Fuel retailing: Room for global players

The divestment of BPCL can set off a virtuous cycle, as it would give the buyer 23% of the fuel retailing business in India, a seasoned supply chain, and access to the city gas distribution business

By Miren Lodha 

The recent relaxation of the investment criterion for setting up petrol pumps and the move to privatise the Bharat Petroleum Corporation Ltd (BPCL) offer global oil majors a big opportunity to tap one of the few markets in the world where demand for fuel is growing. The acquirer of BPCL would get access to, and control over, its complete supply chain comprising refineries, retail outlets and storage infrastructure.

Global fuel-retailing giants such as BP Plc and Saudi Aramco have long eyed India but have kept away because earlier rules required them to invest Rs. 2,000 crore in the upstream or downstream hydrocarbon sector before they could enter fuel retailing, and also because of entrenched competition from state-owned oil marketers. Apart from the amendment to the investment criterion, other decisions made over the past five years have also made domestic fuel retailing attractive to private investors. Indeed, the divestment of BPCL can set off a virtuous cycle, as it opens up a public sector-dominated segment by giving the buyer 23% of the fuel retailing business in India, a seasoned supply chain, and access to the city gas distribution business.

But the going has not been easy for private players. After a decade of presence, they have just ~10% market share – even after deregulation of diesel – and despite having the licence to open more outlets. For example, Shell India, a unit of Shell Plc, operates with just 167 retail outlets.

In terms of benefits, the entry of global majors would have a three-fold impact. The first is that the fuel quality delivery and service standards would improve. Also, their focus would be on offering better services through technological upgrade, though domestic players have started to catch up in the past four-five years. Secondly, just as it is in the US and the UK, players may focus on innovative models to tap revenues from sources other than fuel – such as by tying up with malls and retail chains – so as to reduce upfront investments. Thirdly, the amended retail fuel regulation allows marketers to sell alternative fuels, too, and also provide electric charging points. That would help global majors offer one-stop fuel solutions.

On the flip side, in the absence of adequate refining infrastructure, new entrants would be dependent on fuel imports, though their global reach would help them procure petroleum products at competitive rates. As for tying up with domestic refiners, it would depend on excess volume available with refiners, and would come at a higher cost. New entrants would also have to invest in depot, storage and retail infrastructure – or depend on the facilities of incumbents, which would make them uncompetitive.

All this would come at a time when growth in retail fuel demand is expected to moderate to 4.3-4.8% by fiscal 2024 compared with ~6% in the past five years. Conventional fuels are expected to lose share to CNG as well as electric vehicles in the medium-to-long term. And because growth is moderating, expansion of the retail network would yield relatively low returns. Currently, the national average throughput at retail outlets is ~160 kilo litre per month (KLPM). CRISIL Research estimates that a fuel outlet needs at least 130-140 KLPM to break even. So expanding the outlet network amid slowing demand would put pressure on profitability.

Regulations also say oil marketers must open 5% of their outlets in remote areas within 7 years of launch or pay a penalty. But remote outlets typically have low throughput volume (less than 100 KLPM) and require sizeable supply chain investments, which can impact margins. Therefore, tying up with incumbents or acquiring a well-networked domestic rival makes sense – which buttresses the case for BPCL’s acquisition.

While facilitating investments is the right step, slowing fuel demand, the slow shift to alternative fuels, and increasing competition mean business growth would only be gradual and market share would remain small for a while. CRISIL Research expects the overall share of incumbents and new private players (excluding BPCL) to not increase significantly in the next four-five years from the ~10% seen in fiscal 2019. Therefore, in the near to medium term, the entry of new players is unlikely to have a material impact on the incumbents.

(The writer is Director, CRISIL Research)