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The oil and gas industry has already taken its first steps towards a major retail reform through deregulation of the petro -marketing business. With the retail reform, state owned oil majors are plunging into the marketing business with renewed vitality and partnering with private partners to upgrade their facade design and service at their petrol kiosks to provide a new retailing experience to their customers.
This changing retail landscape leads to new challenges for petroleum products retailing (traditional as well as fuels like CNG and PNG) including opportunities in non-fuel activities.
There has been a growing concern for availability of primary commercial energy to meet the country's growth imperatives. Our economy is growing at a brisk rate of around 9% and is projected to become the 2nd largest economy of the world by 2050 .Such growth requires a corresponding increase in the sources of energy as well as in supply infrastructure as gas retailing. Under these circumstances, the requirement of adequate and reliable energy supply at economic prices for optimal and inclusive growth of the country is a prime concern today.
To develop and operate cost efficient and effective retail market arrangements, which are fair and equitable, to facilitate competition in the gas retail market.
Maintaining relationship between gas shipper and gas supplier.
Growing concern of Gas as a potential source of clean and efficient energy supply.
Service station and convenience retailing.
THE INDIAN PETROLEUM SECTOR - AN OVERVIEW OIL AND natural gas sector
The oil industry can be divided into three major components: upstream, midstream and downstream. The upstream industry includes exploration and production activities, hence is also referred as the exploration and production (E&P) sector. The midstream industry processes, stores, markets and transports commodities including crude oil, natural gas, natural gas liquids (NGLs) like ethane propane and butane and sulphur. The downstream industry includes oil refineries, petrochemical plants, petroleum products distributors, retail outlets and natural gas distribution companies. The downstream industry provides consumers thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane. Both internationally and within India the oil and gas sector is characterized by existence of "integrated" companies, which are present in all these three sectors.
The flow chart below shows oil value chain depicting the entire process under which both upstream and downstream segments are covered. To start with, crude oil is explored and produced (Upstream) and then transformed into various petroleum products with different end uses in refineries and finally marketed to retail customers (Downstream). Except Aviation Turbine Fuel (ATF) and Liquefied Petroleum gas (LPG), all the end products are sent to intermediate storage plants through terminal/depots and finally to retail customers. As regards ATF it is distributed directly to the Airfields or Air stations and refined LPG is dispatched to LPG storage/bottling plants for liquefaction and marketing to retail customers. Pipelines are mostly used to transfer the petroleum products and by products. For onshore fields, coastal tankers are used.
Source: India Energy Portal
Oil Value Chain
The demand for petroleum products has been constantly and steadily increasing in India. It has grown at a CAGR of ~2.8% over last five years. The industry is expected to grow faster in the future on account of increased economic activity. In terms of demand mix, HSD and naphtha constitute more than 50% of the total demand (by volume). Going forward, LPG, MS, and HSD are expected to be the major demand drivers.
Refining capacity depends on the technology used in refineries, capable of processing crude production into clean fuels. In the recent age of decreasing oil production refining capacity have to have well supportive technology, which meet increasingly more stringent environmental Standards. With the increase in global oil demand and stagnant reserve, refining capacity deserves new capacity addition to meet demand. But the graph shows slightly increasing trend of refining capacity till date in last decade. Refinery throuput, as opposed to designed capacity, is computed by dividing the number of refined barrels of oil processed by the actual number of days the refinery was in operation. Refined capacity is lower than refined throuput in the graph below implying under-utilization of capability of processing crude in the existing refineries and lack of up-gradation. There are 18 refineries operating in the country, 17 in the Public Sector and one in the Private Sector, with a total installed capacity of 127.37 million metric tones per annum (MMTPA).
The Indian Oil and Gas sector is one of the six core industries in India and has very significant forward linkages with the entire economy. The oil & gas sector meets more than two third of the total primary energy needs in the country. The sector has been instrumental in putting India on the world map. At present India is the sixth largest crude oil consumer in the world and the ninth largest crude oil importer. The country is also increasing its share in the global refining market. At present Indian refining sector is the sixth largest in the world. This position is expected to be strengthened with plans of Reliance Petroleum Limited to commission another refinery with a capacity of 29 MTPA next to its 33 MTPA refinery at Jamnagar, Gujarat. As a result of this the Reliance refinery would be world's largest single place refinery.
EMERGING TRENDS IN THE FUEL RETAILING SECTOR
A lot of changes are coming to Indian petrol marketing, stepping into broader retail liberalization. Along with PSUs (IOCL, IBP, BPCL and HPCL), although Reliance is India's biggest homegrown private-sector player, this incipient retail revolution extends to foreign multinationals, which will get to sell directly to Indians for the first time. The wheel has turned full circle since India nationalized subsidiaries of Shell (now Bharat Petroleum) and US Esso (now Hindustan Petroleum) in 1974, turning petroleum into a state affair. Shell, Reliance and another private domestic concern, Essar Oil, are concentrating on highways where 330,000 truckers guzzle $10 billion worth of diesel every year as the cities are crowded by the State oil companies.
The new entrants are offering choices to Indian motorists. Most pumps have been isolated entities, selling a cocktail of kerosene, a highly subsidized product, and gasoline. Today there are pumps every few kilometers. Tired truckers, who earlier curled up in their vehicles for a nap and urinated by the roadside, now use motels, restrooms and telephones offered by Reliance's new pumps. And urban Indians, who until recently drove outdated cars and relied on word of mouth to find a clean pump, now drive large Fords and Hondas and demand better fuel and service.
Competition is forcing Indian Oil, Bharat Petroleum and Hindustan Petroleum, which together run more than 20,000 outlets nationwide, to clean up their acts with various anti adulteration steps. The highway-building program should induce big increases in Indian oil consumption, currently only a tenth that of the U.S. Only 7 in every 1,000 Indians own a car, as compared with 12 in neighboring Pakistan. Surely $50-a-barrel oil will slow things in a largely poor country like India, but under normal circumstances the gap with the West will close.
India requires an investment of at least $450 million in the petroleum sector to gain retail rights. And it is tough to make your board understand why a bureaucrat or a minister sitting in New Delhi should fix the price of your gasoline and diesel when you have put that kind of money into the country. India deregulated the oil sector in 2002, but, as with many things in this country, the gesture was purely symbolic. India's foray into freer petroleum retail is a teaser to throwing open an estimated $200 billion broader retail market (just under Wal-Mart's total sales) to foreign direct investment. Supermarkets and department stores make up only 2% of this market, with the rest coming from 12 million mom-and-pop stores, according to a Jardine Matheson report.
Name of the company
Number of retail outlets
IOCL (with IBP)
Challenges faced by oil marketing companies:
The last few years have seen several developments in Indian petroleum sector that continues to make a transition from a fully controlled industry to one that is driven entirely by market forces. However, the highly sensitive nature of the industry and the potential impact of a fully decontrolled price regime on the various stakeholders have resulted in a situation where the industry is buffeted by a host of conflicting forces. For instance, while the refining margins remain buoyant, fetching large profits for stand-alone refineries spiraling crude prices and inability of OMC'S to increase the retail prices in proportion to the rise in crude prices and the inability of OMC's to increase retail prices in proportion to the rise in crude price simply that the marketing sides of the business have started incurring large losses.
Growing competition in retail markets has prompted the OMC's to aggressively expand their retail networks. While this strategy has acted as a protective factor against competitive pressures, it also has resulted in a sharp decline in the per pump throughput. The latter is a key factor determining the viability of any retail outlet, given the low margins (gross margin of around 1.75) in the automobile fuel dispensing business.
There has been a growing concern for availability of primary commercial energy to meet the country's growth imperatives. Our economy is growing at a brisk rate of around 9% and is projected to become the 2nd largest economy of the world by 2050 .Such growth requires a corresponding increase in the sources of energy as well as in supply infrastructure. Under these circumstances, the requirement of adequate and reliable energy supply at economic prices for optimal and inclusive growth of the country is a prime concern today.
It is in this context that the role of natural gas as a potential source of clean and efficient energy supply becomes important parts of the country and ongoing exploration activities; natural gas is poised to play an important role in the development of our economy.
Natural gas marketing is a relatively new addition to the natural gas industry, beginning in the mid-1980. Prior to the deregulation of the natural gas commodity market and the introduction of open access for everyone to natural gas pipelines, there was no role for natural gas marketers. Producers sold to pipelines, who sold to local distribution companies and other large volume natural gas users. Local distribution companies sold the natural gas purchased from the pipelines to retail end users, including commercial and residential customers. Price regulation at all levels of this supply chain left no place for others to buy and sell natural gas. However, with the newly accessible competitive markets introduced gradually over the past fifteen years, natural gas marketing has become an integral component of the natural gas industry. In fact, the first marketers were a direct result of interstate pipelines attempting to recoup losses associated with long term contracts entered into as a result of the oversupply problems of the early 1980s.
Natural gas marketing may be defined as the selling of natural gas. In even looser terms, marketing can be referred to as the process of coordinating, at various levels, the business of bringing natural gas from the wellhead to end-users. The role of natural gas marketers is quite complex, and does not fit exactly into any one spot in the natural gas supply chain. Marketers may be affiliates of producers, pipelines, and local utilities, or may be separate business entities unaffiliated with any other players in the natural gas industry. Marketers, in whatever form, find buyers for natural gas, ensure secure supplies of natural gas in the market, and provide a pathway for natural gas to reach the end-user. It is natural gas marketers that ensure a liquid, transparent market exists for natural gas. Marketing natural gas can include all of the intermediate steps that a particular purchase requires; including arranging transportation, storage, accounting, and basically any other step required to facilitate the sale of natural gas.
Essentially, marketers are primarily concerned with selling natural gas, either to resellers (other marketers and distribution companies), or end users. On average, most natural gas can have three to four separate owners before it actually reaches the end-user. In addition to the buying and selling of natural gas, marketer's uses their expertise in financial instruments and markets to both reduce their exposure to risks inherent to commodities, and earn money through speculating as to future market movements.
THE PASTâ€¦â€¦â€¦. AND THE PRESENT (A Pictorial View)
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The emergence of retailing in India has more to do with the increasing purchasing power of buyers, especially post- liberalization, increase in product variety, and the increasing economies of scale, with the aid of modern supply and distribution management solutions.
Forecourt retailing is yet to emerge in a big way in India. But with renewed thrust from the oil companies, the concept is poised for the next stage of evolution. The concept of forecourt retailing at petrol stations is not new. It began in the 1980s when British Petroleum launched its first convenience store. In India, where consumer interface was recognized as a key factor, the concept was taken up in the late 1990s by Indian Oil Corporation, which started its multi-purpose distribution centers at petrol pumps in semi-urban and rural areas. The concept has been in vogue ever since. But recently it shot into limelight with oil companies trying to milk this revenue stream.
The oil marketing companies need to clearly identify customer needs and establish a strong corporate brand targeting select customer bases. The companies need to drive product and service offerings at retail outlets based on identified customer needs. They should develop cost-effective retail outlets; upgrade existing assets for better throughput and customer service. They should orient their distribution pattern and logistics in tune with demand in target markets and develop superior franchisee selection and training systems along with appropriate risk-reward mechanisms to drive performance.
In this respect, the oil companies have been coming up continuously with various initiatives to differentiate themselves from other competitors and attract customers. They have come up with various loyalty programs, cash card payment solutions, convenience stores, ancillary services, food outlets, various other value added service at the retail outlets to give the customers value for their money. Although the above matter to a large extent in bringing people to a retail outlet, the main drivers include convenient location, branded fuels and assurance of quality and quantity. Thus the companies should look for network expansion, supply chain optimization, steps towards anti adulteration measures and aggressive branding strategies etc. to give the consumers the best they can.
Oil companies have made sporadic attempts at exploring non fuel retail(NFR) opportunities in India - Car Wash, ATMs, Co Branded Credit Cards, Cyber Cafes, Convenience Stores, Food Outlets, etc. Though one-off success stories have been reported no cohesive strategy has emerged as yet on the NFR front. With the third largest distribution network (after post offices and FMCG outlets) there is a lot of untapped potential left for exploring in this arena.
Moreover, Gas Retailers can take British Gas as an example of effective Gas retailing, the methods they have adopted, such as convenience to customer of paying bills online, the home care scheme; with one call customers can update each and every one of their British Gas accounts, from gas to burglar alarm support.
"It's the customer who will emerge as the winner. The company who identifies its customers and his needs and provides satisfactory services will emerge as the leader"