Reliance, Essar’s fuel-retail operations have gained from deregulation

Mumbai: In late 2014, when the government allowed market pricing of diesel, oil marketing companies (or OMCs as they are called in India) feared that they would begin losing share to private retailers.

After all, the only reason private retailers such as Reliance Industries and Essar Oil had failed in their first attempt to crack open the market in the 2000s was the fact that they had no control over prices.

The OMCs—IndianOil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—expected Reliance Industries and Essar Oil to take three to four years to garner a 5-8% market share.

It’s happened much faster. In less than two years, RIL and Essar Oil have cornered nearly 5% of the fuel retail market.

“Private players have captured 4.7% market share in 2015-16; h IOCL and BPCL lost 1% each; HPCL lost 0.3%,” said Dhaval Joshi and Nilesh Ghuge of Emkay Global Financial Services, a domestic brokerage, in a note dated 27 May.

While deregulation of petrol and diesel prices has augured well for RIL and Essar Oil, their cause has also been helped by cheaper crude oil, stable fuel prices and rise in demand, the note added.

Brent crude, the global benchmark, closed at $49.20 on Monday, down 46% from October 2014 levels when it was at $90.94 per barrel. Crude was trading at $115.71 on 19 June 2014.

While petrol prices were deregulated or market-linked in June 2010, diesel prices were market-linked only in October 2014, phasing out subsidies and making the fuel market attractive for RIL and Essar Oil which could, as a result of the change, sell petrol and diesel at the same rate as that of OMCs.

Historically, diesel was sold at subsidised prices in India, with the government compensating the OMCs later. Private fuel marketers received no such subsidy, and were thus edged out of the market when crude oil prices climbed as high as $150 a barrel in 2008.

To combat competition, state-owned oil companies plan to spend Rs.2,500 crore to open close to 3,100 fuel stations this financial year even as their rivals from the private sector step on the gas. The three OMCs together sell over 95% of all petrol and diesel consumed in India.

Officials from the OMCs admit they expect tough competition from private companies but add that they have already undertaken several measures, including automating retail outlets and strengthening their customer loyalty programs, to beat competition.

“We are aware of the expansion that RIL and Essar Oil have undertaken. But we will be expanding too. We have also introduced automation, better customer interface and a transparent mechanism in terms of billing. We don’t expect RIL and Essar to capture more than 8-10% market share,” said a BPCL official who spoke on condition of anonymity.

BPCL plans to open around 500 outlets this financial year at a cost of Rs.400-500 crore. It opened 630 outlets last year. It has automated 8,000 of its 13,000-odd retail outlets so far.

HPCL, the second largest fuel retailer which opened 590 outlets last year, plans to open 800 outlets this year at a cost of Rs.900 crore. “We have a 26% market share in the fuel retailing segment. But with the measures that we are putting in place, we will continue to grow,” said an HPCL official, who did not wish to be identified.

The HPCL official added that the company is confident about the stickiness of its loyalty schemes and the revenue it can generate from the non-fuel segment.

Meanwhile, private fuel retailers are expanding too.

Last quarter, RIL said it may look at opening new fuel retail outlets later this year. RIL has been re-opening its retail outlets and had re-started 950 of its 1,400 retail outlets till April 2016. RIL had around 14% market share in fuel retailing in 2005-06, but had to shut down its outlets in 2008 as crude oil hit $150 a barrel and lack of subsidies made the business unviable.

Essar Oil has 2,100 fuel retail outlets commissioned. It plans to have a total of 5,000 retail outlets. This will make it the largest private fuel retailer in India.

India’s fuel demand jumped 11% in 2015-16, the fastest in two decades, according to data from the government’s Petroleum Planning and Analysis Cell. Demand for diesel, which accounts for roughly 40% of India’s total oil products demand, rose 15.12% over the previous year to a record high of 6.78 million metric tonnes (mmt). Petrol consumption was up 14.5% to 21.8 mmt.