Oiling an irony: India cuts fuel consumption, but filling stations rise

Though India is moving towards reducing fuel consumption, filling stations are set to become more ubiquitous

This July-end, the All India Petrol Dealers Association (AIPDA), which claims to represent around 50,000 of India’s 64,703 fuel outlets, is planning a massive meeting in Goa. The agenda: How to stay in business following India’s big bang fuel retail expansion.
 
Between them, the three oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — are in line to allot at least 78,493 new fuel retail outlets at an investment of approximately Rs 90,000 crore. Russian oil giant Rosneft-led Nayara Energy (NEL) may add 7,000 by 2020 and Reliance Industries (RIL) and its partner BP Plc are expected to come up with 2,000-odd fuel stations, in addition to a few hundred by Royal Dutch Shell.
 
Overall, about 85,000 new fuel outlets could be in business in the next few years, raising fears about fuel pump viability.
 
AIPDA data shows that the average throughput in petrol pumps dropped from 170 kilolitre (kl) per month in 2010 to 155 kl in 2018. For RIL and Shell, it is around 300 kl, but NEL is lower than the average. Petrol dealers say they need at least 170 kl to be profitable. “More than doubling the number of outlets means average throughput may drop to 70-80 kl,” a senior oil industry official admits, indicating that though the expansion was initially limited to 16,000 new pumps, “healthy” competition between OMCs stretched it to 78,493.
 
There are three types of dealership models: Company-owned dealer-operated (CODO), dealer-owned dealer- operated (DODO) and company-owned company-operated (COCO). Companies make a minimal investment of around Rs 25 lakh on setting up tank and dispensing units. Dealers normally recover their investments and operating costs based on throughput and a fixed dealer margin, so lower throughput will hurt them.
 
Competition, however, is not the only cause for concern: Growing demand for alternative fuels is also a threat. “We are looking at massive city gas network expansions and shifting to electric vehicles by 2030. Also, vehicle sales are heading south, and petrol and diesel consumption is increasing minimally,” says Ajay Bansal, AIPDA President.
 
At 70-80 kl, he adds, fuel pump profits may be wiped out, given the 10,000-odd Compressed Natural Gas (CNG), bio-CNG and Liquefied Natural Gas (LNG) outlets that are also coming up, plus contemplated diesel bans in some cities. Much of this is part of a broader plan to cut import dependency on crude oil by 10 per cent by 2022 and tackle pollution.
 
The pressures are already evident. According to the Petroleum Planning and Analysis Cell, petrol and diesel sales grew only 8 and 3 per cent respectively in 2018-19 over 2017-18. By 2023, a CRISIL Research report adds, incremental fuel demand will fall to 5 per cent, and 3.8 per cent by 2030. There is room for less than half the additional fuel pumps to maintain current throughput levels, the report adds.
 
“If only 30 per cent of the proposed petrol pumps are commissioned, that is 30,000 fuel pumps, the business will be able to meet breakeven throughput over the next 12 years; pump throughput is expected to remain at current levels of 160 kl per month, which will keep the dealer’s returns stable at 12-15 per cent,” it said.

 
So why are companies opting for this massive expansion? This “is more about making fuel accessible to the common man, rather than looking at economics, and could create 10,000,000 to 15,00,000 jobs,” said an IOC official. A senior government official pointed out that almost a third of these pumps will be located in rural areas rather than high-density urban areas. Also, the record suggests that only around 30 per cent of the planned outlets will go on stream anyway, owing to myriad problems including land acquisition.
 
A Business Standard analysis, however, shows that the expansion is not really about serving underserved areas. Of the 78,493 planned outlets, 48 per cent or 37,693 outlets are lined up in five major consuming states of Rajasthan (9,621), Uttar Pradesh (9,027), Madhya Pradesh (7,285), Maharashtra (6645) and Tamil Nadu (5115). These states already account for 38 per cent of current petroleum product consumption and around 43.4 per cent of existing outlets.
 
“If the world is shifting towards alternative sources, including electric vehicles, outlet economics have to be reworked by giving prominence to non-fuel revenue. This should be a micro-market-based approach, depending on what the customer wants in an area,” said Anirban Mukherjee, partner and director, The Boston Consulting Group.
 
Non-fuel oulets can extend from value-added products to even financial services, he pointed out. Ideas such as allowing supermarket chains like Big Bazaar and Reliance Retail to sell fuel have been doing the rounds. An OMC official said even at 60 kl, dealers can make gains if the non-fuel economics is added. For 1.7 million employees and over 60,000 dealers, such plans are too long term to address their immediate fears.