Explained: Why are global majors queuing up for Indian oil retail market?

Global majors are bullish on fuel retailing, but recent mega-expansions by state-owned oil majors will crowd the field

In December 2018, Udaipur, the city of lakes, was the centre of attention as the pre-wedding festivities of Mukesh Ambani’s daughter, Isha, got underway. But for those in the oil industry the lavishness of the celebrations hosted by India’s richest man was of incidental interest. On the sidelines, Saudi oil minister Khalid al-Falih met Ambani, sparking speculation about a tie-up between the world’s largest oil producer, Saudi Aramco, and Reliance Industries (RIL) — including for a retailing partnership. Later, al-Falih clarified that the discussions centred on tie-ups for a refinery and for petrochemicals. 

Still, Saudi Aramco’s interest in oil retailing is an open secret. And it is not the only major that has an eye on this fast-growing sector. French energy major Total SA has tied up with Gautam Adani-led Adani Group and the duo is set to open 1,500 outlets to supply compressed natural gas (CNG). UAE’s national oil company Abu Dhabi National Oil Company (Adnoc), too, had expressed interest in tapping the Indian market, while BP plc holds a licence to set up 3,500 fuel retail outlets, which it acquired in October 2016. On the other hand, Russia’s Rosneft has marked its presence through the acquisition of Essar Oil and its aggressive expansion in the Indian retail market through Nayara Energy.  

Why are global majors queuing up for the Indian oil retail market? The answer lies in the prospects: Nowhere in the world has petrol sales increased 153 per cent and diesel by 70 per cent in the past 10 years. Plus, the opening up of city gas distribution networks has stoked the interest of players like Total. Petroleum minister Dharmendra Pradhan’s recent prediction would have added to this enthusiasm. He said diesel and petrol consumption in India could rise to 150 billion litres and 50 billion litres a year respectively by 2030, from 90 billion litres and 30 billion litres now. 

Which is why when the three state-owned oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — invited bids to set up retail outlets at 78,493 sites recently, it raised eyebrows. “Increasing the number of outlets by government companies that already have a monopoly may not serve the business interests of private players like Reliance Industries, Nayara Energy (former Essar oil) and Shell. They were starting to regain their lost market share and again the OMCs are strengthening their footprint,” said a senior official from a private sector retail company. 

 

The country has 64,214 outlets currently. With 95 per cent of the new areas on offer attracting bids from 400,000 applicants, the number of outlets owned by the OMCs will more than double in the next two to three years. Days before the election code of conduct came into force on February 21, the government allotted letters of intent (LoIs) to successful bidders for 2,579 locations. In addition to this, the OMCs have already written a letter to the petroleum ministry to get Election Commission approval to allot LoIs for another 31,800 sites for which winners have been finalised. 

According to the Petroleum Planning and Analysis Cell, OMCs own almost 90 per cent of the retail outlets (see chart). Among private sector majors, Nayara, RIL, and Shell account for most of the remaining share. Apart from massive expansion plans, such as adding 2,000-3,000 outlets by Nayara and reported talks between BP and RIL to set up as many as 2,000 petrol pumps, the private players will be dwarfed by state-owned players once the new outlets come on stream. 

This state-led expansion is symptomatic of the policy uncertainty that has characterised the Indian oil retailing business. RIL, Essar Oil Ltd and Shell had their first entry in the business in April 2002 after the administered price mechanism was scrapped, and fuel markets were opened to private sector. By 2005-06, the private players had built up a respectable market share of 17 per cent.

 

The price controls were re-established in 2006 when global crude rates rose sharply, so much so that their market share fell below 1 per cent by 2009-10. With the OMCs being heavily compensated by the government for selling fuel below cost, private players struggled to compete. 

Now that the market-driven price regime has been restored, the assurance of a permanent level playing field remains paramount. Many of the private players, however, see hope in plans doing the rounds in government circles about changing retail landscape. Innovative marketing models, such as selling fuel through hypermarkets (as is done in UK and France), is one such. A committee led by economist Kirit Parikh, set up in October 2018, is considering options to ease entry rules for private players, including proposals such as this one. Currently, to enter the retail segment, companies must have a basic infrastructure investment of about Rs 2,000 crore in the domestic market or provide bank guarantees of an equivalent amount. The Parikh panel may also be looking at restructuring of these norms too.  

According to a media report, major oil marketing companies in the UK have suffered after supermarket promotions started luring more vehicle owners to Tesco, Sainsbury, Asda and Morrison forecourts. Supermarkets accounted for 45.52 per cent of total fuel sales last year in the UK. Experts too are upbeat about this potential in Indian market. “If you look at global trends, we are seeing that non-fuel is becoming a greater source of value than fuel. With more private participation, India will also be opening up for that,” said Anirban Mukherjee, partner and director, Boston Consulting Group.

Ironically, though, it remains advantage OMCs in India’s fuel retail market.