Diesel prices are expected to get deregulated by Diwali this year. Considering this, Mukesh Ambani-led Reliance Industries Limited (RIL) along with Ruia’s Essar Oil is set to resume their petro-retail operations.
RIL had over 14% of the market share in diesel sales within the first few years of starting its petro-retailing operations.However, it was forced to shut down its pumps in 2008due to the differential between diesel prices offered by private retailers and State-owned Oil Marketing Companies (OMCs). Recently, a source revealed that RIL will be re-opening about 1,100 pumps and then setting up new ones after the diesel prices are completely de-regulated.
Reduced Price Differentials
Since the start of August 2014, the differential between the market and sale price of diesel has reduced to Rs. 1.33 per liter. This is due to the falling crude oil prices, the appreciating Indian rupee as well as the monthly hike of 50 paisa in diesel prices over the past 18 months. Since January 2013, the rates have cumulatively gone up by Rs. 11.24 per liter through 18 installments since the former UPA government took the decision of imposing smaller monthly hikes. The idea was to continue raising diesel prices in small amounts till the losses made due to government subsidies were entirely eliminated. This strategy resulted in trimming the losses to less than Rs. 3 per liter in May 2013, until the significant fall in the rupee value.
Importance of Market Pricing for Diesel
Market pricing of diesel is critical for the viability of the petro-retail business since it accounts for as much as 44% of the total consumption of all petroleum products in India. It is estimated that diesel contributes to about 80% to 90% of sales in fuel pumps at highways across India. Also, the sale of diesel accounts for nearly 50% of the sales at fuel stations nation-wide. Within a span of ten years, diesel consumption has gone up by 32.52 million tons.
How Essar Oil Plans to Capitalize on the De-regulation
Essar Oil plans to increase the number of its retail outlets from the existing 1,400 to 3,000 over the next 3 years. Essar is already working on over 300 new pumps that are in various stages of commissioning. They are already working towards restarting their diesel sales phase-wise. This move is with an aim to capitalize on the de-regulation of diesel sales.
Overall Industry Reaction
Shell India is taking a more conservative approach by keeping a close watch on the entire de-regulation process. 33% of the 45,000 petrol pumps in India are owned by the Indian Oil Corporation. Fearing strong competition by private players after the de-regulation, OMCs such as this are working towards designing an aggressive plan to roll out 16,000 new retail outlets over the coming years.