As politics shapes policy, India's private fuel retailers run on fumes

A quasi-administered price regime and the imposition of Universal Service Obligations are complicating their business plans

Most businesses go through cycles that are the result of market forces. But the fuel retailing business in India has endured cyclical changes that have more to do with variable politics-driven policy over the past two decades than the balance of supply and demand. These policies introduced market-linked fuel pricing twice and reverted to an administered mechanism twice. Four consequential and unpredictable changes in two decades have impacted the private sector the most, presenting a showcase of how unpredictable decision-making in New Delhi can affect investment.

As a result, private fuel retail outlets have had a rollercoaster ride since they re-entered the stage after decades in 2002 and, today, are facing a more complex and uncertain environment than ever before.

April 1, 2002, was a significant day in India’s economic history when petrol and diesel prices were de-regulated with the dismantling of the administered price mechanism.

Soon after, the government opened up fuel retailing for private sector players. This was followed by a massive expansion of the fuel refuelling business with retail distribution licences given to public sector Oil and Natural Gas Corporation, GAIL and Oil India. Significantly, after a gap of many decades, the private sector also entered the business with licences given to Reliance Industries (RIL, now Jio-bp), Essar Oil (now Nayara Energy) and Cairn Energy.

While others backed out of the plan, RIL and Essar aggressively expanded. At one point in 2005-06, the market share of private sector outlets was as high as 17 per cent in diesel, with RIL’s share alone touching around 14 per cent. In petrol, the private sector’s share was around 10 per cent, with RIL at 7.2 per cent.

Then in 2008, a spurt in crude oil prices prompted the government to return abruptly to the controlled price regime. Global oil prices touched $147 a barrel, with petrol prices at private outlets shooting up by as much as Rs 6 a litre and diesel by Rs 14 a litre. This immediately put private players at a disadvantage with state-run competitors since the government compensated the latter for the under-recoveries from the fixed pump price. In March 2008, RIL announced the shutdown of all its 1,400 retail outlets. Though Essar did not take a public decision to close down pumps, it reportedly stopped regular supplies.

In June 2010, the government decided to free petrol pricing again. Prices of diesel, the fuel most widely used in transport, were freed in October 2014. The step was taken to encourage competition and to enhance efficiency in the sector. Both moves stoked foreign interest. Russian giant Rosneft led a consortium that acquired Essar Oil’s Vadinar refinery, 3,500 retail outlets, a power plant and port for $12.9 billion in 2018. Since then, it started expanding its retail presence by almost doubling it. In 2020, UK’s BP paid Reliance Industries $1 billion for a 49 per cent stake in a fuel retail joint venture, forming Jio-BP.

By 2022, private sector players — Nayara Energy with 6,604 outlets, Jio-bp with 1,459 outlets and Shell with 324 outlets — found themselves in a spot. That’s because this time, the government first chose to freeze petrol and diesel prices for 137 days starting from November 2021 at its 74,787 state-owned retail outlets ahead of a set of critical Assembly elections in five states, including in Uttar Pradesh.

Post-elections, the government allowed petrol prices to rise incrementally. The outbreak of the Ukraine-Russia war on February 24 added another twist to the pricing saga. As crude prices crossed $120 a barrel, impacting inflation even further, Finance Minister Nirmala Sitharaman announced on May 21 a cut in excise duty on petrol by Rs 8 a litre and diesel by Rs 6 a litre. At the same time, state-run oil marketing companies continued to hold prices.

Unlike 2008, private players had become bigger players in the fuel retailing business so when they shut select outlets in response to these asymmetries in pricing, it caused a shortage. Madhya Pradesh, Rajasthan, Karnataka, Tamil Nadu, Chhattisgarh, Odisha and Kashmir all faced a shortage of fuel because of short supply in private outlets.

At the same time, continued adverse circumstances, sources said, compelled Jio-bp to revise the retail selling price of petrol and diesel by a nominal amount of Rs 7 per litre and Rs 5 per litre respectively to support both customers and channel partners.

No surprise, then, that for state-run oil marketing companies, sales of diesel and petrol saw an increase of 44 and 42 per cent respectively, between June 1 and 16 this year compared to the same period last year.

The ensuing countrywide shortage of fuel prompted the government to expand the universal service obligations (USO) to the private sector as well last week. This requires fuel outlets to maintain supplies at specified working hours and at “reasonable prices”.

The volatility in global oil supply triggered by the Russia-Ukraine war led to higher product sourcing costs adding pressure on private companies. According to an industry source, as of June 16, industry losses were Rs 19.7 per litre and Rs 31.9 per litre for petrol and diesel, respectively.

According to an estimate, state-run majors may suffer an annual loss of over Rs 1.07 trillion on diesel and Rs 42,700 crore on petrol if prices remain at the current level.

But private players with foreign direct investment are unlikely to take this hit, not least because BP and Rosneft invested in India in anticipation of a decontrolled regime.

“This is a difficult situation for stand-alone retailers. The new retail licensing terms were understood to be allowing market pricing. For future investment decisions, the retailers are seeking clarifications on USO expectations,” said Deepak Mahurkar, partner, PwC India.

According to a Nayara spokesperson, the largest private sector fuel retailer suffered a loss of close to Rs 700 crore in June alone. Another industry source pointed out that Jio-bp held back a price increase over the prevailing retail selling rate even at the cost of losing over Rs 1,500 crore since February 2022.

The Federation of Indian Petroleum Industry has approached the government for relief, stating that under-recoveries at this rate would limit private players’ ability to expand.

Meanwhile, with crude oil prices at $105-110 a barrel, Petroleum Minister Hardeep Singh Puri has urged them to behave like “good corporate citizens”, a statement that explains the government’s approach to private fuel retailing.

The fuel mix
 

83,208

Total fuel retail outlets in India|

8,421 

Outlets under Nayara, Jio-bp, Shell and other private players

Rs 19.7 

per litre: 

Industry's loss on petrol 

Rs 31.9 

per litre: Industry's loss on diesel