Economy

Opening up of auto fuel retail biz will succeed only with stable price regime

Richa Mishra New Delhi | Updated on October 24, 2019

Excluding the private sector for any subsidy in a high oil price scenario will destroy the investor confidence, says Prashant Vasisht of ICRA

 

A rather radical decision was taken by Narendra Modi-led government to open up India’s auto fuel retail business for non-oil companies as well. While it will mean more players in the market, but it may not necessarily mean lower prices at petrol pumps until a stable price regime is assured. It will also prove detrimental for public sector oil marketing companies -- who own almost 90 per cent of the market share.

The Cabinet Committee on Economic Affairs on Wednesday approved the review of guidelines for granting authorisation to market transportation fuels -- guidelines for the marketing of petrol and diesel.

A significant feature of these reforms, based on recommendations of a panel headed by Dr Kirit Parikh, is a much lower entry barrier for private players. Now, the entities seeking authorisation would need to have a minimum net worth of ₹250 crore, thus doing away with the current requirement of ₹2,000 crore prior investments in the sector. This would mean non–oil companies can also invest in the retail sector.

Read also: Cabinet throws open fuel retailing for non-oil companies, too

Also, the companies can now seek market authorisation for petrol and diesel for retail and bulk separately or both together. The companies have been given flexibility in setting up a joint venture or subsidiary for market authorisation.

In addition to conventional fuels, the authorised entities are required to install facilities for marketing at least one new generation alternative fuel, like CNG, LNG, biofuels, electric charging, etc. at their proposed retail outlets within three years of operationalisation of the said outlet. The authorised entities are required to set up a minimum 5 per cent of the total retail outlets in the notified remote areas within five years of the grant of authorisation. An individual may be allowed to obtain a dealership of more than one marketing company in case of open dealerships of PSU OMCs but at different sites.

Increased market participation

According to K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, “…the decision to replace the investment criterion of ₹2,000 crore with revised guidelines towards minimum net worth (of ₹250 crore) would allow an increase in market participation. The move would also facilitate foreign majors to enter the Indian fuel retail market, which is growing at a CAGR of 5-6 per cent.”

Besides, the foreign majors, newer players, who may not have considerable investments in the oil and gas sector, but otherwise have customer-centric businesses and have an expertise in providing high-quality service levels to retail or bulk consumers would also be encouraged to participate in the auto fuel retail sector, he said.

The earlier investment threshold was low by global standards and actually ought to have been raised, said Vandana Hari, Founder and CEO of Vanda Insights. The public-sector oil marketing companies, which weathered years of under-recovery due to fuel subsidies all on their own, will have to share the benefit of a free market with others, she pointed out.

Hari cautions that if the new entrants start selling imported fuels at their stations, India's refiners may end up with surplus products that they have to export to markets that offer lower profit margins. It would also be an inefficient way of managing the country's fuel balances.

Besides, the current asymmetry of all players wanting the most lucrative retail spots is unlikely to go away, she said.

According to Ravichandran, nonetheless, for effective participation in the market, the government must ensure open access to pipelines and other infrastructure facilities on an open-access basis to the new entrants.

As regards the impact on the PSU OMCs, Prashant Vasisht, Vice President and Co-Head, Corporate Ratings, ICRA, said …for private competition to deepen, a stable regulatory regime on the auto fuel pricing will be imperative especially in an elevated crude oil price scenario. Excluding the private sector for any subsidy in a high oil price scenario will destroy the investor confidence in the sector.”

Published on October 24, 2019

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