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Oil sector: fuelling a titanic battle

Hemangi Balse

It is a battle of the titans that will be fought out in the forecourt of petrol pumps around the nation. In the fray are public sector leviathans like the Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum and the recently sold IBP.

Also, looking for ways to capture the high ground and go on the offensive are the new private players like the Reliance Group and Essar.

At stake are gigantic amounts of money that will be pumped into the industry by the oil companies over the next three years. Industry analysts reckon that the companies will spend around Rs 250 billion in the next three to five years as they make a giant effort to win customers.

What is about to take place is a total transformation of an industry that has traditionally been controlled by slow-moving public sector giants who were assured of returns.

Now, as the industry moves into a decontrolled and highly competitive era, everyone is looking for ways to grab an advantage.

For a start, about 10,000 new petrol pumps are likely to be opened in the next three to five years both by newcomers like Reliance and existing players like Indian Oil and Bharat Petroleum. Currently, there are around 18,500 petrol pumps around India.

This is a battle of the giants that is still taking shape. The final contours will only be clear when the privatisation of Hindustan Petroleum and Bharat Petroleum goes through. There will also be corporate faces that won't be familiar to motorists.

On one hand, there could be public sector corporations like ONGC that are searching for a new role in the swiftly changing scenario. ONGC has applied for permission to open 800 petrol pumps in coming years.

Similarly, there's Bharat Petroleum Corporation's 3 million tonne per annum grassroots Numaligarh Refinery that is looking for ways to stay in the fight and wants to open 250 retail outlets.

And, that's not even looking at the players who haven't declared their intentions yet. For a start, there's global giant Shell Overseas Investment BV (Shell) of Holland, which is looking for ways to return to India with a bang. Shell is expected to make its intentions known when the privatisation of Hindustan Petroleum and Bharat Petroleum finally gets under way.

Other surprise entrants to the 100 million tonne (Rs 2,190 billion) Indian oil market, like the Kuwaiti oil company Q8, could also declare their hand once the privatisation process gets under way once again.

For the time being, it is the Rs 1,160.81 billion Indian Oil Corp that has drawn first blood. The public sector Navratna already has a 59 per cent share of the market but it isn't taking any chances.

It outbid all the rival bidders and snapped up a 33.58 per cent holding in IBP for Rs 11.537 billion.

IOC had seen the competitive future long before it became a reality. It now has around 9,100 petrol pumps across the country and during the last three years it has moved swiftly to pre-empt the competition by adding 1,200 pumps.

It will probably keep adding similar numbers for the next few years. IOC is likely to spend about Rs 4.50 billion on new stations in the next one year.

If that isn't enough, IBP - newly-acquired by IOC - is also pushing with its own plans to expand its roadside presence.

IBP is likely to open about 300 petrol pumps in the coming year. Says Arun Jyoti, managing director, IBP: "We are setting up about 300 outlets and we will be investing about Rs 10 million to Rs 15 million on each outlet."

Meanwhile, the two other public sector companies - Hindustan Petroleum and Bharat Petroleum - are also working out ways to tackle IOC and any other newcomer which joins the fray.

Both are trying to be selective and pick the right sites for their petrol stations without splurging too much money on the entire exercise. Both companies have about 4,600 pumps.

Bharat Petroleum is likely to open about 100 to 150 stations annually. Hindustan Petroleum may start an even larger number and has laid aside almost Rs 3 billion for the exercise annually.

Of course, the battle isn't only about petrol stations. In recent years, as refining margins have fallen dramatically, the battle has focused on the customer end of the business.

The oil companies have been searching for ways to become more customer friendly and ensure that drivers become loyal to one brand.

The front-runner in the branding battle is almost certainly Bharat Petroleum, which caught the attention of customers with its marketing campaigns that hit the road before any of its rivals.

Bharat Petroleum has taken a slew of other initiatives that have put it out in front in the marketing race. Take, for example, its LPG business.

Bharat Petroleum was the first to offer customers the possibility of booking LPG cylinders on the Net. Bharat Petroleum dealers have installed computers and voice mail that makes bookings a less painful process than in the past.

But the biggest winner from Bharat Petroleum has been its 'Pure for Sure' campaign designed to tackle fears about adulteration. This is one move that has forced all its competitors to respond.

IOC, for instance, has launched a Q&Q campaign to ensure that customers get the right quantity and quality of fuel each time they stop by for a refill. Similarly, Hindustan Petroleum has launched Club HP and has invested Rs 100 million in the initiative.

Will all this be enough to keep competition at bay? The private sector players aren't in the marketplace yet but it won't be long before their intentions become clear.

Reliance desperately needs a nationwide network and it must either buy one or set up its own right from scratch. It is the same story for Essar Oil.

Essar Oil says it will concentrate on the north and western regions initially. Says Jagdish M Mehta, marketing director and CEO, Essar Oil: "We are putting up a network of retail stations which are considered to be the most rewarding activity."

For Reliance, the first step could be the setting up of 500 'refinery backyard retail outlets' over a 300-km radius around its Jamnagar plant.

Also, it is looking at setting up around 1,000 outlets in the first 15 months (5,849 in all) along highways and strategic locations.

That's because, diesel which accounts for 50 per cent of a refinery's output is largely consumed by long distance vehicles and sold outside city limits.

This would immediately pare down costs, as setting up a single outlet within city limits needs an outlay of Rs 25million to Rs 30 million.

But, for the time being, its plans will rest on whether it is able to snap up HPCL or BPCL.

The world has changed beyond recognition for the oil companies during the last few weeks. Till recently, the oil companies were under the pricing diktat of the ministry of petroleum and natural gas. The companies had a 12 per cent return on net worth.

All that has now changed with deregulation from April 1. But the economics of the oil companies will only become clear in the next few months. What's more, now that the sector has been thrown open to the private sector branding has become the driving force for oil companies.

So far only a handful of big players have shown their hand. One reason is because the government has laid down tough conditions and insisted that companies must invest Rs 20 billion in oil regulated infrastructure.

"With strict investment norms of Rs 20 billion and Rs 5 billion bank guarantees, we expect only serious players to enter marketing of petroleum products," says N K Puri, director, marketing Hindustan Petroleum.

Even if there aren't that many players they will all have deep pockets. And this is the beginning of a vicious battle in which the combatants won't run out of fuel quickly.

Slipping on an oil slick

Pradeep Puri

There's one unscientific way of figuring out whether the oil industry's reforms have started to work or not. Stand in the corridors of the petroleum ministry and watch the comings and goings of the top honchos of the oil world. If you hang around for long enough it is possible to see that the ministry is still the industry's Mecca.

It isn't tough to figure out that the ministry still rules. This conclusion is borne out by further investigation. The administered price mechanism was dismantled on April 1 but the government is clinging tenaciously to its powers and dictating terms to the industry.

Take the question of price hikes. Theoretically, companies like Indian Oil and Bharat Petroleum are now free to fix prices. In actual fact it works differently.

Look at what happened on June 15-16 when prices were raised for the second time in the month. The companies wanted to hike prices by about Re 1 but the government put its foot down and refused.

The final clearance for a 25-paisa hike came from Petroleum Minister Ram Naik himself. The result: the oil companies are being forced to absorb losses because they haven't been allowed to hike prices in line with international movements.

"It is not easy to give up control over the lucrative oil PSUs. If it is done, who will pay for the large Indian delegation's visit to Rio to attend the forthcoming World Petroleum Congress, who will foot the bill for the fleet of cars at the ministry's disposal every day, who will look after the renovation of the minister of state's room," says a senior official.

The fact is that ONGC and IOC are jointly footing the bill of the Indian delegation to Rio. The delegation will probably have about 20 to 25 members.

The government's reluctance to let slip its powers shows in what has not been done in the last two years. The first thing that should have been done before deregulating the sector was to frame guidelines on how the private sector would be allowed to market petrol and diesel.

This would have given everyone sufficient time to apply for the marketing rights and put up retail outlets. Then they would have been able to start selling from April 1 this year. The guidelines finally came only one month before the dismantling of APM.

Then, there's the appointment of a downstream regulator, which should have been one of the first moves on the agenda. This still hasn't happened and, therefore, the ministry has appointed itself as the ad hoc regulator. This gives it enormous powers to fix the retail prices of petrol and diesel and to regulate the functioning of the PSUs.

The ministry is also working against privatisation in other, more subtle ways. It isn't openly opposing the privatisation of HPCL and BPCL, but it is quietly putting spokes in the wheels of the divestment ministry.

Recently, despite opposition from the divestment ministry, the petroleum ministry gave its approval to an IPO being planned by BPCL before divestment. It has so far not allowed the divestment ministry to seek Cabinet approval for the divestment in the two oil PSUs.

When will decontrol really start to work? Probably when the private players make their presence felt and reach out to customers.

But even before then competitive pressures are likely to be felt. Already the public sector giants are jostling for a larger share of the pie. When all these forces come together decontrol in the oil sector will one day become a reality.

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