Reliance Industries Ltd. (RIL) and Essar Oil Ltd. (ESOIL), operators of India’s two biggest refineries, face at least a two-year wait to profitably retail diesel, as the government prolongs the process of completely freeing prices.
State-run oil companies can raise diesel by about 0.5 rupees (less than 1 cent) a liter per month until they wipe out their losses from below-cost sales in about two years, Oil Minister Veerappa Moily said Jan. 20, three days after a cap was partially lifted. While Reliance and Essar are free to set their own rates at their pumps, they are unable to match the subsidized costs offered by Indian Oil Corp. (IOCL), Bharat Petroleum Corp. and Hindustan Petroleum Corp. (HPCL)
“Until diesel prices are completely market-driven, Reliance and Essar won’t have a reason to celebrate,” said Bhavesh Chauhan, a Mumbai-based analyst with Angel Broking Ltd., who rates Reliance shares neutral and doesn’t cover Essar Oil. “Companies won’t invest in new fuel stations until the government fulfills its promise of market-linked prices.”
Motorists, unwilling to pay a premium for the gasoline and diesel sold on the tack of superior quality along India’s highways, have shunned outlets of the two companies. Billionaire Mukesh Ambani’s Reliance has shuttered about half its 1,400 pumps. Essar, which is controlled by billionaire brothers Shashi and Ravi Ruia and owns a similar number, sells minuscule quantities of diesel and has frozen expansion.
“Throughput at our outlets was virtually negligible,” Essar Oil spokesman Rabin Ghosh said in an e-mailed response to questions. “We’re awaiting complete price parity before drawing up our next phase of expansion plans.”
Reliance spokesman Tushar Pania declined to comment on the Mumbai-based company’s retail plans.
Reliance has gained 6.9 percent this year, after reporting third-quarter profit that surged the most in two years. The shares dropped 1.6 percent to 897.55 rupees at the close in Mumbai today. Essar Oil rose 0.4 percent to 77.65 rupees, taking this year’s advance to 11 percent. The key Sensitive Index (SENSEX) has climbed 3.5 percent in 2013.
Reliance and Essar Oil ship fuels including gasoline, jet fuel and diesel to Europe, Africa and the U.S. at international prices and typically make a profit from distilling crude oil into cleaner products. They also sell fuels at market rates to the state refiners when domestic demand exceeds supplies.
Freeing diesel prices is part of Prime Minister Manmohan Singh’s attempt to shrink a budget deficit and revive economic growth. Asia’s third-largest economy will expand about 5.7 percent to 5.9 percent in the year through March 31, less than an earlier estimate of as much as 7.85 percent, the finance ministry said in a mid-year review to lawmakers last month.
Reliance and Essar Oil, whose refineries in the western state of Gujarat are capable of turning cheap, heavier grades of crude into high-value products, are seeking to increase retail sales in India, where a growing middle class is buying more cars. The nation’s fuel consumption is projected to rise 5.2 percent to a record 155.6 million metric tons in the year ending March 31, according to oil ministry data. Diesel use may increase 8.3 percent, the fastest pace in three years.
Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker by volume, has bookings for 125,000 vehicles, 90 percent of them diesel-powered, Mayank Pareek, head of sales, said Oct. 30. Sales of diesel vehicles at the company rose to 72,462 units in the second quarter from 50,920 a year earlier.
Level Playing Field
“Unless there’s a level playing field, there’s no reason for Reliance and Essar to enter the retail market,” said Praveen Kumar, an analyst at FACTS Global Energy in Singapore. “They would rather sell the fuel at market prices to the government companies when needed.”
The government still controls prices of diesel, cooking gas and kerosene, while state refiners are free to set gasoline rates. The refiners are partly compensated by cash payments from the government and discounts on crude oil by state-run explorers.
“The need of the hour is complete deregulation of fuel prices and allowing market forces to set the benchmarks in tandem with global oil prices,” Essar Oil’s Ghosh said. “Private oil marketing companies have invested substantially in setting up their retail outlets, but due to lack of level playing fields, these assets were underutilized.”
Reliance will open all its gas stations only when price controls are lifted, P. Raghavendran, president of the company’s refinery business, said in December 2011.
The state-run refiners lost 1.24 trillion rupees on below- cost fuel sales in the nine months ended Dec. 31, according to oil ministry data. This includes 738.2 billion rupees on diesel.
The government said earlier this month that diesel to bulk users such as the railways and provincial bus-transport services will be sold at market rates, increasing prices by 9.25 rupees a liter. This is as an opportunity for Essar to sell more diesel in India, Ghosh said.
“Reliance and Essar need to have the infrastructure in place,” FACTS’ Kumar said. “Companies such as Indian Oil and Hindustan Petroleum have many depots in several cities, and Reliance and Essar need to set up similar facilities to win.”