Private oil companies stare at a Rs2.5 lakh crore pie

The much awaited scrapping of the capped-price policy for petrol and diesel has opened up one of the world’s fastest growing hydrocarbon markets to private sector players like Reliance Industries, Essar Oil and Shell, three years after they were virtually forced out of the market.

The three private players, who entered the Indian retail market in 2003 when the government scrapped the controlled prices policy the first time, had been forced to shut down most of their outlets three years ago due to spiralling prices of crude oil.

The price of crude oil, which was around $25 per barrel when the administered pricing formula was abandoned in 2002-03, reached levels of up to $147 by early 2008, forcing the government to bring back price controls on petrol and diesel and pushing private players out of business.

While the move will result in retail prices of petrol almost doubling, Essar Oil says the consumer stands to benefit in the long term should crude go back to its earlier records. “India’s market potential can be better realised in a deregulating market environment. The move will benefit consumers in the long run through competitive pricing and offering better services across outlets,” said Naresh Nayyar, head of Essar Oil, in response to the dismantling of motor fuel subsidies.

Essar is currently the largest private sector oil retailer, running around 1,400 of the total 40,000 petrol and diesel pumps in the country. Having started out with an ambitious target of setting up 5,000 pumps across the country, the company had to scale back its ambitions due to the effect of the high crude prices.

None of the private sector players produces substantial amount of crude in-house and they are all almost totally dependent on international crude markets for raw material supply.

They, however, account for about a quarter of India’s 160 million tonne refining capacity and currently either export their petrol and diesel or sell it to state-owned companies in the country.

Essar, which earlier had a plan of expanding to 3,000 outlets by March 2010, says it will now take its total to 1,750 by March 2011.

Reliance Industries, the other big player, which at one time operated around 1,400 pumps, has already activated around 600 over the last few weeks, according to sources close to the company.

RIL, controlled by India’s richest man Mukesh Ambani, however, did not comment on Friday’s development and is likely to reveal its cards only if the government decision survives the political protests that are expected to follow.

International giant Shell, which took the licence to set up 2,000 petrol pumps, had announced that it was looking to shed some of the 90 or so properties it has already set up.

A Shell spokesperson said the company will put up more sites than it sells off, resulting in a net expansion.

Meanwhile, nearly every analyst agrees that the opportunities offered by an unregulated Indian market are almost unparalleled.

The Indian petrol and diesel market is expected to be around 60-70 billion litres per year, worth around 2.5 lakh crore at current prices, making it one of the biggest industries in the country.

Moreover, diesel and petrol consumption has been growing at 10-15% per year even during the global economic turmoil. Around 92% of the market is with state-owned companies, which are bedevilled with issues such as corruption, bloated infrastructure and adulteration of their products by their agents.

The companies also work on an ‘assured capital return’ basis and charge a fixed margin on their products, irrespective of market conditions and are unused to competition.

The move will also bolster the profits of domestic oil producers such as Oil and Natural Gas Corp and Oil India, which have been picking up 100% of the petrol and diesel subsidy burden.

The two would have ended up paying around Rs 20,000-30,000 crore during the current year without deregulation or price-hikes.

Deregulation of petrol and diesel prices, however, will have no impact on government finances as the latter are used only to compensate for cooking fuel related subsidies.