Breaking the myths of fuel decontrol
New Delhi 02-Dec-2010
Mr. G C Daga,
Director (Marketing), IndianOil
For the past five months, car owners have been spending 10 per cent more on their petrol bills. The increase is roughly the same, irrespective of the state-owned oil marketing company (OMC) outlet at which he fills up his tank: IndianOil, Hindustan Petroleum Corporation or Bharat Petroleum Corporation. Should he patronise a private outlet, the bill could be slightly higher.
Say hello to price decontrol, the second time since the dismantling of the administered price mechanism in 2002. Strangely, nobody is protesting the price hikes - four to be precise since decontrol was announced on June 26.
One of the reasons could be that the increases are not publicised by the fuel retailers, and a consumer only realises he's paying more after filling up at a petrol pump. The other probable reason is that consumers can afford market-determined prices and take the increases in their stride.
S Thangapandian, CEO-marketing, Essar Oil, claims that "decontrol has helped create a level playing field in the petrol retailing business" by making "retailers of all hues, whether private or public sector, more competitive" to the benefit of the end customer. But it is not clear how exactly consumers benefit.
Despite good intentions, a competitive market is yet to fully develop. Also, given the current $80-plus crude oil prices, it will be some time before the consumer sees private outlets competing in full force. "Petrol consumption in the country is just one-fourth that of diesel consumption. So, its deregulation does not make much of a difference," says P Raghavendran, president, Reliance Industries (RIL).
One senior government official claims that "deregulation is working well, with companies free to decide their petrol prices and the private sector slowly coming back to the market". But RIL, the biggest private producer of petroleum products, is still not aggressively pushing products through its outlets, although Essar says its sales have improved.
An executive at one of the companies says the current regime is a "neither here nor there" situation. The new players in the business have their outlets on the outskirts of cities, along highways and in small towns where diesel dominates sales volumes.
"The government put off diesel deregulation when it decontrolled petrol prices in June. With inflation and international oil prices ruling high, it is far more difficult to deregulate diesel. But the government will need to bite the bullet at some stage," says Raghavendran.
Diesel decontrol will widen the market for new retailers. These companies will enjoy better margins, since they will not have to sell any product at subsidised rates. At present, private refiners sell kerosene and LPG to OMCs at import parity rates, even as government-owned OMCs retail the products on subsidised rates.
According to the chairman & managing director of one of the government-owned OMCs, who did not wish to be identified, if public sector companies keep bearing the burden of subsidies for LPG and kerosene, it will be tough to compete with the private retailers when diesel deregulation takes place.
"Diesel deregulation will benefit private companies, while we will still be left to bear the burden of subsidised LPG and kerosene. This will reduce our margins to a large extent and we will not be able to sell diesel at very competitive rates," he says.
Saying diesel deregulation is unlikely this financial year, the ministry official also agreed that if OMCs are not fully subsidised for LPG and kerosene, either by the government or upstream companies, there is a danger of them losing out to private players when diesel deregulation does take place.
GC Daga, director in-charge of marketing operations at IndianOil, the country's largest petroleum retailer with 35,000 marketing touch-points, does not subscribe to this view and sees no threat from the re-entry of private players in the diesel market.
Citing the example of auto lubricants, Daga says IndianOil, with 48 per cent marketshare in petroleum retailing, has 32 per cent marketshare in finished lubricants, where there are 30 players. Even in the aviation turbine fuel business, where price is market-linked, government-owned companies compete successfully with private operators.
At the peak of its petroleum retail business in 2005-06, RIL commanded a marketshare of 15 per cent in diesel and 7.3 per cent in petrol, with as many as 1,433 outlets across the country. Essar, the first private entrant in the market, had also made significant inroads.
"Private players had given us tough competition even then. We improved our services by introducing branded fuel, non-fuel facilities and automation at our retail outlets. We also moved to rural areas with the concept of kisan sewa kendras," says Daga.
The year 2008 proved a game changer in the petrol and diesel segments, with global oil prices touching their peak at $147 a barrel. With subsidy available only to the three government-owned companies, RIL and Essar were priced out. RIL shut all its outlets by April 2008, although the phasing-out had started in 2006 when international prices began their upward march. Essar continued to slug it out in the market, and with global prices stabilising, it scaled up operations. It currently has 1,300 outlets.
RIL, in contrast, has only a negligible presence even now. It pushes products through other retailers to whom it sells at market rates. "We are the largest producer of LPG and there is no reason why we will not sell in the retail market if LPG prices are decontrolled. We are selling only small quantities through parallel marketing at market prices, but if there is a level playing field, we will build capacities. Whoever is efficient will have a greater marketshare and ultimately consumers will benefit," sums up Raghavendran.
