Oil marketing has so far been the forte of the PSUs such as IOC, BPCL, HPCL and IBP. Now, with the opening up of the downstream segment (that includes marketing of petroleum products and LPG) for the private and foreign players in the energy sector, competition is likely to reach enormous proportions with the private sector giant Reliance going all out selling its petroleum products from the Jamnagar refinery.
It should be noted that hitherto, Reliance was selling its produce in the domestic market only to oil PSUs, as it did not have a marketing presence. However, the equations have now changed and Reliance is launching an aggressive drive to set up 1,500 retail outlets by the end of 2005.
What are the implications of the new players coming into the retail segment on existing companies like BPCL, HPCL and IOC?
Although the APM (administered price mechanism) was dismantled in 2002, the Government still imposes its control on oil PSUs as far as pricing of petroleum products are concerned (petrol, diesel, LPG and kerosene). This is very much evident from the fact that although crude price are reaching new highs, oil companies have abstained from increasing the prices due to political considerations. Even under normal circumstances, post-APM dismantling, prices were fixed every fortnight after a joint meeting among the PSUs. If this current form is phased out, we expect PSU majors to have some kind of pricing power.
Recently, BPCL announced a cut in its offtake of petroleum products from Reliance's Jamnagar refinery. The company plans to offtake 1.7 MT (million tonnes) as compared to 3.5 MT last year.
Other PSUs are likely to follow suit. One of the reasons is the fact that as per the government notification, oil-marketing PSUs need to give priority to PSU refineries for products offtake. As a result, Reliance's sales to the PSUs shall drop to around 4.3 MT in FY05 from the current levels of 11.3 MT. This is largely due to the fact that the oil PSUs is ramping up capacity indigenously (IOC by 6 MT and BPCL by 3 MT).
The drop in demand for petro-products by public sector retailers will mean Reliance will either have to export the products or adopt an aggressive marketing strategy in the domestic markets. Reliance is currently planning to enter the Eastern region, where IOC has a strong market share of 75%. Reliance plans to ship upto 25,000 tonnes of high-speed diesel (HSD) for bulk sales to small and medium industries. This move shall prove to be a direct threat to IOC, as Reliance need not keep the prices higher like in the case of oil PSUs to cross-subsidise liquefied petroleum gas (LPG) and Kerosene. This just seems to be the tip of the iceberg, with the retail competition likely to intensify across the sector, once Shell comes in with its natural gas terminal at Hazira. So, PSUs could be at a disadvantage.
Currently, Reliance exports 8 MT to 9 MT of petroleum products, which is likely to rise, given the fact that oil PSUs have reduced their offtake and Reliance's retail network is yet not in place. However, expanding exports may not be a viable option, as the company shall feel pressure on margins (it is estimated there is a price difference of Rs 1,200/tonne to Rs 1,500/tonne between international and domestic prices).
As per recent developments, the oil PSUs are planning to enter into an informal 'price-discipline' agreement with Reliance to ensure that petroleum product prices move uniformly. Further, the oil PSUs are now into discussions relating to the quantity of offtake from Reliance and pricing. While we believe that competition is likely to increase in the retail side over the next five years, the likes of BPCL and HPCL have been proactive enough to launch new products. Besides, considering the scale of operations of BPCL, HPCL and IOC, it will be sometime before the likes of Reliance and Shell poses a substantial threat to PSUs.
While much of the focus seem to be on the supply side, the demand side prospects looks challenging. Diesel and naphtha are more likely to lose out to compressed natural gas and natural gas over the long term. This could impact growth in revenues for oil PSUs in general in the medium-term. If demand fails to match the supply side, there will be cut throat competition in the retail side of the business.
Overall, there are challenging times ahead for oil companies in general.