Oil retailing is set for a big churn, probably turning as chaotic as the telecom market
In July 2008, when crude oil prices peaked in the international market to $147 per barrel, Indian government was still dilly-dallying with the reform process. It continued to administer diesel/petrol prices, keeping them at affordable levels, through subsidies. Reliance Industries (RIL), Essar Oil and RoyalDutch Shell struggled to sell oil through their retail outlets as the production cost went above the government-administered prices, forcing most of them to shut down. As the government-owned oil refining-cum-retailing majors such as IOC, HPCL and BPCL merrily sold diesel/petrol at subsidised rates, the customers had their last laugh, short-lived though.
In less than a decade, we have swung to the other end of the spectrum.
We were told oil retailing was shaken out of the administered price mechanism and prices linked to the international rates (petrol and diesel prices were deregulated in June 2010 and October 2014). But are the prices now purely market-driven? Despite a substantial fall in global prices, oil remained expensive in India. From being a recipient of subsidies, oil began funding the government's big social reforms and public spending. Oil retailing turned a political honeycomb for the government and retailing companies. Consumers, mostly 'rich' as they own a two-wheeler at least, were left to lick their wounds.
Over the last decade, oil retail outlets have grown leaps and bounds to over 56,000, up from 36,000 in 2008. Of course, the number of 'rich' consumers is on a steady rise. International Energy Agency has predicted India's oil consumption will more than double to 10 million barrels per day (bpd) by 2040.
No wonder then, oil giants are vying for a share of India's growing market.
In August, Russia's energy giant Rosneft and its partners have completed the $12.9-billion acquisition of Essar Oil, making it the largest Foreign Direct Investment in India. The transaction includes Essar Oil's pan-India network of over 3,500 retail outlets along with its 20 million tonne refinery at Vadinar in Gujarat and Vadinar deep draft port. The new owners of Essar Oil have already announced their plan to scale up the company's petrol pump network to 6,000 outlets.
In July, British Petroleum Group chief executive Bob Dudley and RIL chairman Mukesh Ambani met prime minister Narendra Modi and oil minister Dharmendra Pradhan. Apart from investing in deep-sea gas field development, they are also exploring joint marketing of fuel in India.
India's oil market is set for a big churn, probably turning as chaotic as the domestic telecom market. State-owned refiners, who own 93% of the existing outlets, will face the biggest challenge ever. The deep-pocketed private giants, armed with better pricing power, can go for the kill, with the government rolling out a red carpet.
Public sector refiners will have to strengthen their back-end logistics and widen network to stand up to the competition. They no longer enjoy the government support they relied on for several years and that helped thwart the looming threat from RIL and Essar in 2008. Dealers who run outlets have reason to get worried too. Higher service levels, brand equity and better technologies may drive customers to new players.
Surely, India needs competition in its large and growing oil economy. But it's for the government to ensure retail prices drop when the market swings downwards. The government-owned oil companies may end up paying a huge price.
The writer is editor, DNA Money. He tweets @AntoJoseph
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