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Will this make oil retailers efficient?
Wed, 1 Feb Pre-Open

The oil marketing companies (OMCs) have had a difficult year indeed in FY12. First, it was the supply crisis. And then, the boiling crude prices and devaluation of rupee have made it really tough for these companies to continue a profitable existence with the existing practices. The regulation on pricing (barring petrol) and a substantial dependence on imports do not leave much room for these companies to manage costs.

However, desperate times call for desperate measures. To minimize the extent of damage, the state run OMCs are now planning to streamline the logistics part in the oil and gas business. Until now, each company has its own infrastructure namely depots, terminals and bottling plants. However, to cut the costs in a challenging business environment, the management of the companies are now mulling over outsourcing the building and maintenance of logistics infrastructure and adopting a common user facility approach. This is because it makes sense for the companies to own and operate their own infrastructure only at places where large operations are present. However, each of the companies in some places operate at a scale that doesn't justify setting up such infrastructure and this is where the new approach will help. The companies in the latter case will have the option to jointly use the facility (now set up and managed by the third party) in lieu of certain payment.

While the idea sounds interesting, we believe it is in the nascent stage as of now and it needs to pass a lot of operational and technical feasibility checks before the resources are strategically shared. If executed well in time, the proposal can decapitalize the balance sheets and can improve the operational efficiency by substituting a lot of fixed costs with the variable ones. As deregulation remains a mirage, it's time that oil companies look for other ways to improve up their efficiency and profitability.

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