Mumbai: Mumbai-headquartered refiner Essar Oil has fallen behind its plans to expand a network of petrol pumps, a result of the unremunerative nature of fuel-retailing in India where prices are indirectly regulated by the government. The company, which has 1,100 outlets now, and has planned to have 2500 in place by the end of this month, will instead focus on the export market, said an Essar executive who did not wish to be identified.
“We are exporting 100% of the output of refined petroleum products, save for a select basket of by-products which are sold in India. The auto fuels being retailed by us currently are being purchased from public sector and private sector refineries in India,” said a company spokesperson.
Essar Oil commissioned its much-delayed refinery, with a capacity to process 7.5 million tonnes of crude a year, last January. Essar isn’t the only one going slow on retail plans.
Shell India and Reliance Industries have commissioned fewer retail outlets than they planned to. “The government has artificially suppressed the price of transportation fuels. This has put pressure on our margins,” said the executive.
For the nine months ended 31 December 2006, Essar Oil, posted a net loss of Rs56.57 crore on net sales of Rs204.9 crore.
Although the government doesn’t set the price at which private companies such as Essar and Reliance retail fuel, it fixes the price for public sector oil marketing companies such as IndianOil, Hindustan Petroleum and Bharat Petroleum.
Essar currently sells its diesel for Rs2 more and petrol for Re1 more than what government retailers do, but even this price is unremunerative. Part of the losses public sector firms incur in retailing is subsidized by the government.
Two key units of Essar’s refinery, a fluid catalytic converter unit and a diesel hydro desulphurization unit, are expected to be commissioned in the second quarter of 2007-08, said the spokesperson.
Once these two units are functional, Essar will be able to produce auto fuels compliant with the European Union’s Euro-III standards. These fuels, on which the profit margins will be higher, can be sold by the company either in the domestic market or exported. It is likely that the company could choose to do the latter in a context where the government continues to keep prices of petrol and diesel unnaturally low. For instance, Reliance Industries exported 4.8 million tonnes of its refinery output in the third quarter of 2006-07 as compared with 2.5 million tonnes in the third quarter of 2005-06.
The spokesperson said Essar has managed to match the prices of public sector oil marketing companies for auto fuels sold in Gujarat, Karnataka and Maharashtra. He added that it would accelerate its rollout of petrol pumps only when market conditions in India improve, his way of referring to a situation where both public sector and private sector oil refiners and retailers were free to price their products.