Petrol stations cautiously eye Indian boost

All along India’s highway network, more than 700 deserted Reliance Industries petrol pumps stand as silent testimony to the ills of the country’s energy sector, distorted by huge subsidies that shield Indian consumers from high global oil prices.

The pumps were shuttered five years ago, when surging global oil prices made it a mug’s game for the three private players – Reliance, Essar, and Royal Dutch Shell – to try to compete with state-owned Hindustan Petroleum, Indian Oil, and Bharat Petroleum, which were selling fuel at highly subsidised, government-mandated prices.

As it grapples with a yawning fiscal deficit, New Delhi has begun chipping away at its huge oil subsidy burden. The Congress-led government last week ended state controls over petrol prices, which promptly rose over 7 per cent. It also pledged to gradually free the price of diesel, which accounts for more than 80 per cent of India’s automotive fuel use, and imposed immediate 5 per cent increases.

Both private and public sector oil companies – and powerful Indian industry groups – have hailed the move as a welcome signal of New Delhi’s ability to undertake tough reforms to the crucial energy sector.

But analysts say that the real test of India’s seriousness will be the pace at which it liberalises more politically sensitive diesel prices – and what happens when global oil prices rise again. S. Sundareshan, the oil secretary, has already said that the government reserved the right to intervene again if prices surged.

“The litmus test for the arrangement is when oil prices do spike, what does the government do?” says Jahangir Aziz, chief economist at JPMorgan.

India, which imports about 70 per cent of its oil, tried to liberalise fuel prices in 2002, with a plan to gradually move to market levels. But when crude prices soared, the Congress-led coalition ordered state-owned oil companies to hold pump prices down.

Though the state-controlled groups were partially compensated for their losses, they still ran into financial difficulties. Private companies received no compensation, however, and could not compete, forcing them to mothball many of their stations.

Crisil, the Indian rating agency, said the move last Friday to deregulate petrol prices would help state-owned oil marketing companies such as Indian Oil to improve their cash flow and reduce dependence on expensive external borrowings. Shares in state-controlled oil companies, which said the moves would help them revive expansion plans, have bounced.

Meanwhile, both Essar, which says it reopened all of its 1,350 retail fuel outlets as global oil prices fell over the past two years, and Shell’s Indian subsidiary say they expect higher sales as petrol prices at state-pumps and privately retailers levels out.

“The three private players are going to get a big boost from this,” says Vikram Singh Mehta, chairman of Shell India, which runs 70 fuel retail outlets, mostly in urban areas where petrol use is higher. “It levels the playing field.”

Naresh Nayyar, the chief executive of Essar Energy, says he is considering an expansion of its fuel retail network. “As the largest private sector fuel retailer in India, we are well placed to capture additional sales for fuel and non-fuel items.”

Yet analysts say companies will probably remain cautious on any expansion of their retail networks, given New Delhi’s record of interference. Much will also depend on what happens to diesel pricing, as the country’s dominant fuel.

So far, the government has given no details about how or when it might move to full deregulation.

That’s hardly encouraging for Reliance. Its deserted petrol stations are primarily located along the major highways, where diesel – used by India’s huge long-distance trucking fleet – is the main fuel in demand.