Last July, Reliance Industries petrol pump dealers in Gujarat threatened to immolate themselves in front of the company’s office. They were demanding financial relief and exit from the dealership of India’s largest private company.
After a battle that lasted a few months, RIL relieved a handful of retailers. However, others lament their investments are still stuck, with virtually no sales at their retail outlets. Though RIL says it compensates its dealers by paying Rs25,000 every month to meet costs, latter deny receiving any such payment.
These retailers however, would have been a happy lot had they retailed fuel for state-run refiners —Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL)— and been compensated for selling fuel below market prices.
Essar Oil, which has a large number of operational retail outlets, compensates its dealers by providing a 12.5 per cent fixed rate of return on their investment. The company has 1,406 operational retail outlets and an additional 200 are being constructed. Currently, it doesn’t record any margin on fuel sales. With a price differential of Rs3-8 a litre on petrol and Rs15-20 a litre on diesel, compared to the rates of public sector units, Essar Oil had last recorded profits in its retail business in 2010.
In 2004, Shell India, the only international energy company licensed to build and operate fuel outlets in India, secured a marketing licence from the government to set up a network of up to 2,000 fuel retail stations. The company has operational retail outlets across six states. Shell India says though it continues to invest, the flow is slow, anticipating a clear policy on selective subsidies. This hits revenue and its ability to grow.
And, analysts don’t foresee any change in the fortunes of these companies, since diesel accounts for most of their product portfolios. “Until and unless diesel deregulation happens, their fuel retail plans will not pick up,” said an analyst, requesting anonymity.
RIL, Essar and Shell hold the government responsible for their state. The government had invited private companies into the market and stated eligibility for a marketing licence was subject to an investment of Rs2,000 crore in India’s oil infrastructure. “After the investment was made, the government has not ensured a level playing field by controlling the pump prices of public sector companies,” a Shell India spokesperson stated in an emailed response.
He added the government “could, in a sense, be termed the biggest ‘violator’ of its own laws — going back on withdrawal of the administered pricing mechanism without changing the law, thus eliminating competition in oil marketing. It has also ignored the rights of minority shareholders in oil PSUs (public sector undertakings), who have seen serious erosion in the value of their stocks.”
An RIL spokesperson did not respond to a detailed questionnaire sent to him.
Government control over the price of diesel sold by its companies has rendered over three-fourths of RIL’s retail outlets non-operational. The company, which had 1,470 retail outlets, currently runs only 450 of those. Last year, the number of the company’s operational retail outlets stood at 350.
RIL, which held 12 per cent market share in diesel sales in 2005, on Wednesday holds less than 0.5 per cent market share in fuel retailing. The company had spent Rs5,000 crore in setting up these outlets, and has said its mainstay was diesel sales. It has maintained till diesel is deregulated, it is not viable to operate the retail outlets.
“The majority of RIL’s outlets are on highways, and no one comes to highways to buy fuel. So, there is hardly any sale,” says an RIL official.
Another official said the government was doing great disservice to consumers and the environment. “We have put in huge technology to ensure consumers get pure fuel, not only in value terms, but also in volume terms. Truckers were extremely happy, as their mileage was improving,” he said.
Essar says undoubtedly, private companies don’t have a level playing field in the retail sector. While PSUs get government subsidy to sell fuel below the market price, this is denied to private companies. “While state-run oil marketing companies are rapidly expanding their retail outlets, those set up by private players are grossly under-utilised, which is a national loss and should be corrected,” stated an Essar Oil spokesperson.
Last month, the company’s chief executive, L K Gupta, had written to the ministry of petroleum and natural gas, suggesting steps to extend subsidy schemes to private sector companies. In the letter, it was suggested the government decide the levels of subsidy to be offered to both public and private companies during the annual Budget.
“Once the subsidy is fixed, the diesel price can be deregulated and all oil marketing companies can be given autonomy to fix their own prices,” Gupta had stated in the letter.
To provide an additional source of revenue to its franchisees, Essar Oil has explored multi-fuel options such as compressed natural gas and an increase in non-fuel retailing activities by forging alliances with non-fuel retailers in segments such as lubricants, food & beverages, agro products, telecom and banking & finance.
So far, 15 of Essar Oil’s outlets in its nationwide retail network have CNG- and two have auto LPG-dispensing facilities. In the next financial year, the company plans to raise these numbers to 50 and 25, respectively.
Essar Oil has tied up with Indraprastha Gas, Gujarat State Petroleum Corporation, Mahanagar Gas, GAIL Gas, Sabarmati Gas, Adani Gas and Gujarat Gas Corporation to provide multi-fuel options, as part of its efforts to support its franchisees in increasing footfalls at their outlets.
