry is in favour of a merger of public sector petroleum companies Oil and Natural Gas Corporation and Indian Oil Corporation, instead of allowing ONGC to bid for Hindustan Petroleum Corporation Ltd.

This is in contrast to the petroleum ministry's stand that ONGC be allowed to bid for HPCL to enable its foray into petroleum product retailing.

The finance ministry's position is based on an analysis of the current position of the oil companies in terms of their respective strengths.

North Block feels that ONGC's foray into the retail sector can be better achieved by bringing ONGC and IOC closer.

This way, ONGC can avoid shelling out large funds, which it might otherwise spend on acquiring HPCL.

Senior government officials said the financial aspect was a crucial consideration because any bid by ONGC for HPCL would entail an expenditure of over Rs 5,000 crore (Rs 50 billion).

They said this would only add to the divestment kitty of the Centre. ONGC can instead use the funds to invest in its core business of oil and gas exploration.

The officials said the proposed merger of IOC and ONGC was a cheaper alternative, and made sense at a time when there were no immediate plans for their divestment.

The present plan is significant  because it comes after the decision of the Cabinet committee on divestment to defer the sale of HPCL and BPCL till the Budget session, after obtaining the views of the Attorney General.

The next meeting of the Cabinet committee will decide if ONGC should be allowed to bid for a stake in HPCL.

The finance ministry's position will bolster the stand taken by the divestment ministry that public sector oil units should not be allowed to bid for other oil companies.

The next Cabinet committee meeting is expected to decide if ONGC is an exception.

Independent experts have also argued that allowing bids by public sector firms was not in consonance with the liberalisation of the oil sector post dismantling of the administered price mechanism.