 "oil, fuel, petroleum")
It is axiomatic from the pattern of their operations worldwide that global oil majors are willing to invest wherever oil flows, irrespective of whether the country is a democracy or a dictatorship. What these companies look for is policy and tax stability. That’s because returns are earned over decades; it can take years of exploration to strike oil and costs hundreds of millions of dollars to drill a well. Predictably, they are wary of investing in a country in which the government announces reforms and concessions and then reverses them, potentially causing crippling financial losses.
India’s fuel retail business is one such story.
This weakness was vividly demonstrated between November 2021 and March 2022 when India’s leading fuel retailers IOC, BPCL and HPCL collectively incurred a substantial revenue loss of $2.25 billion though crude oil prices averaged $111 per barrel in March compared to around $82 in early November. Such losses would have left a private retailer bankrupt.
Reliance and Essar had to close their retail operations 15 years ago after India reversed the first phase of fuel price reforms that lifted price controls from the original practice of state-set prices.
Reliance and Essar had to close their retail operations 15 years ago after India reversed the first phase of fuel price reforms that lifted price controls from the original practice of state-set prices.
Investors are not blind to this. Opaque pricing of petrol and diesel, the dominance of state oil companies, and an unseen hand over fuel pricing have eroded India’s credibility among investors, foreign and domestic. It has cost the nation tens of billions of dollars in investments that the Shells and Aramcos would have made without a need for billions of dollars in electric vehicle subsidies or production-linked investment schemes, an industry official said.
Since 2014, Reliance has added only around 200 outlets, Nayara around 5,000 and Shell 243. In contrast, in the last nine years, state refiner IOC added 12,400 outlets and coupled with fellow state oil companies the figures add up to nearly 30,000 outlets in the same time frame, according to oil ministry data. That compares with hardly 6,000 outlets set up by private sector retailers.
Currently, private sector retailers put together have less than 9,000 outlets compared to 78,000 for state oil companies. IOC leads with 36,400 outlets, with BPCL and HPCL operating over 21,000 outlets each.
It is hard to imagine that Reliance, which implemented a multi-billion dollar deepwater gas project in the 2000s, without prior exploration experience, and in record time in the KG basin, can only add a handful of fuel retail outlets in a $200-billion business that is growing at 5-6 per cent annually.
Despite the lucrative potential of India’s fuel market and the blue chip credentials of refiner BPCL, New Delhi failed to find a buyer during the pandemic. This, at a time when Japan’s 7/11 paid $21 billion in 2020 for US independent Marathon Oil’s fuel retail business. Indian state oil companies have also failed to find investors for their downstream chemical units and refineries for several years.
“While the Indian retail fuel market holds significant growth potential, the industry currently faces challenges stemming from the prolonged freeze on diesel and petrol prices. This has resulted in substantial marketing losses and created obstacles for future investments,” said Brajesh Singh, president, Arthur D. Little India.
Why would one invest in a business where the price of petrol and diesel has not moved an inch over the past year while international prices swing between $146 a barrel and $85 a barrel?
“The intention of fuel price freezes is to provide relief to consumers from increasing global oil prices but the impact on downstream investments is adverse,” said Sourav Mitra, director-consulting, CRISIL Market Intelligence and Analytics. “A freeze on fuel prices introduces uncertainties and undermines the attractiveness of the Indian market with an inability to increase prices when global crude lurches upwards, and it hampers the profitability of private players.” Mitra also said high taxation by both central and state governments makes it difficult for foreign players to compete against government oil marketing companies (OMCs).
Singh added that an unprecedented freeze on diesel and petrol prices for 137 days between November 2021 and March 2022 left private retailers, such as Nayara Energy (backed by Rosneft), Shell and Jio-bp, with the difficult choice of either raising prices and risking customer attrition or restricting sales to minimise financial losses.
Climate concerns have further queered the pitch for investments in fuel retailing. “Given the growing recognition of the role of fossil fuels in climate change, major players in the oil and gas industry, including BP, Shell and Exxon, are increasingly focusing on low-carbon investments and lucrative upstream assets,” Singh said. “Unfortunately, retailing petrol and diesel falls under the downstream sector, and investment in downstream assets such as refineries and retail outlets appears to be of lower priority.”
Lifting price controls on diesel, India’s most consumed and most subsidised product, in October 2014 was one of the first decisive achievements of Prime Minister Narendra Modi’s administration on stepping into office. “Instructions have been issued today i.e. on 18th October 2014 to make the price of diesel market determined with effect from midnight of 18th-19th October 2014. The prices of diesel will be market determined at both Retail and Refinery Gate level for all consumers thereafter,” the government release said.
Despite the fact that Reliance, Essar Oil and Shell were burnt earlier — when similar reforms introduced by Atal Behari Vajpayee’s administration was scrapped after a Congress-led coalition came to power — private retailers harboured hopes of competing with well-entrenched state OMCs on an even footing.
But fuel price reforms have turned into a mirage, dissolving gradually into oblivion over the years. If forecasts on first quarter earnings of oil marketing companies by Nomura Research and other analysts are to be believed, then Indian oil companies are expected to post healthy profits in the April-June quarter. Oil minister Hardeep Singh Puri said that oil marketing companies may consider cutting pump prices if the first quarter results are good.
Brokerage Nomura expects robust earnings at OMCs driven by a surge in marketing margins. Blended fuel marketing margins increased to Rs 10.7 per litre in the week ended July 10, 2023, remaining sharply above normative levels of Rs 3 a litre.
Diesel marketing margins have increased 6 per cent quarter-on-quarter to Rs 10.9 a litre in 1QFY24, while Indian retail prices remain unchanged. Based on current prices, diesel marketing margins remain at super-normal levels (average margins are Rs 2 to Rs 3/litre) of Rs 7.6 per litre.
IOC’s Ebitda may increase to Rs 22,800 crore in the April-June quarter vs Rs 15,300 crore in the previous one; BPCL may increase earnings by 25 per cent to Rs 14,000 crore vs Rs 11,200 crore; and HPCL earnings may increase 91 per cent to Rs 9,200 crore vs Rs 4,800 crore in the same quarter period.
The question remains whether oil companies will consider passing on such handsome gains to consumers. Allowing market forces to determine prices are critical to incentivise fuel retail investments, CRISIL’s Mitra said. Additionally, the country needs innovative business models with regards to sharing of existing infrastructures to act as an enabling factor for private sector participation in fuel retailing in India.
The slippery slope
· Lifting price controls on diesel, India’s most consumed and most subsidised product, in October 2014 was one of the first decisive achievements of Modi’s administration
· But opaque pricing of petrol and diesel, the dominance of state oil companies, and an unseen hand over fuel pricing have eroded India’s credibility among investors, foreign and domestic
· Why would one invest in a business where the price of petrol and diesel has not moved an inch over the past year while international prices swing between $146 a barrel and $85 a barrel?
· The question remains whether oil companies will consider passing on such handsome gains to consumers. Allowing market forces to determine prices are critical to incentivise fuel retail investments
