Private fuel retailers have given a thumbs down to the government’s decision to allow state-run oil companies to raise diesel price from time to time.
Although any diesel price revision by public sector companies will be followed by private companies, retailers say the government will only allow two or three ‘token’ price hikes and later forget about it as elections will be round the corner.
Private fuel retailers - Essar Oil, Reliance Industries and Shell India - form less than 10 per cent of India’s fuel retail business. Government-owned companies - Indian Oil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation - dominate the fuel retail business, with more than 90 per cent share.
“Currently, the under-recovery on diesel is around Rs 9.6 per litre. A minor Re 1 or 2 hike will not help private fuel retailers as they would still be bleeding. Everybody knows the government will not go in for a Rs 10 hike to cover under-recoveries. Only the government knows what it has done,” said a senior executive with one of the private fuel retailing companies.
Diesel is the mainstay for all fuel retailers. Private oil marketing companies have invested substantially in setting up their retail outlets, but due to lack of a level-playing field, these assets were left under-utilised.
“This move vindicates the stand of private players, who have chosen to remain in this business despite government’s apathy. This provides us hope that complete deregulation will take place someday. Till then, we shall continue as we have been in this business,” said the CEO of a private fuel retailing company, who did not wish to be named.
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Essar Oil, which has around 1,406 retail outlets, has only 1,200 retail outlets operational. After today’s decision, however, the company may open its other 200-odd outlets.
Although Essar Oil’s managing director and CEO L K Gupta welcomed the move, he said, “The need of the hour today is complete deregulation of fuel prices and allow market forces to set the benchmarks in tandem with global oil prices.”
He added that once price parity is reached between retail and market prices, it will not only benefit consumers by providing them choice, but also help in demand management of diesel. “It will also be good for the economy, since a ballooning subsidy bill was threatening to derail the overall fiscal discipline.”
Essar Oil compensates its dealers by providing a 12.5 per cent fixed rate of return on their investment. Currently, it is able to break even in its retail business. While it sells petrol at the same rate as that sold by public sector units, except for its fuel stations in the north-east, it sells diesel at a price differential of Rs 8-10 a litre, compared to the rates of public sector units. Essar Oil last recorded profits in its retail business in 2010.
Mukesh Ambani-owned Reliance Industries, which has around 1,470 retail outlets, currently runs only 450 of those.
On the other hand, Shell India, the only international energy company licensed to build and operate around 2,000 fuel retail outlets in India, runs around 35-40 retail outlets across six states. Shell India had earlier told Business Standard that although it continues to invest, the flow is slow, anticipating a clear policy on selective subsidies. This hits revenue and its ability to grow.
The government had invited private companies into the market and stated the eligibility for a marketing licence was subject to an investment of Rs 2,000 crore in India’s oil infrastructure. “After the investments was made, the government has not ensured a level playing field by controlling the pump prices of public sector companies,” Shell India had told Business Standard earlier.
“A lot will depend on the actual price hike that will take place. A key reason for this announcement could be the pressure the government is facing from rating agencies and the fuel subsidies, which are a drain on India’s finances,” said a senior analyst from a broking firm.