Companies

With fuel prices deregulated, Reliance Industries and Essar Oil may revive retail network again

Tanya Thomas Mumbai | Updated on January 24, 2018

Both companies and dealers will be more cautious in expanding their networks

If oil refiners Reliance Industries and Essar Oil are to be believed, we will see their chirpy green and red fuel pumps reopen in full strength by the end of the financial year.

At its shareholder meeting last week, Reliance announced that 400 of its retail outlets are currently operational and it will re-commission the rest of its roughly 1,000 outlets by next March. Lalit Gupta, MD and CEO, Essar Oil, said in a recent investor report that 1,500 of its outlets are already up and running, from the company’s target of 5,000.

Reliance and Essar had gained considerable market share after entering fuel retailing in 2003, initially appearing to compete successfully with State-owned oil marketing companies such as IOC, BPCL and HPCL. But losses started mounting as crude oil prices surged to life-time highs and private sellers had to conform with government-regulated fuel prices.

Now that petrol and diesel prices have been freed from government control, the two private sector refiners find it viable to enter the retailing segment again.

Sumit Pokharna, Deputy Vice-President, Kotak Securities, said: “Reliance and Essar have vastly better gross refining margins (the difference between the cost of crude and price of refined products) at between $8 and $10 a barrel, compared to the $3-$5 that public sector refiners manage. After shuttering their own retail networks, they had to sell their fuel to public OMCs and the benefits of better refining margins did not pass on to the refiners. Now that prices are deregulated, the best proposition for these two companies is to re-enter the retail business themselves.”

The main hurdle to expanding their retail networks is the cost of real estate, which is prohibitive. The two companies burnt their fingers with rapid expansion the first time around.

Dealer-operated stations for Reliance particularly were in a limbo, Pokharna said, not able to operate, neither were they able to use the space for other purposes, given how the franchise contracts were signed.

“This time around,” he adds, “both companies and dealers will be more cautious in expanding their networks.”

Privately, the companies acknowledge this. Essar’s immediate focus is on reopening shut stations. A senior executive at Reliance also said that the company will be moving ahead cautiously, only reopening stations that had earlier been mothballed.

The market for fuel retailing in India (fuel pumps number over 50,000) is dominated by public sector oil marketing companies, who, for now, don’t seem to be unduly threatened by the return of the private sector challenge. AL Krishnan, State-level co-ordinator for public sector the oil industry in Maharashtra, says the public sector will depend on automation to retain their market share.

“It won’t just be a price war this time. We’re fully geared to use technology and automation to enhance the quality of service at fuel pumps.”

Pokharna believes that the shift in volumes from the public to private sector will be more gradual, and the difference in the segment’s contribution to revenue (for Essar and Reliance) will take about three to five years before it starts to show.

Nevertheless, consumers stand to benefit. Either from lower prices, improved dealer margins or the better quality of fuel that private refiners can force into a market that was until now in the stranglehold of the public sector.

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Published on June 18, 2015
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