The Hindu Business Line : Soaring global oil prices — Essar Oil cuts supplies to franchisees

When contacted, an Essar Oil spokesperson confirmed that the company was compensating its franchisees, but refused to share details of the agreement.

Ahmedabad , Aug. 19

ESSAR Oil Ltd has been forced to cut supplies of petrol and diesel to its franchisee filling stations to cushion the losses due to soaring international prices of petroleum products.

While all petroleum marketing companies are suffering on account of the Government's refusal to raise petrol and diesel prices in line with the increase in global crude prices, Essar, a pure marketing company without a refinery to fall back on, has been hit the hardest.

Essar has cut back supplies to its franchisees and asked them to reduce working hours. The company has also advised its dealers to avoid sales on credit.

But, to keep its franchisees from going into the red, it has agreed to compensate them on the basis of their April sales.

"We had been asked to reduce our sales, especially the sales to bulk customers on credit and cut our working hours. While we are losing out in terms of the additional income from growth in our operations, Essar has been compensating us for the loss in the total margin over the April sales," an Essar franchisee dealer here told Business Line.

According to the formula worked out by Essar Oil, the dealers continue to get their full lease rentals, agreed upon return on investment and "commission on a notional basis on the sales in April 2005 less commission earned on actual sales" during a particular month, he said.

For outlets commissioned after March this year, the compensation is based on the sales target, the dealer said.

Essar pays a commission of 73 paise per litre of petrol and 43 paise per litre of diesel to its franchisees.

When contacted, an Essar Oil spokesperson confirmed that the company was compensating its franchisees, but refused to share details of the agreement. The company also refused to quantify the losses arising out of the difference in its sales and cost price.

Market sources, however, said the company was losing about Rs 2 per litre in the case of petrol and Rs 3-4 for every litre of diesel sold.

In its communication to the dealers, Essar Oil had sought to explain why it was cutting back their supplies while other companies continued to release full supplies.

Essar buys its products from Mangalore Refinery and Petrochemicals, Numaligarh Refinery, Indian Oil Corporation's Haldia refinery and through imports.

"Since we do not have our own refinery, the opportunity of making up our losses in marketing through gains in the refinery does not exist," the letter to the dealers said.

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