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Analysis: India's move to liberalize fuel retailing signals more competition

Highlights

Companies with net worth of Rupee 2.5 bil eligible

Analysts welcome move, expect more competition

Fuels, such as CNG, LNG, will also stand to gain

Singapore — India has further liberalized its energy sector by opening up its retail transportation fuel sector to non-oil companies, a move that will intensify competition in a segment dominated by state refiners, while private and global oil majors seek to expand their presence.

It will also help to boost consumption of cleaner fuels, such as LNG, as New Delhi has now made it mandatory for those outlets to sell at least one "new generation alternative fuel."

The decision by Prime Minister Narendra Modi's cabinet to allow non-oil companies to enter the retail business comes at a time when global giants, like Saudi Aramco and Shell, as well as private oil refiners, such as Reliance Industries and Nayara Energy, are also aiming to have a bigger retail footprint.

The move is seen as another major step for its retail fuel sector. It comes more than two years after India aligned its transportation fuels with the global oil market by allowing its state-owned oil marketing companies to adjust daily prices of gasoline and diesel -- two products that together account for about 60% of total oil products consumption.

India's gasoline and diesel demand

"The existing policy for granting authorization to transportation fuel marketing has not undergone any changes for the last 17 years since 2002. It has now been revised to bring it in line with the changing market dynamics and with a view to encourage investment from private players, including foreign players, in this sector," the Indian government said in a statement.

"Non-oil companies can also invest in the retail sector. Requirement of prior investment in the oil and gas sector, mainly in exploration and production, refining, pipelines and terminals has been done away with," the statement added.

The policy reform is expected to attract more private and foreign players to invest in retail fuel marketing, leading to better competition and services for consumers, it added.

"This should help to induce competition, which should be beneficial for consumers. Fuel retailers will not only have to be competitive in terms of pricing but will have to differentiate themselves by providing better services," said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics.

EASE OF DOING BUSINESS

Under the previous rules, a new player seeking to operate a retail fuel outlet needed to make a minimum investment commitment of Rupee 20 billion ($282 million) for the country's oil and gas sector. Under the new set of guidelines, that is no more a requirement. Now, any company having a minimum net worth of Rupee 2.5 billion can apply for a license.

"In addition to conventional fuels, the authorized entities are required to install facilities for marketing at least one new generation alternate fuel -- like CNG, LNG, biofuels and electric charging -- at their proposed retail outlets within three years of operationalization of the said outlet," the statement said.

India has nearly 60,000 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 more than 90% of the market share.

As per the new rules, the companies will be required to set up minimum 5% of their total retail outlets in remote areas within five years.

"The policy reform to allow non-oil firms is a welcome move for the industry provided there is no intervention by the government in controlling retail prices in any form in the future," said Senthil Kumaran, Consultant at Facts Global Energy.

"The government is targeting small towns, growing rural markets and new highways for future expansion of retail outlets. Sourcing of products, inland freight, tankage and other infrastructure will be challenging. Operational costs will be higher in remote and low-serviced areas," he added.

Many global oil companies have set their eyes on the growing Indian oil products market. Shell was the first overseas oil company to venture into the Indian fuel retailing market.

In August this year, BP would expand its current partnership with Reliance to include retail fuel, convenience retailing and aviation fuels in India. Under the deal, the partners have agreed to set up a new joint venture, which will assume ownership of Reliance's existing Indian fuel retail network.

Even France's Total is looking into the possibility of investing in India's retail fuel sector.

India's oil demand growth has eased this year due to slowing economy and transport fuel consumption dampened by weak vehicle sales. But demand should strengthen as the economy picks up.

Demand outlook for the next few years is expected to be stronger with an average annual growth of around 200,000 b/d, supported by population growth and an increase in disposable personal incomes, according to Platts Analytics.

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Ratnajyoti Dutta, newsdesk@spglobal.com

-- Edited by Kshitiz Goliya, kshitizgoliya@spglobal.com