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Press Release [FREE Access]
Petro Intelligence » One-Buck Dilemma For Private Fuel Retailers

by R. Sasankan

Sudden and unexpected decision-making by any political establishment can often knock the bottom out of the edifice of expectations on which businesses frame their investment strategies. Politicians, worried about angering their constituents forced to suffer the blows of negative externalities, often make knee-jerk decisions to ease the pangs. The global crude oil price surge in early October was one such negative externality against which the government could provide little cushion. Result: pump prices for petrol and diesel shot through the roof.

The government which was already battling a fiscal deficit crisis because of weak growth in tax revenues and the decision to slash borrowings in the second half of the year was left with no fiscal headroom that would allow it to make the desired cut in the excise duty on these petro fuels. After resisting pressure to intervene in the market, the NDA government finally gave in by announcing a reduction of Rs 2.50 per litre of petrol and diesel of which the excise duty cut was Rs 1.50 per litre and the remaining Re 1 to be absorbed by the public sector Oil Marketing Companies (OMCs).

Arun JaitleyThe state-owned oil companies did not protest even though the directive meant that it would gouge profits from their books. The private sector players – RIL, Nayara and Shell – have not complained because legally they do not have to shoulder the burden. But the move had an immediate and long-term impact on their retailing strategies and they have been left seething against finance minister Arun Jaitley’s October 4 missive to the public sector giants.

“It is a setback to the government’s credibility,” said an executive who preferred anonymity. Both Prime Minister Narendra Modi and finance minister Jaitley had repeatedly assured them in the past that the government would not intervene in the market. Credibility in government policies is essential to attract private investment.

It is fair to say that any other government, faced with a similar predicament of rising crude prices, would have intervened much earlier. The protest is not against market intervention, especially after crude oil touched a four-year high of $ 86 to a barrel. The government could have taken the entire hit through a cut in excise duties that it has levied since 2014. Only once before did it announce a cut in excise duty.

Arun Jaitley has a genuine problem. He has indicated that he will cap fiscal deficit at 3.3 per cent of GDP this year – and intends to stick to that promise made in this year’s budget even though he has virtually no fiscal headroom left. Fiscal deficit is the yardstick to measure the health of the economy and that is why he was holding out for so long on the excise duty relief.

In retrospect, it appears that the government could have waited for a few more weeks. Crude oil prices have since tumbled below $ 70 a barrel and the economic sanctions that the US has imposed against Iran has had no upward impact on prices. The downturn in crude prices and consequent fall in retail prices of petrol and diesel began in the last week of October. This trend will continue for a few weeks. But the burden on PSU oil companies cannot be lifted until the elections to the five state Assemblies are over.

This is not the first time that the NDA government has intervened in the retail market for petroleum products. Retail prices of petrol and diesel are revised every morning in line with the fluctuations in the crude oil market. Crude oil prices started surging in early 2018. By May, when the election campaign for Karnataka state Assembly had reached a crescendo, the PSU oil marketing companies refused to revise the retail prices of petrol and diesel for 15 days, obviously at the behest of the government. IOC alone incurred a loss of Rs 5 billion as a result.

The latest market intervention comes at a time when private players like BP and Total announced their intention to set up retail outlets. BP has licence to set up 3500 outlets. It has teamed up with RIL to open 2000 outlets in the first phase. Total, which is partnering Adani in LNG, is keen to establish 1500 retail outlets. This will put pressure on Shell to speed plans to set up its retail outlets. So far, it has opened only 114 outlets against its licence for 2000 units.

True, the government’s decision to force state-owned outlets to absorb Re 1 per litre of petrol and diesel does not cover private players. But the move hurts them. In a market hugely dominated by the PSUs, they cannot sell petrol and diesel at a higher price. This is precisely why the retail outlets of RIL and Essar Oil (Nayara’s predecessor) remained shut for close to a decade when the UPA government re-introduced the subsidy on petrol and diesel in early 2010s.

The private retailers are terribly upset. What options do they have? Will they press for a policy announcement from the government against such market interventions in future? They haven’t held out any such threat. More and more companies are interested in entering India’s retail market. Saudi Aramco has already announced its interest in investing in India’s retail market. The situation calls for a policy clarification, which is the only way to instill confidence among the private players.

The options before the private players are limited. India is perceived to be a growing market for transportation fuels such as petrol and diesel for which demand is expected to remain robust until 2040. The penetration of electric vehicles is expected to be very slow in India. According to one estimate, electric vehicles of above average quality cannot sell in significant numbers in the Indian market unless the price comes down to $ 30,000 per car against the prevailing price of $ 50,000. This will take time. Recharge facilities become economically viable only if there are enough cars in the market. These facilities are not expected to be in place before 2040. This is precisely why oil majors are keen to enter the Indian retail market. They will be forced out of the advanced markets soon and they will want to avoid a confrontation with the government of such a promising market like India. That presents them with a genuine dilemma.



To download the latest issue 'Volume 25 Issue 23 - March 10, 2019', click here
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