Essar Oil Ltd has closed around one-third, or about 350 of its franchised petroleum pumps even as it continues to lose significant amount of money on petrol and diesel sales at the remaining 800 or so outlets.
Essar Oil’s problems are not unique in the sense that private fuel marketing companies, including Reliance Industries and Shell India, are facing similar profitability issues. The situation stems from the nature of fuel-retailing in the country where fuel prices are indirectly regulated by the government.
Essar, for instance, cannot sell fuel at its retail outlets at prices that government-owned oil marketing companies such as Indian Oil Corp., Bharat Petroelum Corp. Ltd and Hindustan Petroleum Corp. Ltd do. In a market where global crude oil prices have headed north—both private and government-owned companies here import crude and refine it—the private companies are at a disadvantage because they don’t get subsidized as much by the government.
Raw deal: In a market where global crude oil prices have headed north, private companies are at a disadvantage because they don’t get subsidized by the government as much as state-run marketers.
As on 28 February, Essar had 1,149 retail outlets and had previously put its plans to have 2,500 outlets by March on hold. While its retail outlets are owned by the franchisees, Essar Oil has made investments in setting up the supply set-up, and currently operates 18 terminals and depots.
Essar is now losing Rs5 on every litre of petrol and Rs6 on every litre of diesel that its pumps sell.
“Although Administered Pricing Mechanism was to be dismantled effective 1 April 2002, the Indian government still continues to control the product prices. As public-sector units operate almost 95% of the retail outlets across the country, it is not possible to sell product at prices higher than (their) price, which results in huge loss for Essar Oil on sale of products,” said a spokesman for the company.
Reliance, which runs around 1,300 outlets, recently wrote to the petroleum and natural gas ministry noting that it has difficult choices ahead: either continue to absorb big losses by selling fuel at the same price as the government-owned oil marketers do or sell at higher prices and face customer backlash in what is a fairly price-sensitive category.
Private oil marketers are also finding it more lucrative to export most, if not all, of their refined petroleum products. Essar Oil commissioned its much-delayed refinery, with a capacity to process 7.5 million tonnes of crude a year, last January.
Essar Oil’s remaining outlets are also operating at low volumes. In April, all the Essar outlets sold only 12,000 kilo litres of petrol and 25,000 kilo litres of diesel. In March 2005, its fuel sales data indicates that Essar Oil sold twice the volume when it had only around 575 outlets.
“Essar Oil currently does not make any margins in marketing of products; in fact, it loses on sale of products. In case we are not able to provide product to franchisees, we compensate them in the form of financial assistance,” said the Essar Oil spokesman.