Under existing rules, companies were required to invest at least  ₹2,000 crore in the petroleum sector to enter the fuel retail segment (Photo: Mint)
Under existing rules, companies were required to invest at least 2,000 crore in the petroleum sector to enter the fuel retail segment (Photo: Mint)

State-owned fuel firms wary as India opens up oil retail market

  • The move to allow all firms with a net worth of 250 crore to set up fuel retail outlets aims to boost investment
  • The change in the fuel retail policy will definitely lead to an increase in competition and the customers will benefit, IOC chairman said

In a significant move last month, the National Democratic Alliance (NDA) government opened up the fuel retail market by lowering the entry barrier.

The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Narendra Modi, approved the review guidelines, which will allow all companies with a net worth of 250 crore to set up retail fuel outlets.

Under existing rules, companies were required to invest at least 2,000 crore in the petroleum sector to enter the fuel retail segment, which many believed, favoured state-run oil marketing companies (OMCs).

The Centre’s move will now allow even non-energy companies to sell petrol and diesel to consumers, but with a few riders—they can open multiple dealerships of more than one state-run OMC, but the outlets must be set up at different locations. Besides, the companies will have to install facilities for marketing at least one new-generation alternative fuel, such as compressed natural gas (CNG), liquefied natural gas (LNG), biofuels, or electric charging units. Apart from OMCs, any private entity can source and sell fuel from anyone.

Dipping domestic demand
Dipping domestic demand

The landmark decision comes amid a slump in fuel demand in September, and a fall in commercial vehicle traffic on highways, besides the consumption demand slump in a slowing economy. However, there was a rise in domestic cooking gas and petrol consumption.

Private sector oil companies such as Reliance Industries Ltd, Essar Oil Ltd and Shell India, have some presence in fuel retailing, but the segment is dominated by state-run OMCs such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd.

“The existing policy for granting authorization to market transportation fuels had not undergone any change 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," the government said in a statement.

In recent times, the Indian energy space has been witnessing growing interest from investors. While Adani Gas Ltd and Total SA plan to build a gas fuel retail network of 1,500 outlets along highways, the world’s largest oil producer, Saudi Arabian Oil Co. (Saudi Aramco), is also considering entering the fuel retailing market in India. That apart, other global energy majors, such as Rosneft, Kuwait Petroleum, ExxonMobil, Shell and Abu Dhabi National Oil Co. are planning to acquire the government’s stake in BPCL.

“As far as pricing is concerned, existing companies are fairly efficient. Large multinational players are already present in the retail market. So, competition is already there," IOC chairman Sanjiv Singh had said last month. “But, the change in policy will definitely lead to an increase in competition and the customers will benefit."

Experts welcomed the move. “The Indian retail fuel market is overarchingly dominated by PSUs, which control about 90% of the existing retail outlets and occupy the high-traffic sites at urban centres and highways. Accordingly, the decision...would allow an increase in market participation," said K. Ravichandran, senior vice-president and group head, corporate ratings, Icra in a statement.

IOC, the largest OMC in India with around 43% market share in fuel retailing, or 65,202 outlets, said on 31 October that diesel consumption grew by around 1% in the first six months of the current financial year.

“When we talk about gasoline (petrol), in the first six months, we saw growth of close to 9%, which is fairly good in spite of a reduced sale of auto vehicles. We are still seeing decent growth as far as gasoline is concerned," Singh added.

“While demand for petroleum products has been declining globally on account of increasing environmental concerns and thrust on electric vehicles, India continues to be a growth market, and thus a key market for international players," India Ratings and Research wrote in a 5 November report.

However, concerns remain. Indian businesses have been battling a demand slowdown and liquidity crunch, which resulted in the economic growth rate cooling to a six-year-low of 5% in the June quarter, and private consumption expenditure was at an 18-quarter-low of 3.1%.

Besides, according to the latest survey by Delhi-based think tank National Council of Applied Economic Research (NCAER), the Business Confidence Index (BCI) fell dipped to 103.1, falling 15.3% from the quarter ended July. The BCI was at 100.4 in October 2013.

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