Pump priming the fuel retail business

New entrants are likely to rely on the public sector oil marketing giants to establish their supply networks

Indians may soon see new brands of fuel retail outlets (or petrol pumps) as the oil ministry allows more companies to market auto fuels in the country. Seven new authorisations have been granted under the relaxed guidelines for authorisation to market transportation fuels that were revised in 2019 (see table: In the pipeline)

These companies are banking on rising fuel demand predicated on growing vehicle ownership and rising mobility. There is a rising challenge from electric vehicles to be sure, but a complete transition that would dent demand growth may be further away in the future.

These new approvals were granted with lower entry barriers to companies having a minimum net worth of ~250 crore at the time of making the application. For both retail and bulk supplies, the minimum net worth was ~500 crore. According to the 2019 rules, for retail authorisation, an entity has to set up at least 100 petrol pumps, of which 5 per cent should be in the notified remote areas, within five years of the grant of authorisation.

Under the earlier rules, framed in 2002, companies had to invest at least ~2,000 crore in the domestic oil and gas sector before they were allowed to enter auto fuel retailing. This opened the way only for companies like Reliance Industries (RIL) and Nayara Energy (then Essar Oil), which had heavy investments in crude oil refineries.

But their entry into the business was marred by subsidies on petrol and diesel, borne by the Centre, for the state-owned oil marketing companies (OMCS). When crude oil and resultant petrol and diesel prices rose, the fuel sold by RIL and Essar Oil became too expensive for consumers who would otherwise be buying at subsidised prices from OMCS.

The situation is different this time since fuel pricing has been liberalised and prices are now market-linked. Despite the record high prices, the prognosis for the retailing business remains strong. “The demand for petrol- and diesel-run vehicles is not going to phase out immediately. These new companies could be eyeing a share of the demand that will accrue for auto fuels in

India,” Sumit Pokharna, research analystoil and gas sector and vice president, Kotak Securities, told Business Standard.

According to the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales declined 2.24 per cent in April-march 2021 over the same period last year and commercial vehicle sales dropped 20.77 per cent in the same period. Overall automobile exports declined by 13.05 per cent during this period. This fall was largely in line with the economic slowdown due to the Covid-19 pandemic. Restrictions on the factory value chain due to lockdowns also hampered production of vehicles. As a result, petrol and diesel demand fell to below 2017-18 levels during fiscal 2020-21 (see table: Going with the flow). Now both auto fuel and vehicle sales are expected to recover to postpandemic levels in 2021-22.

“Demand will continue to grow over the next three to five years despite the high prices and pickup in alternatives such as compressed natural gas (CNG), auto liquefied petroleum gas (LPG) and electric vehicles, though the growth percentage could gradually decline,” said Bhanu Patni, a senior analyst at India Ratings & Research.

This will also mean continued dependence on petrol and diesel for running a larger share of vehicles on the road.

“With the rise in electric vehicle use, the road fuel demand will see steep decline in Europe and the US. Companies are looking for alternative markets. But in India, electric vehicles will not immediately come in a fullfledged manner on a large scale. It requires proper infrastructure, including a mesh of charging stations. This gives hope for using fossil fuels or internal combustion engines (ICE) for a longer time,” Pokharna added.

This is the opportunity that Chennai-based IMC (once called Indian Molasses Company), or newly-incorporated Onsite Energy, and companies like M K Agrotech as well as Manas Agro Industries and Infrastructure are eyeing. While these companies do not have experience in fuel retailing, they do have some involvement with the oil and gas value chain in India.

IMC had competed for a discovered small field project during the second bid round to explore and produce oil and gas from India. While IMC could not bag a project, it does offer liquid storage for multiple ports in the country. The company is also known for storing petroleum products, liquefied gases, petrochemicals, acids and vegetable oils.

Assam Gas Company, owned by the Assam government, is a gas transporter as is another company that has got an approval for fuel retailing. The city gas distribution company is active in Tinsukia, Dibrugarh, Sivasagar, Charaideo, Jorhat, Golaghat and Cachar districts of Assam. A liquid fuel retailing licence will only add to its bouquet of products.

M K Agrotech is part of a diversified conglomerate with interests across agricultural products such as sunflower oil, real estate, and crude oil and gas extraction. Manas Agro Industries and Infrastructure has its own brand of LPG or cooking gas and has also collaborated with Essar Petroleum (now Nayara Energy) to supply ethanol-blended petrol.

Onsite Energy, a company incorporated in May 2020, offers oil and gas field service activities on a fee or contract basis.

The other two approvals were to RIL and its subsidiary, Reliance BP Mobility (RBML). Although the group is already in the fuel retailing business, the approvals were needed because of a reorganisation of its petroleum-to-chemicals business.

These newbies are not expected to contest with the fuel retailing mammoths, the OMCS, which account for 90 per cent of the country’s fuel retailing outlets, with RIL and Nayara Energy accounting for the rest.

In fact, the OMCS are likely to play a complementary role for the new players. “Essentially, these new entities will need back-end support from some company that already has infrastructure. Since they are not into fuel refining, it will be hard for them to get the entire value chain in place from fuel import to dispensation point. So, they will have to tie up with some large company that has such an existing infrastructure in place. They will have to ride on bigger players,” said B S Kanth, former director (marketing) at Indianoil.

Under the earlier rules, framed in 2002, companies had to invest at least ~2,000 crore in the domestic oil and gas sector before they were allowed to enter auto fuel retailing