India's retail fuel race attracts global attention: Fuel for Thought

The number of global oil majors weighing options to invest in India’s retail fuel space is impressive as pricing deregulation allows private firms to compete with state companies.

Since the BJP-led government came to power in 2014, New Delhi has taken some concrete steps to align domestic fuel pricing with market forces.

One of the most significant reforms undertaken by the government was the deregulation of diesel—unshackling a decades-old subsidy regime—that has created a level-playing field for private companies. The diesel market’s deregulation came four years after gasoline prices were deregulated in 2010. As a result, fuel marketing in India has become a profitable business.

Couple deregulation with one of the strongest pockets of global oil demand growth and it’s easy to see why several foreign majors have set their sights on India.

India’s oil product consumption growth is expected to outpace China’s for a third year in a row. Indian oil product demand is likely to grow 7% to 4.13 million b/d in 2017, whereas China’s oil demand is expected to rise only 3% to 11.5 million b/d in the same period, according to Platts Analytics.

Royal Dutch Shell was the first overseas oil company to venture into the Indian market. In October 2016, UK major BP was given the go-ahead to set up retail fuel outlets in India, becoming the second global major to enter into the country’s retail oil sector.

Late last year, Russia’s Rosneft and a consortium led by Trafigura agreed to jointly buy Essar Oil, in an effort to expand their footprint in the country’s retail fuel sector.

The deal is expected to close this year.

Saudi Aramco is also in talks with the government to gain market entry. Even France’s Total is looking into the possibility of investing in India’s retail fuel sector.

Competing with state companies

The road for private players is not going to be smooth, however, as competing with the state-run oil marketing companies won’t be an easy task.

International oil majors can bring decades of global experience in the retail fuel segment, but the area where they will face problems is building infrastructure and finding pockets of opportunity in between the vast network of fuel stations built and operated by the state-run oil marketing companies.

India currently has about 57,400 retail fuel outlets spread across the country, out of which the three state-run firms—Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp—account for about 53,500, controlling more than 93% of the market share.

India’s domestic private players Reliance and Essar had ventured into the retail space in 2002, but were forced to close down their fuel stations after the government decided to control prices post 2005.

But after the diesel price deregulation in October 2014, Essar re-opened 300 outlets, and has added 1,400 new fuel stations.

Essar aims to increase its outlets to 5,000 by next year.

Reliance, on the other hand has reopened 1,000 stations, but has not added any new ones, opting for a wait-and-see approach.

That Reliance has been sitting tight even after three years of price reforms provides a caution to private players that they have a huge task at hand in their pursuit of grabbing a part of the retail oil market.

In India, private refiners also regularly sell cargoes to state-run oil marketing companies when domestic demand rises and state refiners are unable to meet the incremental demand from their own output. In that sense Reliance and others would still be able to take advantage the growing retail market without needing to own the pumps.

Tie-ups key to entry

About 10-12 years ago, one could have argued that private refiners produce much better quality fuel, compared state refiners. But that’s no longer the case as some state-run oil marketing firms are well-equipped to produce fuels that match the quality of private players.

Since quality is no longer a concern and with state companies already commanding most of the market share, the best way for international players to succeed, may be to tie up with a local partner—private or government—rather than fly solo.

BP and Reliance recently decided to jointly invest $6 billion to produce natural gas from the KG-D6 deepwater gas fields off the east coast of India.

Perhaps as part of the BP, Reliance natural gas marriage, Oil Minister Dharmendra Pradhan invited BP and Reliance to invest in the retail fuel sector.

Market participants are of the view that if BP and Reliance indeed decide to invest jointly in the retail fuel sector, they would be in a stronger position to compete with the network of state-run refiners, compared with what they could achieve if they invested independently.

Even Saudi Aramco can see the benefit of having a local partner. It has expressed its interest to buy a stake in the world’s biggest refinery-cum-petrochemical complex that India’s state-run oil marketing firms jointly plan to build in the western state of Maharashtra at a cost of $40 billion.