Diesel decontrol sparks fresh hopes for pvt oil marketers

At 65 million tonnes per annum, dieselaccounts for nearly 40 per cent of all petroleum products sold in the country.Not surprisingly, it is a huge opportunity for private oil marketing companies.Now that the government has decided to decontrol diesel prices for bulk usersand allowed government-controlled oil marketing companies to raise retailprices in small monthly doses, private oil companies such as RelianceIndustries, Essar Oil and Shell India have a real opportunity on their hands.Bulk sales could be an immediate business, but in retail with a 45 paisa alitre increase, the current under-recovery of Rs 9.25 a litre will take 21months to wipe out, if future increases, too, are of the same order.

To be sure, private fuel retailers are no strangers to the market. Private fuel retailers had entered the sector after it was opened up in 2003. However, by 2006 most of them had started folding up their operations as international prices rose and it became difficult for them to compete with state-controlled Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, which sold petrol and diesel at government-dictated subsidised rates. As a result, diesel sales were virtually negligible for private oil companies since their price was higher than the oil marketing companies by about Rs 12 per litre.

Though petrol was again decontrolled in June 2010, it did not offer the same opportunity to private retailers as petrol accounts for less than one fourth of the diesel sales. As of now, private fuel retailers — Essar, Reliance and Shell — form less than 10 per cent of India's fuel retail business, with government-owned companies — IndianOil, Bharat Petroleum and Hindustan Petroleum — dominating the scene.
Diesel is the mainstay for private retailers primarily because most of their outlets are located on the outskirts of big cities, on highways and in small towns where the fuel is much in demand. Till now, direct diesel sales were virtually negligible for private oil companies. With market pricing of bulk sales and sales from retail outlets, too, inching towards total decontrol, diesel business has the potential of turning around the fortunes of private retailers.

There are two categories of bulk consumers: defence, the railways and the state transport undertakings, which form 60 per cent of this segment of diesel buyers; and industries like power plants, cement plants and chemical plants, which account for the remaining 40 per cent. Essar says it has already received enquiries from some bulk consumers, especially in Gujarat where its refinery is located.

What probably will work in the favour of the state-owned oil marketing companies is its well-established infrastructure. Their storage facilities and depots are fairly widespread. It might be particularly difficult for private companies to make inroads in the railways and defence as state-owned oil marketing companies own the infrastructure there. Besides, government entities often place orders through tenders for all-India delivery. That’s where the wide network of state-owned companies will come in handy. So, it will be the remaining 40 per cent (of the bulk users) that the private oil companies will try to tap.

The challenge for bulk sales will come from the retail outlets. Prior to the January 17 decision of the government, bulk sales were at a cheaper rate than retail because there was no dealer margin in the transaction. Now, thanks to the huge price difference, bulk consumers could flock to retail outlets for diesel. Retail outlets currently sell diesel to industrial consumers and for use in generator sets. The only yardstick they follow is to check on explosive storage licence for customers buying 2,000 litres and more. With dual pricing in place now they can now sell it at 20 per cent cheaper than the bulk rate. Dealers say it is impractical to implement dual pricing at the retail outlets. The biggest challenge for both private and government-controlled companies would, therefore, not come so much from each other as from the dual pricing of the fuel itself.
The real fight will happen once retail prices are fully decontrolled. At the peak of their retail business in 2005-06, private companies had made significant inroads into the sector. Reliance Industries, one of the key players at that time, commanded a market share of about 15 per cent in diesel and 7.3 per cent in petrol with 1,433 outlets across the country. Essar, the first private entrant in the market, too, had expanded its network widely. “Private oil marketing companies have invested substantially in setting up their retail outlets, but due to lack of a level-playing field, these assets were underutilised. Once price parity is reached between retail and market prices, it will not only benefit consumers by providing them a choice, but also help in demand management of diesel,” says L K Gupta, managing director & chief executive, Essar Oil. His company has a retail network of over 1,400 outlets nationwide with almost 200 more under various stages of completion. The network will prove to be a great value booster to the company after the full implementation of diesel deregulation, he says.

In such a scenario, what can swing the market in favour of private oil companies is price. But the leverage to play the price game is limited because the cost of crude oil, which is 90 per cent of the cost, is the same for all. Still, says an Essar spokesperson, there can be several differentiators even when prices remain the same. The company would be leveraging service, credit terms, quality, and fuel grade options to serve the end consumer. Though the company says it will leverage the existing infrastructure and wherever needed, will quickly add more, oil marketing companies are not unduly perturbed.

For one, they are not new to private competition. Indian Oil, which has 48 per cent market share and over 35,000 customer touch points, has survived competition for years. In auto lubricants, for instance, which always had private sector competition, the company has around 32 per cent market share in finished lubricants where there are 30 players. “Today we are competing with other refineries on most petroleum products. We have private sector competition in aviation turbine fuel. Diesel will be one more product. We should not be overly worried about this. But as public sector units we are responsible to so many agencies and have to follow so many procedures which sometimes act against our commercial operations,” says R S Butola, chairman and managing director, IndianOil.

The fuel market all of a sudden looks more interesting.

Source- BS online.