The Hindu Business Line : Reliance may lose Rs 600 cr on lower oil PSUs offtake

THE urgency for Reliance to set up its own retail network to dispense petrol and diesel is not far to see. The public sector oil retailers' recent indication towards a lower purchase volume from Reliance Industries Ltd's 33 million tonne refinery could potentially hit Reliance's bottomline during fiscal 2004-05.

Lower offtake by public sector undertakings, Indian Oil Corporation, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd, will result in export of products by the energy major, which fetches a lower realisation compared to domestic sale. This is mainly due to two factors - tariff protection for domestic refineries as well as lower freight costs. Broadly, for every tonne of product exported, the realisation is lower to the tune of around Rs 1,200 - Rs 1,500 per tonne.

On the domestic front, currently, Reliance does not have any retail outlets. Given the public sector retailer's lower product requirement, Reliance would require to export higher volumes. The volumes will, however, be lower to the extent that it sells products through a retail network it proposes to set up during the year.

If Reliance sets up 500 retail outlets through the year, where it could sell around 500 kilolitres of petrol and diesel per outlet per month, its own domestic channel will sell around 3 million tonnes of products. This still leaves Reliance an additional 4 million tonnes to export.

Hence, the realisations from exports are expected to be lower (compared to domestic sale) by around Rs 500 crore - Rs 600 crore per annum.

On the other hand, Reliance may well decide to take on the public sector in a price war. The company has the financial muscle to compete in the domestic market through price wars. "If Reliance is going to get lower realisations in the domestic market, it might as well sell products through its outlets at lower prices in the domestic market and use the financial leverage to penetrate the market," a senior industry official told Business Line.

Recently, public sector oil marketing companies had informed the Government that they would be able to contract only around 4.1 million tonne (m.t.) of products from Reliance Industries Ltd's 33 m.t. Jamnagar refinery in the coming fiscal, down from the 11.3 m.t. likely to be lifted during the whole of 2003-04.

During fiscal 2004-05, Oil and Natural Gas Corporation, which does not have its own marketing network, indicated that its refinery, Mangalore Refineries and Petrochemicals Ltd, will be operating at its full 10.5 m.t. capacity in the coming fiscal, up from 4.5 m.t. during the current fiscal. BPCL and Chennai Petroleum Corporation Ltd, too, informed the Government that they would be bringing an additional 3 m.t. each of capacity on stream during 2004-05.

The result of this new supply equation is that the public sector undertakings propose to purchase only 4.1 million tonnes of products from Reliance during fiscal 2004-05.