The Hindu Business Line : Pumping up competition

THREE DECADES AFTER it was sent packing by the then government, multinational Royal Dutch/Shell is all set to re-enter the country's lucrative petroleum product retailing business. Having fulfilled the norms for entry into retailing, the oil major is awaiting issue of licence. Shell's re-entry into the retail marketing business is indeed a landmark event that could change decisively the dynamics of the industry, for long the preserve of the Government-controlled Indian Oil, Bharat Petroleum and Hindustan Petroleum. Shell will join Reliance Industries and Essar Oil, the other new private players on the block, to provide the competitive element that consumers deserve.

Little is known about the pricing structure of the various petroleum products, and even less about the role of subsidies in pricing. There are also a few anomalies in the pricing structure that puts some consumers at a disadvantage vis-à-vis others. For instance, the issue of uniform pricing of products regardless of the consumer's location. A buyer of petrol in Mumbai, which has two refineries at its doorstep, pays the same price for a litre of petrol as one in Nagpur, located in the hinterland. Logically, consumers close to refineries ought to be paying less as the transportation cost will be lower. Oil marketing companies have been demanding differential pricing freedom, that is, the liberty to price products based on a place's proximity to a refinery. The Government, for its own reasons, has not been amenable to the idea.

There are several other such anomalies in the pricing structure of petroleum products, but what competition will do is to get the prices to align more closely with those in the international market. Given Shell's deep pockets (in turnover terms, it is almost ten times the size of Indian Oil, the country's largest retailer) and the strong presence in the South-East Asian region, Shell can shake up the Indian market as no other player can or has done till now. The Anglo-Dutch major has always had an eye on the lucrative Indian retailing market though its ambitions to claim a share of that pie were stymied at every stage. It will probably begin in a small way with a few hundred retail outlets but the company is bound to scale up its operations in due course. Shell has the choice of importing products from refineries in neighbouring Singapore or Thailand taking advantage of trade agreements to start a price game in the domestic market.

Essar Oil has demonstrated that it is possible to take on the government oil companies. It began by sourcing diesel from the international market and selling it to bulk customers at prices lower than that offered by the government oil companies drawing protests from the latter. Shell's re-entry will also raise the bar on such critical issues as fuel quality and customer service at petrol pumps. To be fair to the oil marketing companies, they have already started improving the quality of services but there is still quite a way to go before they catch up with international best practices. To be sure, Shell may not be able to change the market tomorrow but over the long term there is bound to be a positive impact on the industry.