Professional Documents
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MDSO831D Petro Retailing Business - Word
MDSO831D Petro Retailing Business - Word
MDSO831D Petro Retailing Business - Word
Course Design
Advisory Council
Chairman
Dr Parag Diwan
Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO
Dr S R Das
Dr Sanjay Mittal Prof V K Nangia
VP – Academic Affairs
Professor – IIT Kanpur IIT Roorkee
Print Production
Author
C Bhattacharya
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
Contents
Block-I
Block-II
Block-III
Block-IV
Block-V
Glossary.......................................................................................................................................................... 255
UNIT 1: Introduction to Petro Industry
1
F Notes
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BLOCK-I
Detailed2 Contents Petro Retailing Business
Notes F
UNIT___________________
1: INTRODUCTION TO PETRO INDUSTRY
UNIT 3: CUSTOMER RELATIONSHIP IN PETRO
Introduction SECTOR
___________________
Petroleum Industry Structure Introduction
___________________
Geological System of India Customer Relationship in Indian Petroleum Sector
___________________
Exploration and Production Activities in Initiatives Taken by Indian Oil Corporation Limited
Petro Industry to Improve CRM
___________________
Refining and Marketing Activities in Petro Industry CRM by Bharat Petroleum Corporation Limited
___________________
UNIT 2: THE CUSTOMER UNIT 4: PRODUCTION & STRATEGY IN PETRO
___________________ INDUSTRY
Introduction
___________________ Introduction
People in Petro Industry
___________________ Petroleum Production – Highly Regulated Industry
Customers’ Categorization and Recognition
Exploration and Production
___________________
New Competitors
Crude Oil Reserves
Customer Loyalty Programmes
Strategy of 11th Plan (2007–12)
3
Unit 1 Notes
Introduction
The petroleum industry involves the refining of crude petroleum
and the processing of natural gas into a multitude of products, as
well as the distribution and marketing of petroleum-derived
products. The primary pollutant emitted is volatile organic
compounds arising from leakage, venting, and evaporation of the
raw materials and finished products. Significant amounts of
sulphur oxides, hydrogen sulphide, particulate matter, and a
number of toxic species can also be generated from operations
specific to this industry. In addition, a wide variety of fuel
combustion devices emits all of the criteria pollutants and a
number of toxic species.
The search for oil in the country began way back in 1866 when
Mr Goodenough of McKillop Stewart Company drilled a well near
Jaypore in upper Assam and struck oil. However, he could not
commercially exploit this discovery. In 1899, the Assam Railway
and Trading Company (ARTC), which had obtained exploration
rights in the same area, struck oil at Digboi making the beginning
of oil production in India. Subsequently, the Assam oil company
(a wholly owned company of ARTC) sold its rights to the Burmah
Oil Company. But the exploration and production activities
confined to the North East until the middle of the 20th century.
Exploration for oil in the upper Assam shelf was recommenced
after the Second World War and large-size oilfields were
discovered at Nahorkatiya and Moran in 1953 and 1956,
respectively. At the same time, the Government sought advice, aid
Petro Retailing Business
___________________ In August 1956, the Oil and Natural Gas Commission (ONGC) was
set up and was assigned the task of planning, promoting and
implementing programmes for exploration and exploitation of
petroleum resources throughout the country.
In 1959, Burmah Oil Company and the Government of India
formed a joint sector company, Oil India Ltd. In 1981, it became a
wholly owned public sector enterprise. Indian Refineries Limited
and Indian Oil Company were set up in 1958 and 1959 to take up
refining of oil and marketing of petroleum products, respectively.
These two companies were later merged to form the Indian Oil
Corporation (IOC).
5
a subsidiary of BPCL – Chennai Petroleum Corporation Ltd.,
(CPCL) and Bongaingaon Refineries and Petrochemicals Ltd., Notes
Activity
(BRPL) both subsidiaries of IOC do not have any marketing rights Writeanarticleonthe geological system of India.
___________________
and their products are marketed by marketing companies.
___________________
Mangalore Refineries and Petrochemicals Ltd., (MRPL), the first
joint sector refinery of the Aditya Birla Group and HPCL – now a
subsidiary of ONGC.
6
Check Your Progress
Notes
Activity
n assignment on the exploration Fillindustry.
and production activities in petro
___________________ in the blanks:
7
discoveries. They had started exploration in Arunachal Pradesh Notes
and stuck oil in the Kharsand areas. During the decade (1967–77),
the production of crude oil increased from 5.66 MTPA to 8.9 MTPA.
Next decade (1977–87) began on a note of deep concern due to the
escalating import bill. The demand for petroleum products was
rising and international prices were also high. The augmentation
of indigenous resources became the key demand of strategy. Both
ONGC and OIL took up the challenge and formulated ambitious
exploration programmes. The exploratory efforts yielded results in
the form of discoveries of oil and gas in a number of structures in
the Mumbai offshore areas. Exploration was extended to other
offshore areas like the East Coast by ONGC and in the offshore of
the Andamans by the OIL with varying degrees of success.
Both the ONGC and the OIL continued their efforts to make the
discoveries, though of small size. OIL discovered a few other small
pools in the nearby areas, which were taken up for development. In
its newly acquired areas in Rajasthan, OIL has completed its first
phase of seismic survey. It is to start exploratory drilling in this
basin.
In the year 2009–10, the production of Petroleum Products in the
country was 149.65 MTs as against 150.52 MTs during 2008–09, a
decline of about 0.6%. Out of the total domestic production of
149.65 MTs of all types of petroleum products, high-speed diesel oil
accounted for the maximum share (41%), followed by Fuel Oil
(12%), Motor Gasoline (11%), Naphtha (10%), Kerosene (6%) and
Aviation Turbine Fuel (5%). During the current financial year (2010–
11), production of crude oil is estimated at 37.96 million metric
tonne (MMT), which is about 12.67 per cent higher than the crude oil
production of 33.69 MMT during 2009–10. The projected production
for natural gas, including coal bed methane (CBM), for 2010–11 is
53.59 billion cubic metres (BCM) which is 12.80 per cent higher
than the production of 47.51 BCM in 2009–10. The increase in
natural gas production is primarily from the KG deep-water block.
The upstream oil and gas sector is characterised by high
commercial risks, upfront financing exposure and commitments
necessitating high premium on stable relationships with
Government and partners.
Petro Retailing Business
9
Increase the number of players in exploration and production Notes
sector.
According to an estimate, about US$60 billion will be required in
exploration, drilling and development activities over the next 10
years. The Indian acreages have the capacity of absorbing this
order of investment and the government is encouraging private
sector participation with attractive fiscal and contract terms in the
exploration and production sectors. The Government of India has
also offered private companies the opportunity to participate in the
development of discovered medium and small-sized fields. The
estimated oil production from these fields is over 360 million
barrels and gas production is about 50 billion cubic metres.
The most visible change in the environment of the oil industry is
happening in the downstream public sector companies. The
Indian Oil Corporation, Hindustan Petroleum Corporation and
Bharat Petroleum Corporation, which were hitherto engaged only
in refining and marketing, have decided to enter the upstream
activities. These oil companies are also looking for strategic
alliances for exploration and production of oil and gas abroad and
in India.
Presently, there is a need to mobilise huge venture capital (to the
tune of $ 60 billion) which is mostly in the form of risk capital. The
upstream sector has always been a high-risk and high-return
business. So the government is encouraging private capital, both
domestic and foreign, and to this end has started simplifying
procedures and also providing fiscal incentives, which are given in
the New Exploration Licencing Policy.
The government has expressed due concern for:
The need to accelerate the pace of absorption of new cost
effective technology because any increase in recovery level
from existing fields is tantamount to adding new oil fields.
The need to conserve oil and natural gas, petroleum products,
etc., rather than just meeting gap with increase in production
or imports.
With the acceleration of exploration activity in India, increased
opportunities will be available to foreign and domestic companies
in the area of oilfields goods and services. Domestic capability
exists with ONGC and certain other private sector and public
sector companies in India to carry out geophysical surveys,
Petro Retailing Business
Notes
Activity
Present a written draft on the refining and marketing activities of petro ind
___________________
___________________
Contd...
UNIT 1: Introduction to Petro Industry
13
Notes
15
appointed. It was expected that post dismantling of APM, the Notes
marketing companies would be free to price their products and
that prices of automotive fuels would differ from one fuel station to
another. However, the West Asian crisis and the resultant upsurge
in crude oil prices coupled with socio-political compulsions made
the petroleum ministry direct the oil companies not to pass the
surge in fuel prices to customers. Thus, theoretically though the
marketing sector is decontrolled, the Government of India still
plays a dominant role in guiding the prices. Having said that, it is
unrealistic to expect that a country that has been subject to
regulation for decades would suddenly move towards a deregulated
oil industry. The desired free market regime and market
determined pricing of oil products can emerge only in a phased
manner and in the meantime aspects such as cost control, increase
in productivity, strategic disinvestments, etc., should be
concentrated upon.
Summary
The present unit gives explanation of sectors of oil industry. It is
imperative to study the changes and impact of oil-sector reforms on
the growth and restructuring of Indian Oil Companies during the
post-reform period. The Oil Sector has two major activities –
exploration and production of crude oil and gas (E&P) – and is an
upstream activity while refining, distribution and marketing are
classified as downstream activities. In India, the operations of oil
companies are in upstream or downstream or both. The oil
companies can be grouped into Exploration and production,
Refining plus marketing, Pure refining and Pure marketing.
16
Notes Keywords
Hindustan Petroleum Corporation Ltd (HPCL): It is an
Indian state-owned oil and natural gas company based at Mumbai,
Maharashtra.
Indian Oil Corporation Ltd. (IOC): It is an Indian state-owned
oil and gas corporation with its headquarters in New Delhi, India.
New Exploration Licensing Policy (NELP): It was introduced
to boost the production of oil and natural gas and providing level
playing field for both public and private players.
Petroleum Exploration Licence (PEL): It is a title granted by
the NSW Government to individuals and companies who wish to
explore for Petroleum (oil & gas) for period up to five years.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
UNIT 1: Introduction to Petro Industry
17
Web Readings Notes
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
18
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 2: The Customer
19
Unit 2 Notes
The Customer
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
The petroleum retailing industry in Asia and Middle East faces
noteworthy challenges. With little product differentiation, lack of
customer loyalty, coupled with strong competition, due to
deregulation, as in India, the different players will try to gain
share from each other. This will exert downward pressure on
margins and force players to implement new and innovative
strategies.
India has deregulated the pricing mechanism in favour of retail
petroleum, facilitating new players to enter the market, which was
once a fiefdom of the public sector. The entrance of new players
like Reliance, will grow the number of stations from existing
19,000 to over 23,000–25,000 in subsequent 4–5 years. This will
lessen the average throughput per station, and total fuel volumes
per player. With market decided pricing mechanism, prices will
have to be lowered, therefore reducing margins from fuel products.
In growth markets, the chief imperative should be to increase
profitable revenues and market share growth. The petroleum
retailers will require to develop differentiated value propositions,
to perk up revenues and their bottom lines; by adopting a customer
focussed approach and build strong brand equity. To make
revenues and margins, the retailers will have to attract new
customers or augment share of their existing customers’ wallet.
The latter can be achieved by offering non-fuel products in addition
to services. Non-fuel products, which offer superior margins
compared to petroleum products, enable companies to sustain
Petro Retailing Business
21
Customers’ Categorization and Recognition
Notes
Activity
In developing products and services, the significant aspectWrite
is anto article on the customer’s categorization and recognition.
___________________
understand your customer. Segmentation is a dominant tool to
help marketers identify the requirements of the customers. ___________________
The top three segments as being the most advantageous and oil
companies developed its products and services to cater to the
target customers’ requirements. An implementation to understand
the customer segments can go a long way for local petroleum
retailers to recognize the target segments and developing the
appropriate strategy.
New Competitors
The petroleum retailing market has not been entirely deregulated,
the increased competition among the existing players is already
evident. The same is being evident in the form of new products,
upgrading in ambience and service levels, investments in systems
and emphasis on non-fuel sales. Roll out of noteworthy networks
by new players like Essar, Reliance and Shell would provide a
supplementary dimension to the competition.
What does the customer want? “Unadulterated fuel of the accurate
quantity procured at least cost in reasonable period of time” is the
usual current customer requirement from the retail outlet across
the Indian market. The existing players are investing significantly
in training and equipment and “unadulterated fuel.” “Exact
quantity,” cost competitiveness and services would be the
significant areas of competition.
With predictable new competition, site security is the key. In India,
with the development of roads network, the existing players
reserve the key sites, to beat future competition. On the other
hand, development of the sites is undertaken once the road
becomes operational. The challenge is to apply a scientific site
selection model, to make certain that the site is profitable once it is
operational.
UNIT 2: The Customer
23
Site Rationalisation Notes
Site Upgradation
The regional players have realised that having a striking station,
with welcoming staff, and offering Retail customer segmentation in
series of non-fuel products and services, is the key to acquire
customers to drive into their station. Depending on the site space
accessibility, the different players in India and have started
renovating their existing sites, to present an international look and
feel. The challenge is to prioritise the sites that necessitate to be
upgraded first and which could start offering higher contribution
because of the change.
Ancillary Services
Convenience Stores
The notion of C-stores though relatively new in India, has got
launched in the UAE for past 3–5 years. Though the annual
average revenue per sq. ft. in UAE is $325 judged against to $550
in the US and $800 in UK. The average value per transaction in
UAE is below $3, compared to $6 in the UK.
Petro Retailing Business
25
Auto Care Services Notes
Auto care services complement the fuel services. These comprise
lube change, car wash, wheel & tyre services, car upholstery
cleaning, minor repair services, etc. All of these add to the
incremental share of the customers’ wallet. The car wash and auto
care average approximately 7% and 4% of the total revenues for
fuel retailers in Japan and US. In the UAE, it is between 1%–2%.
Moreover, the lube to fuel volume ratio in UAE is 0.26%, compared
to 1% internationally. Though, in the UAE it is observed that
where these services are obtainable, their utilisation is high, for
that reason, they should be available at more number of locations.
In India, these services offered at the stations are at a nascent
stage, because of the customers’ unwillingness to pay the price.
Small garage operators are inclined to offer these services at a
much lower price. The challenge is to recognize the customers’
willingness to pay, and design the service, coupled with correct
communication to promote them.
Ancillary Services
ATMs, laundry facilities, Internet access, mosques (in the Middle
East), etc. catch the customer to drive into the station, and add to
his spending. In UAE, there are also offered car testing,
registrations, and auto insurance facilities, which are licensed by
the authorities.
26 This gives the customer a one-stop-shop for the car’s annual check-
Notes up, and additional formalities, with the comfort of an air-conditioned
Activity
Presentadraftonthe customer loyalty programs.
___________________ facility, in less than 30 minutes judge against to the half-day at
government facilities. Door-to-door service is as well offered,
___________________
which requires even lesser time.
Further ancillary services possibly will be potentially offered to
take in courier services, car rentals, etc., depending on the
customers’ requirements. The initiative is to make the petrol
station into a destination for the customer visit. Petroleum
marketing has a well-built non-fuel element, which can be
leveraged for segregation in a commodity market environment.
27
Summary Notes
Keywords
Ancillary Services: Services that include ATMs, laundry facilities
and Internet access in order to catch the customer to drive into
the station, and add to his spending.
ATMs: ATMs – Automatic Teller Machines of various leading
banks for the convenience of the customer.
Auto Care Services: Services that complement the fuel services
such as car wash, wheel & tyre services, car upholstery cleaning,
minor repair services, etc.
28
Notes Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 3: Customer Relationship in Petro
Sector
29
Unit 3 Notes
Activity
Write an article on the customer relationship in Indian Petroleum Secto
Customer Relationship
___________________
___________________
in Petro Sector
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
In CRM, the alphabet ‘R’ means relationship. However, there is
always an ambiguity to understand the actual meaning of this
relationship. This relationship between supplier and customer is
not a personal relationship or a one-time transaction relationship;
for example buying a refrigerator from a consumer’s outlet would
not be called as a relationship.
Relationship between any two partie s is actually the interaction
or
transaction done between the two over-times or consists of a
continuous series of synergisti c episode of interaction many
a
times. This relationship only exists when the two parties diverge
from a state of autonomy to mutual or interdependent
.
Occasionally having a cup of tea from a café does not mean that
there is a relationship. If the customer returns to the café and
orders the same tea again because he likes the environment and
taste or the method of making tea, more looks like a relationship.
Relationship with customers can change from time to time
because it is evolved under distinguished situations.
30
Prepaid Petrocard
Notes
Activity It is a similar concept
as in a cellular prepaid / postpaid card but
rt on the initiatives taken by Indian Oil Corporation Limited to improve CRM.
___________________ with a functional difference. “The company will provide a Prepaid/
___________________ postpaid Petrocard by which one can fill the tank from any of its
outlet at a discounted constant price for a certain time period (say
___________________
1 month) prevailing during the time period”. This strategy is a
WIN-WIN situation for both Customer and company – the
customer gets a price discount and becomes insulated from
frequent price fluctuations and supplier gets higher volume.
Clubbing Petrol with LPG
To target domestic consumers, a bouquet of Petrol and LPG can be
offered to middle income group consumers. It could be a major
initiative for building brand value and also for brand recall. Major
discount and reward schemes can also be offered for these
customers.
Customer Service
Though many initiatives have been taken in the past, Customer
service and support is one area that still lags behind world
standards. COCO (Company Owned Company Operated)
initiatives could be made as training centres for the workers of
petrol stations. The companies should increase their inspection,
should communicate their standards of operations and come up
with rewards for excellence and penalty for poor performance.
Services
The following facilities are provided by the Bharat Petroleum to
enhance the customers:
Bazaar: Bharat Petroleum has pioneered the concept of
Convenience Stores in the country, called ‘Bazaars’. These Stores
go a long way in meeting customers’ convenience needs on the
road. The fact that these ‘Bazaars’ work late in the night when
most other stores are closed is a significant help. The product mix
extends from light snacks and a can or glass of Pepsi for the
hungry traveller, to breads, milk and personal care products. Some
of the stores even vend frozen foods, greeting cards, music CDs and
gift items.
ATMs in ROs: ATMs – Automatic Teller Machines of various
leading banks have been provided at select Bharat Petroleum
Retail Outlets (Petrol Pumps) for the convenience of the customer.
The convenience of the ATM is that it removes the restriction of
timings of the traditional banking system. In an emergency,
especially at night when the good old bank is closed, the ATMs
become a boon.
With various networks emerging amongst the banks in future, a
cardholder will be able to draw cash from the ATM of any bank.
Bharat Petroleum has started this initiative with two banks,
HDFC Bank and ICICI Bank, both of whom are technology savvy
and customer driven. While the HDFC Bank’s offering is a pure
UNIT 3: Customer Relationship in Petro
Sector
37
ATM, ICICI’s will have an ATM, an Internet Banking facility and Notes
a Telebanking facility. These banks are also interested in
installing these ATMs in the smaller towns apart from the Metros.
Lubricant Top-ups: Also, attendants at Bharat Petroleum petrol
stations gladly carry out lubricant top-ups as per customer
requirements. Do drive into any of Bharat Getting the oil changed
for a vehicle is no longer time-consuming. One can drive into one
of Bharat Petroleum’s modern petrol stations that have the latest
equipment, which just sucks out all the used oil and automatically
fill the engine with fresh Automol Gold Engine oil – All this in just
14 minutes.
Car Wash: With the cars on the road becoming more and more
sophisticated, the customers have also started feeling the need for
better methods of cleaning their cars. Bharat Petroleum is meeting
this requirement of the customers through automatic car washes
at some of its retail outlets.
Air Water and Wash Room: While free air, water and wash room
are mandatory requirements, Bharat Petroleum has extended it
beyond the mandatory need by providing automatic air gauges at
its new generation outlets. In the next phase, you would be using
these auto air gauges even in small towns.
Internet Kiosks: One can drive into some of Bharat Petroleum
Petrol stations and surf the Internet.
Credit Cards: Bharat Petroleum pioneered the concept of co-
branded credit card, the Bharat Bobcard, in association with
Bobcards Limited. The Bharat Bobcard is accepted at all Bharat
Petroleum outlets in major towns. Bharat Petroleum Outlets also
accept all major credit cards, with the customers having the
advantage of getting the transactions processed within a couple of
minutes through an automatic swipe machine, without the hassle
of going through hot lists.
38
Notes Summary
The CRM strategies of IOCL is to continuously provide the best
products and services at the most reasonable cost. The “New Look”
petrol/diesel service stations selectively have Convenience
shopping stores, snap services, quick Lube change, automatic car
wash and multi-product dispensing pumps.
The “In and Out” store at Bharat Petroleum petrol pumps, offers a convenience
errands are aggregated under one roof for the benefit of the
customers.
Keywords
Bazaar: These Stores go a long way in meeting customers’
convenience needs on the road.
Customer Relationship Management (CRM): It is a widely
implemented strategy for managing a company’s interactions with
customers, clients and sales prospects.
Lubricant Top-ups: Attendants at Bharat Petroleum petrol
stations gladly carry out lubricant top-ups as per customer
requirements.
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
40
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 4: Production & Strategy in Petro Industry
41
Unit 4 Notes
Activity
Writeanarticleonthe petroleum production industry.
___________________
Petro Industry
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
India’s energy use is mostly based on fossil fuels. Although the
country has significant coal and hydro resource potential, it is
relatively poor in oil and gas resources. As a result, it has to
depend on imports to meet its energy supplies. The geographical
distribution of available primary commercial energy sources in the
country is quite skewed, with 77 per cent of the hydro potential
located in the northern and north-eastern region of the country.
Similarly, about 70 per cent of the total coal reserves are located in
the eastern region while most of the hydrocarbon reserves lie in
the west. India has to satisfy about 16 per cent of world’s
population. Coal, oil and gas are important sources of energy. The
Reserves/Production (R/P) ratio indicates the length of time the
reserves would last if production is to continue at the current level.
The R/P ratio for natural gas has declined over the years, but is
still higher than that of crude oil, which implies that the
production of natural gas would be higher than at present. For
crude oil, the ratio has remained same over the last few years. The
increase in production of crude oil would come from raising the
rate of accretion.
43
information from the geological history and the nature and Notes
organisational aspects of reservoir. The surveys whether 2D or 3D
can give us the signals of structure containing oil or not. It is the
exploratory drilling, which can ascertain whether the oil is there
or not. The costs involved in exploratory drilling are very high and
also require huge amount of capital. The costs may escalate if
exploratory activities are further stepped up. In this way, it would
put a pressure on the resources of the Oil Company. On the
contrary, if oil is actually found under the identified structure the
whole costs involved in exploration could be capitalised. Otherwise,
in case of dry well the entire costs would be written-off by the
concerned company.
Development Drilling: It is the phase in which oil that has been
explored can be commercially extracted. Development of drilling is
meant for commercial extraction of oil but it is highly capital
intensive and requires a long gestation period. In most Asian
countries, the governments have managed to extract between 80 to
90 per cent of the total revenue in the form of various royalties,
levies, duties and taxes.
Exploration expenses and leasehold costs divided by reserve addition and revisio
45
Crude Oil Reserves
Notes
Activity
The definitions of reserves are given in several reports of the Make a report on the crude oil reserves.
___________________
international oil companies. The definitions given by Mobil
Corporation are technically and practically more useful than any ___________________
other ones. It provides a good framework within which industry
can further evolve a set of “industry accepted practices” for the
understanding of hydrocarbon assets.
Discovered Undiscovered
ProvedProbablePossible P1P2P3
Reserves are quantities of hydrocarbons in known reservoirs that are estimated to be recoverable in future year
Level playing field to public sector and private sector players includingfore
ProvideinfrastructurestatustoE&Pcompaniesand
competitive fiscal terms to attract significant investments in the sector.
Availability of trained manpower and expertise in E&P sector.
47
Make E&P operations compatible with the environment and Notes
reduce discharges and emissions.
Continue to acquire acreages abroad for exploration as well as
production.
Exploration programme has been given in Table 4.1.
49
Summary Notes
Keywords
Crude Oil Reserves: It provides a good framework within which
industry can further evolve a set of “industry accepted practices”
for the understanding of hydrocarbon assets.
Development Drilling: It is the phase in which oil, which has
been explored, can be commercially extracted.
Speculative Potential: Speculative potential is the quantity of
hydrocarbons located in unproved traps, in undrilled provinces or
deeper reservoirs underlying productive fields where geological
conditions are believed to be favourable for the accumulation of
hydrocarbons.
UNIT 4: Production & Strategy in Petro Industry
50
Notes Questions for Discussion
1. Discuss the nature of Indian oil industry.
2. What are the principal activities involved in E&P?
3. Write a note on exploration and development in Ninth Plan.
4. What are the tools of measuring exploration efficiency?
5. Discuss the history of oil exploration in India.
6. Write a note on crude oil reserves in India.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 5: Case Petro Retailing Business
Studies
51
Unit 5 Notes
Case Studies
Objectives
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
Contd...
UNIT 5: Case Studies
53
One of the critical success facto for the store is its merchandize source. They have skilled buyer whoNotes
have the pulse the designs in d
Trent gives utmost importance to the selection of the store site, with five members of the senior management concentrating on the
Demographics of the population
The market segments available
The demand potential of the area
Car ownership of the area
The buying patterns
Lifestyle of potential customers
Cost of buying the property, which incidentally is the biggest expense and therefore, deterrent in the retail business.
Through print ads the company keeps reminding its customers about its future in the grocery business, which helps the share price
Question:
Do a SWOT analysis of the firm, redefine its vision and mission to suit the latest market trends for retail trade. Give your recommen
UNIT 5: Case Studies
54
Notes
Case Study 2: Case at Louis Vuitton
The retail industry is poised to grow as foreign investors show
much interest in the emerging Indian market.
57
a Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
BLOCK-II
Detailed58 Contents Petro Retailing Business
Notes F
UNIT___________________
6: NEW EXPLORATION LICENSING POLICY
UNIT 8: FUEL ADULTERATION
Introduction
___________________ Introduction
Concept of NELP
Committees and Task Forces Constituted in India
___________________
Salient Features of NELP for Checking Fuel Adulteration
___________________
Offering of Blocks under NELP-IX Consumers Front: Anti-adulteration Tips
Demand and Supply of Petroleum Product
___________________ Hindustan Petroleum Corporation Limited
– Quality Management Initiatives
UNIT___________________
7: FUEL QUALITY
UNIT 9: FORECOURT DESIGN AND NETWORK
___________________
Introduction
Introduction
Fuel Industry
___________________
Objective of the Transportation and Logistics
Fuel Quality Problems
___________________ Market Segments and Transportation Legs
Indian Initiatives to Control Fuel Adulteration
___________________ Transportation in Petro Industry – A Multi-modal
View of the Fuel Quality in India Operation
Objectives
After completion of this unit, the students will be aware of the following
topics:
◢ Concept of NELP
◢ Salient Features of NELP
◢ Offering of Blocks under NELP-IX
◢ Demand and Supply of Petroleum Product
Introduction
New Exploration Licensing Policy (NELP) was conceptualised by
the Government of India, during 1997–98 to provide an equal
platform to both Public and Private sector companies in
exploration and production of hydrocarbons with Directorate
General of Hydrocarbons (DGH) as a nodal agency for its
implementation. It was introduced to boost the production of oil
and natural gas and providing level playing field for both public
and private players.
Concept of NELP
The oil industry in India is considered the wheel of the economy
as it is inevitably linked with all others sectors. It is common
knowledge that any hike in prices of petroproducts and petrol has
pushed up the rate of inflation. Oil is important for industry,
infrastructure and the economy as a whole.The growing demand-
supply gap in oil sector has been exerting pressure on the
government to develop the strategies for further exploration in
hydrocarbon sector. Success in oil exploration in our country has
come in different phases. Bombay High was the brilliant discovery
in Western offshore fields but, since then no appreciable results
were found. By and large, exploration has been in the hands of
ONGC and OIL. These two have concentrated their business in areas
of high prospects near producing fields. But, the exploration and
production is a very high risk and capital-intensive business. The
national oil companies do not have sufficient amount of risk
UNIT 6: New Exploration Licensing
Policy
60 capital required to invest in exploration business. It is precisely in
Notes
this perspective that the Government of India has embarked upon
the process of inviting the private investment into the oil sector.
The remarkable development in this context has been the promulgation of New
61
been opened up for exploration. It appears that resources of deep
waters are likely to be several times higher than what was Notes
Activity
anticipated earlier. Along the East Coast alone about 30 new Make a report on the salient features of NELP.
___________________
geological plays/structures have been mapped with limited data
___________________
collected by DGH. Structures mapped fall under large to medium
size category and average size is close to 500 sq. km. Several
structures exhibit direct seismic indicators for the presence of gas
deposits. Latest interpretations carried out by DGH suggest that
some of these prolific oil and gas producing fields are on the west
coast of Africa, deep-water areas of Gabon, Nigeria and Campos
basin in Brazil. Several large international companies have shown
interest in deep water areas surveyed by DGH.
63
The New Exploration Licensing Policy involves:
Notes
Activity
National oil companies to compete with private sector for
Prepare an assignment on offering of blocks under NELP-IX.
licences. ___________________
non-NELP areas.
Incentive for deep water exploration with only half of the royaltypayableint
66
Notes
Global Oil Demand
The economic growth in the major Organisation for Economic
Cooperation and Development (OECD) industrial countries’
economies in Asia (excluding Japan) will be the key factor in
deciding global demand for oil for the next decade. The economies
of the industrialised countries are expanding and the economies
of many developing countries are growing rapidly.
Summary
We have ONGC and OIL as the two giant National Oil Companies
engaged in exploration and production of crude oil and have
predominant share with about 90 per cent and 10 per cent
respectively. Since 1981 – 82, there has been massive increase in
drilling activities in the offshore areas representing a
rationalisation of exploratory activities in line with prognostication
of reserves. But, the current reserve accretion continues to be low
and is a major concern for the Government.
ONGC and OIL were known as good finders. However, as they
faced the challenge of exploring more difficult areas and the deep
water, the technology gap has become critical. According to some
experts this gap between the best globally available technology and
that used by ONGC is serious.
The average recovery factor in India is about 28 per cent of the
initial oil in-place reserves. This is low by international standards.
Improvement in recovery factor would yield additional oil and gas
without any corresponding additionality in the reserves accretion.
Several steps are required to be taken up for enhancing the
reserves accretion.
The demand-supply gap in oil sector has been rising for the last
one or more decades. The demand for petroproducts has been
higher than the crude production. As a result the self-reliance has
declined to 31 per cent. Domestic production has been stagnant.
The exploration and discovery achievements have been slipping in
the last few years. Most production fields are either on the
declining phase or are facing technical problems. ONGC’s onshore
production has remained steady in the last eight years.
68 simplified and more fiscal incentives are given under the NELP.
Notes
The NELP terms are widely regarded as the best in the world for
attracting greater investment in the upstream oil and gas sector.
These terms are beneficial both to the National Oil Companies as
well as to the Private investors. However, earlier rounds of bids
failed in the sense that they were not able to make the activity
commercially as attractive as elsewhere especially for foreign oil
companies. Recent closure of the first round of bids under NELP
has been important due to two reasons. Firstly, it marks the
consolidated entry of the private sector both domestic and foreign
into this area and, secondly, the policy has still a long way to go
before it really becomes attractive for world oil majors to explore
in
India.
Keywords
Conventional: Most oil explored and produced by the world so far
and will be produced over the next 20 years is termed
“conventional” oil, which flows at high rates from giant oilfields.
Non-conventional Oil: It includes heavy oil, tar, sand oil and
shale oil, oil obtained by enhanced recovery.
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
70
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 7: Fuel Quality
71
Unit 7 Notes
Activity
Write an article on the fuel industry in India.
___________________
Fuel Quality ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
◢ Fuel Industry
◢ Fuel Quality Problems
◢ Indian Initiatives to Control Fuel Adulteration
◢ View of the Fuel Quality in India
Introduction
The petrol retail sector can be termed as one of the mainly
organized sectors of the retail industry. In line with the strong
GDP growth, the petroleum sector saw a noteworthy increase in
the consumption of petroleum products, the year on year growth
has resulted in sales of petroleum products rising.
The oil and gas industry is predictable at US $ 110 billion, which is
14% of India’s GDP. This sector is about 45 per cent of the total
energy consumption of the nation, which is the fifth largest energy
consumer in the world. Petroleum exports have also emerged as
the single largest foreign exchange earner, and increasing at a
faster rate.
Fuel Industry
Key players in this sector comprise Bharat Petroleum Corporation
Limited (BPCL), Hindustan Petroleum Corporation Limited
(HPCL), Indian Oil Corporation (IOC) and Oil & Natural Gas
Commission Limited (ONGC). Oil retailers are as well looking at
revenues from non-fuel retailing, such as FMCG products and
grocery sales, at their outlets. One more public sector company,
Mangalore Refinery and Petrochemicals (MRPL) is planning to
open around 15 outlets over the next two months. Numaligarh
Refinery (NRL), a subsidiary of BPCL, has 74 retail outlets across
the country and plans to open at least 100 more, both in the North
East and North India.
Petro Retailing Business
72
Notes
The country has 36,936 petrol pumps. Of the overall retail outlets, state run Indian Oil, Bharat Petroleum an
73
Check Your Progress
Notes
Activity
Fill in the blanks: Make a slideshow on the fuel quality problems.
___________________
1. ………………-based convenience stores have developed
___________________
into large businesses with corporations.
2. Reliance Industries outlets were selling approximately
……………… times the average sales of PSU outlets.
One will need an accurate fuel sample from the vehicle he/she
want to test. Even though there are several safe ways to remove
fuel from tank, it is being recommended that one may pick up a
special fuel siphon hose from the auto parts store.
One will also need a glass cylinder that is graduated in millilitres.
In order to keep the testing simple it is best to apply round
numbers. The graduated cylinder should hold 100 ml and have a
cap to prevent tainted results. One does not have to be a scientist
or technical expert to carry out this test but will need a gas sample
and a graduated cylinder.
Petro Retailing Business
74
Notes
Why Test Fuel Quality
On a few occasions we have been faced with drivability problem
that seemed impracticable to solve that was eventually traced back
to contaminated fuel.
We have also seen repeat failures of fuel pumps and related
components due to surplus alcohol content in the vehicle’s fuel
supply. Too much alcohol in the fuel can do a lot of damage,
however, one of the most common results is repeat fuel pump
failures.
Many areas of the nation use oxygenated fuel to help improve air
quality. The additive that is used to oxygenate the fuel is most
commonly alcohol. Chemicals such as ethanol have the similar
effect on the fuel system as alcohol.
If the alcohol concentration goes beyond 10% by volume, this can
cause the engine to run lean. A lean running engine has higher
combustion chamber temperatures and possibly will increase wear
to items such as spark plugs, valves and seats and the fuel system
components for instance pressure regulators and injector nozzles.
At this instant snap the sealing cover over the end of cylinder and
shake the mixture thoroughly for about a minute. After that place
to cylinder on a level surface and allow the solution to settle so
UNIT 7: Fuel Quality
75
that the different fluids separate. Usually wait an hour or two
before examine the cylinder. Notes
Activity
Prepare a report on the initiatives taken to control fuel adulteration.
Because water is heavier than gasoline, the water will settle to the ___________________
bottom of the cylinder along with the alcohol that is in the fuel. ___________________
Water and petroleum products do not mix but alcohol and water
will bond to each other and fall to the bottom of the cylinder.
If the fuel contains any alcohol, the water level will be greater than
its initial reading of 10 mL if the new watermark exceeds the
20 mL mark on the graduated cylinder that indicates a
concentration of more than 10% alcohol. If there is more than 10%
alcohol in fuel, it should be replaced along with fuel filter. This will
avoid any of the problems that can result from having too much
alcohol in fuel.
It must be noted that if an individual just want to test for water in
fuel, he/she will need to get the fuel sample from the bottom of
the tank. Then just fill the cylinder to the 100ml mark and let it
settle before observing the results.
77
8. MoPNG have issued two control orders namely (i) the solvent, Raffinate and SlopNotes
(acquisition, sale, storage a
country.
79
Additionally, Gasoline with Benzene content of 1.0 Vol.-% Notes
Max. has been introduced in the NCR of Delhi and Greater
Mumbai.
Gasoline with Benzene content of 3.0 Vol.-% Max. has been
introduced in Kolkata and Chennai.
CNG, LPG, Ethanol Blends are used in Specified Areas.
80
Notes Summary
Fuel quality problems cause enormously hard-to-find engine
drivability problems and repeat failures of fuel system components.
There must be an effective way for an individual to check the
basics of fuels quality.
The Ministry of Petroleum & Natural Gas has caused oil
companies takes various steps to detect/prevent adulteration of
MS/HSD at retail outlets which are Filter paper Test, Density
checks, Regular/surprise Inspection of retail outlets, Joint
inspection of retail outlets by the industry teams, Regular/surprise
inspection by mobile laboratories, Special vigilance drives, etc.
Keywords
BIS: Bureau of Indian Standards, the National Standards Body of
India.
Fuel Adulteration: The act of debasing a pure or genuine fuel for
pecuniary profit, by adding to it and inferior or spurious article.
Quality Assurance: It refers to the systematic measurement,
comparison with a standard, monitoring of processes and an
associated feedback loop that confers error prevention.
Quality Management: Program focused on product/service
quality and uses quality assurance and control of processes to
achieve more consistent quality.
Quality: Degree to which a set of inherent characteristics fulfils
requirements.
81
5. What are the Indian initiatives to control fuel adulteration? Notes
6. Write a short note on the view of the fuel quality in India.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
82
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 8: Fuel
Adulteration
83
Unit 8 Notes
Activity
Write a report on the committees and task forces constituted in India for checking fu
___________________
Fuel Adulteration ___________________
___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
It is essential to dispense auto fuels of the right quality to achieve
the targeted emissions from vehicles. Hence, adulteration of auto
fuels should be discouraged in all its forms.
Spectrace Technique
M/s Rohm & HAAS have developed a new NDT for checking fuel
adulteration. Based on successful demonstration, the same has
Petro Retailing Business
85
The Task Force felt that return streams from petrochemical Notes
plants to the refineries may be getting diverted for
adulteration, as such all return streams from petrochemicals
after removal of necessary ingredient should be returned to
the nearest refinery and the onus of return will be with the
users only. Moreover, no slop is to be allowed to be market
directly.
Anti-adulteration Cell
Government of India has set up an Anti-adulteration Cell headed
by a Director General. The functions of the Anti-adulteration Cell
are:
1. Prevention of adulteration and other malpractices in the sale
of petroleum products.
2. To conduct inquiries into complaints against Dealer Selection
Boards.
3. To act as a coordinating agency for oil companies and
Central/State Governments departments in the matters
related to adulteration of fuel.
Inter-
MinisterialCommitteetoformulateAuto Oil
Programme constituted by MOEF.
3.……………… has constituted a Task Force to examine the use of solvent, raffin
87
the recorded density/reference density, which can be seen from the Notes
density register maintained by the dealer. If the variation between
the observed density and recorded/reference density is within
+ 0.0030, then the product density can be considered to be
correct. If the difference is more than + 0.0030, then it points out
possibility of adulteration.
Water Contamination Checks: For both MS and HSD can be
done with the assistance of a dip rod and water finding paste,
available with the dealer.
In Case of Lubricants: The customer should check the seal of
container, date of manufacture and name of the manufacturer. For
ease of 2/3 wheelers, Retail Outlets provide 2-T dispensers/2-T mix
dispensing units and also keep tamper proof 2-T pouches.
Recommendations
Bringing down the price discrepancy between adulterants and base
fuel products appears to be an effective step in discouraging this
practice, but it could not be possible to increase the prices of
products like kerosene, etc. which caters to poor people. There exist
various technical measures are accessible to tackle this problem
but those measures give benefit only when backed up by very good
system of monitoring and surveillance. Furthermore, petroleum
products being complex hydrocarbon mixtures with batch-to-batch
variations, certain inevitable mixing between diverse batches in
transit and in storage, availability of wide variety of adulterants,
and the detection methods may not be easy. However, conscious &
systematic efforts can reduce adulteration to a great extent. Some
of the possible measures are enlisted as follows:
Responsibility: The oil companies must be legally responsible
for the failure of any product fully meeting the required
specifications or detection of some admixture of low duty
product, by-products or waste products in the outlet of the
company carrying the sign of the company. Any fault by the
transporter or the dealer will be still inside the jurisdiction of
the Oil Company.
Oil Company’s Role: Responsibility for dispensing the right
quality of fuels must be made obligatory to oil companies.
Being in their jurisdiction, the oil companies must be required
to closely examine the transport and retailer facilities and
conduct suitable checks to control and prevent adulteration.
Petro Retailing Business
89
protect their brand image and ultimately mount pressure on Notes
the oil companies to be efficiently vigilant about the quality of
fuels sold in their retail outlets.
Compliance Certification/Awards: A system of monitoring
and award for the fuel stations can be initiated in the cities.
Bodies like Central Pollution Control Board can undertake
monitoring of samples from different outlets and award
compliance certificate to the stations. Upon non-compliance of
samples, the relevant fuel station may be stripped off its
compliance certificate. This when practiced would motivate the
petrol pump owners for fine & quality conscious business.
Markers: Special marker systems are nowadays available in
International Markets and some pilot projects on markers are
also going on in India. These markers possibly will be adopted
for detecting adulteration.
Research & Development: R&D organization must be
directed to conduct studies to assess the impact of
adulteration on quantum & toxicity of emissions and results of
such studies can be helpful in creating public awareness.
Good Business Practices: Voluntary initiatives of the oil
companies similar to “Pure for Sure” as initiated by BPCL
needs to be encouraged by the Government.
Awareness: Consumer organizations at city/town level with
essential support of concerned authorities can serve as
watchdog to check adulteration.
90
Hindustan Petroleum Corporation Limited –
Notes
Activity
mmarized document ___________________
Quality Management
Initiatives
on the quality managementinitiatives undertaken by HPCL.
HPCL is a Government of India Enterprise with a Navratna
___________________
Status, and a Fortune 500 and Forbes 2000 company, with an
___________________ annual turnover of ` 1,69,011 crore and sales/income from
operations of ` 1,88,130 crore (US $ 36.975 billion) during FY
2011–12, having about 20% Marketing share in India among PSUs
and a strong market infrastructure.
HPCL operates two major refineries producing a wide variety of
petroleum fuels and specialties, one in Mumbai (West Coast) of
6.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the
other in Vishakapatnam, (East Coast) with a capacity of
8.3 MMTPA.
Club HP
91
the shortest possible time. The Club HP outlets provide a distinct Notes
set of basic and value added offerings which include “Efficient &
Expert Service”, “Quick Care Point”, “Digital Air Towers”, “Vehicle
Finance and Insurance related assistance”, “Bills Payment
facilities”, “Refreshments”, “HPCL – ICICI Credit Cards” and a
host of other amenities.
To deliver the many conveniences and services, it has associated
with leading companies like Coca Cola India, ICICI Bank, Fed Ex,
Western Union Money Transfer, Café Coffee Day, US Pizza,
Skypak and many more. It is also forging service-specific alliances
with several automobile companies and OEMs like Tata Motors to
jointly identify “Club HP” outlets, which could qualify as
“Authorised Service Centres” for leading automobile brands. The
roll out of “Club HP” began in a phased manner, initially targeting
85 outlets in the cities of Mumbai, Delhi, Bangalore and Kolkata.
Encouraged by the initial experience, the “Club HP” brand has
been quickly expanded to cover over 1000 outlets in all major cities
and towns across India. The distinctive red and blue Club HP logo
is an all too familiar symbol, inviting motorists looking for a quick
and refreshing fuelling experience.
“Club HP” outlets are categorized as Standard, Mega and Max
depending on the levels of services and amenities available. Each
outlet will offer a bouquet of standardized services to consumers,
depending upon market requirements and logistical abilities.
Vehicle Care: The Club HP outlets have been carefully
selected to ensure that they can offer high quality vehicle care.
Each Club HP Mega and Max outlet is equipped with a service
station. In addition, the outlets will also provide vehicle
consumable and accessories, all under one roof. More and more
outlets will progressively upgrade to “Authorised Service
Stations” as part of our association with various vehicle
manufacturers.
Quick Care Points: Consumers are offered a free check-up of
vital elements such as engine oil, brake oil, battery water,
coolant, fan belt, radiator hose, etc. by the specially trained
“Club HP” attendants. In addition, a quick inspection of the
tyres is done and recommendations given in case any
immediate action is required.
Digital Air Towers: The performance and safety of new
generation cars depend a lot on the correct air pressure
Petro Retailing Business
93
Basic Amenities: Each “Club HP” outlet will extend basic Notes
amenities such as “safe drinking water” through water
purifiers, hygienic rest room facilities, food counters, basic
medicines and first aid facility. HPCL has also tied up with
Coca Cola India to provide beverages and bottled water as
well as snacks at all “Club HP” outlets.
Source: http://www.hindustanpetroleum.com/En/ui/RetailClubHP.aspx
Summary
The Committees and Task Forces Constituted in India for
Checking Fuel Adulteration are BIS Study Group on Adulteration,
Biocode marker system, Spectrace Technique, R&D marker
system, CPCB Working Group on Adulteration, Ministry of
Petroleum & Natural Gas Task Force on Adulteration and Anti-
adulteration Cell.
Consumers are the sufferers of adulteration malpractice. Any
quality conscious consumer has the right to be assured of the
quality of the products and if he wishes, he can get his sample
checked for adulteration. Some easy and important checks can be
conducted at the retail outlet, which include filter paper test,
density test and water contamination checks.
A part of HPCL’s strategic retail marketing initiative that seeks to
break out of traditional fuel retailing, new Retail Brand “Club HP”
assures high – quality personalized “Vehicle and Consumer Care”
through a select set of outlets.
94
Notes Keywords
Adulterant: An adulterant is a substance found within other
substances (e.g. food, beverages, fuels), although not allowed for
legal or other reasons.
Adulteration: The addition of adulterants is called adulteration.
Filter Paper: Filter paper is a semi-permeable paper barrier
placed perpendicular to a liquid or airflow.
Hydrometer: A hydrometer is an instrument used to measure the
specific gravity (or relative density) of liquids; that is, the ratio of
the density of the liquid to the density of water.
Lubricants: A lubricant is a substance introduced to reduce
friction between moving surfaces. It may also have the function of
transporting foreign particles.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
UNIT 8: Fuel Adulteration
95
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning Notes
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
96
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 9: Forecourt Design and
Network
97
Unit 9 Notes
Activity
Prepare a report on the objectives of the transportation and logistics.
___________________
Forecourt Design and Network ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
As a mineral product, crude oil is available only in limited oil fields
in the country. Crude oil is refined and blended to make various
streams of refined products to meet various types of end use.
Refining of petroleum products is a capital intensive and high
technology oriented process, whose threshold scale of production is
very high. Due to these reasons, there are only 16 refineries with
total production capacity of 114 million tonnes, which together,
serve to meet the demand of petroleum products in our country.
Therefore, logistics of movement of petroleum products from the
production centre to the consumption centre in a vast country, with
diverse topography like ours, is a complex process. Moreover,
as part of petroleum products is imported and exported, to that
extent the refined petroleum products move in and out of 13
(12 government and 1 corporate) ports in the country.
Scope
Keeping in view the complexity of the operation, it is proposed to
study the logistics and transportation of Oil in India:
1. The study will cover all aspects of the activity in a structured
way. In the process, many issues of economic significance will
be identified. The study will attempt to provide solution to
those issues.
2. The study will make a case-study from one of the dominant
modes of transportation.
3. The study will provide a direction for further work in terms of
research and business opportunity.
100 which are built and operated by agencies other than Oil
Notes
Companies. Pipelines need pumping and storage stations. Oil
tankers need oil jetties, which are built and operated by port
sectors, and rail sidings are built and maintained by Railways.
These require huge investment, planning and coordination.
Integrated Operation
Logistics and transportation of oil and gas is closely integrated
with the operation of Oil and Gas Companies. The Oil Companies
primarily plans the logistics and transportation is undertaken to
carry out their plan. The end users of Oil and Gas also play a role
in this, as they are the ultimate customers, whose needs dictate
the chain of activities.
The Oil Companies themselves have built and are operating a
segment of the transportation infrastructure, either by themselves
or through their joint ventures. Similarly, many end users also
have developed their own transport facilities for their dedicated
use. The transport operators are service providers to both. The
transportation activity is carried out in close link with the users,
so that optimization takes place at all the links of the total chain.
Thus, transportation has links with production, import, storage of
inventory, end use pattern in the domestic market and export. At
every stage, value is created, optimized and is passed on to the
next stage.
Ocean Transportation
Petroleum products are transported through the ocean transport
mode by way of the following five ways:
Crude Oil
1. Import of Crude (from international markets to Indian
Refineries for processing), and
2. Coastal movement of Crude (indigenous Crude supplied to
Indian Refineries through tankers).
Petroleum Products
3. Import of products (from international market to Indian
market for domestic consumption).
Petro Retailing Business
Pipeline Transportation
Transportation of petroleum products, crude oil and gas through
pipelines is considered as the cheapest, safest and environment
friendly mode of transportation. The network of underground
pipelines in the country has grown in a big way in the last few
decades. The network of pipelines is immensely helpful in
maintaining the supply chain of crude oil, petroleum products and
gas in the country. The onshore cross country pipelines are laid
underground at a depth of about 1.5 metre in a corridor of about
18 metre wide, and are operated normally at high pressure.
As on 1st April 2010 the country has a network of 28 product
pipelines with a length of 11037 km and capacity to carry 67.21
MMT of products. Also there are 3 LPG pipelines with a length of
2197 km and capacity to carry 4.50 MMT of LPG. Over and above
this, there are 17 crude oil pipelines of 7425 km, with capacity of
transporting 105.55 MMT. The details are as follows:
Road Transportation
Road transportation is usually the last leg of the long journey of
petroleum products and it is mostly associated with the retail
segment of the petroleum industry. As an economic activity, its
significance is very wide as it touches a wide segment of small
employers of capital and manpower. Not withstanding its economic
value, road transportation has a number of negative features. It is
a high-energy consuming Mode; its contribution to environmental
pollution is high; it is hazardous to itself and to the surrounding.
However, considering the retailing nature of road transportation,
its service can hardly be dispensed with.
104
Notes Summary
Transportation of petroleum products in India is set for a drive
towards efficiency, economy and environmental protection. For a
macro level solution, we have Petronet model available to us. Its
effectiveness and operation has to be observed in the post April
2002 regime. For user specific localized solution we have the model
of Oil Tanking, which is a company providing tanking and
handling service worldwide, which has a presence in India as a JV
with IOC. In the transportation chain, there are multiple players
and each link provides room for investment and cost optimization.
Keywords
Economic Design: Economic design of pipeline system involves
establishing an optimum relationship between pipeline sizes and
pumping configuration in terms of number of pumps and power
requirements.
Logistics: Logistics means the management of business
operations, such as the acquisition, storage, transportation and
delivery of goods along the supply chain.
Pipeline Transportation: Pipeline transport sends goods through
a pipe, most commonly liquid and gases are sent, and also send
solid capsules using compressed air.
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
106
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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UNIT 10: Case
Studies
107
Unit 10 Notes
Case Studies
Objectives
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
108 other retail majors. After introducing the ‘Pure for Sure’, Petro Card, Smart Fleet and OST
Notes The In & Out chain of convenience stores have been set up in 234 out of its total 6,000 pet
BPCL has exclusive tie-ups with FMCG majors such as ITC, Cadbury and Frito-Lay for providin
The latest addition of the oil company is the launch of its E- charge electronic prepaid service
Question:
Critically evaluate the HLL-BPCL retail strategy.
Source: http://www.thehindubusinessline.in
UNIT 10: Case Studies
109
Case Study 2: India, Nepal to Take Forward ` 100-cr Oil Notes
Pipeline Project
India and Nepal on Tuesday decided to take forward the proposal
to build a 41-km petroleum pipeline between the two countries
at a cost of around ` 100 crore. The pipeline is to be laid between
Raxaul in Bihar and Amlekhgunj in Nepal.
After a meeting with his Nepalese counterpart, Mr Purushottam
Ojha, the Commerce Secretary, Dr Rahul Khullar, said, “It is a
project we have to look at and find money for.”
However, he added, “It will take time. These things don’t get
sorted out in a day. We have identified the project and moved on
to the next stage. So give it some time.”
The pipeline will save transportation costs and has many
advantages, Mr Ojha said, adding, “Currently petroleum products
are transported to Nepal through tanker trucks from the Raxaul
depot of Indian Oil Corporation. The pipeline will also save us
from delays due to traffic jams on the way. The talks (on the
pipeline) are going on the positive track.”
The project was initially proposed by IOC in 1995 and was aimed
at cutting the transportation costs by half. It was also meant to
help the landlocked Nepal in solving its fuel-shortage problem.
India is to give financial and technical knowhow assistance for
the project.
Study & Indecision
Though a pre-feasibility study and technical study was carried
out in 2004 and 2006 respectively, there has been hardly any
progress in the project so far. One of the factors for the delay was
the reported indecision of the Nepal Oil Corporation regarding
building the pipeline all by itself or in partnership with IOC.
Both countries also discussed ways to increase trade and
investment as well as the security concerns expressed by Indian
investors regarding investing in Nepal. Mr Ojha said, “Due to
supply side constraints in trade we aspire for more investments
from India.”
Issues relating to transit trade including procedural
simplification of transit clearance as well as ways to increase
trading and investing directly, rather than through third
countries, were also taken up.
Both sides will meet in January to discuss matters including
Nepal’s proposal for trade assistance projects such as building
infrastructure (including bridges and hydel power projects) and
laboratory facilities in Nepal, Dr Khular said.
The other issues discussed included India’s demand that Nepal
increase the margin of preference granted to Indian goods vis-à -
vis imports from other countries; and phasing out of Nepal’s
Agricultural Reform Tax on the farm products from India; as well
as Nepal’s demand that India eliminate additional duty on 162 of
its agro products exports to India.
Contd...
Petro Retailing Business
110 Sources said New Delhi has agreed to do away with the Duty Refund Procedure for the ben
Notes Questions:
Write the case facts.
Discuss what you infer from the case.
Source: http://www.thehindubusinessline.com
UNIT 11: Supply Chain and Transportation
111
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
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BLOCK-III
Detailed112Contents Petro Retailing Business
Notes F
UNIT___________________
11: SUPPLY CHAIN AND TRANSPORTATION
UNIT 13: PETROL STATION AND RETAIL
Introduction OUTLETS
___________________
Supply Chain and Logistics Introduction
___________________
Marketing of Transportation Fuels in India Petrol Station Security
___________________
Pipeline Transportation Indian Oil–Petrol/Diesel Stations
Perspective Issues in Indian Pipeline Systems
___________________ XtraCare
Training Programme for Pump Attendants
UNIT___________________
12: THE PUMP of XtraCare Retail Outlets
___________________
Introduction
UNIT 14: VARIOUS SCHEMES IN RETAIL
Petrol/Diesel Stations of HPCL
___________________ BUSINESS
Customer Loyalty Programmes by HPCL Introduction
___________________
Fuel Promise Indian Oil’s Initiatives
___________________
Concept of Kisan Seva Kendra (KSK)
Concept of Swagat Outlets
Convenience Stores
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
The petroleum supply chain comprises the transport of finished
fuels from the door of the refinery to consumers and the sale of the
products either in bulk or in small quantities in gas stations.
The distribution of finished products is made by pipeline, tanker,
truck, rail or barge. The quantities transported are smaller
(typically 10 to 50,000 tons) than in the case of crude oil (generally
over 100,000 tons) and therefore the economies of scale are less
important than in the case of bigger crude oil tankers.
118
Structural Shifts Envisaged in Transportation of Petroleum
Notes
Activity Products
e a written draft on pipeline transportation
___________________ of petroleum and its products.
Transportation of Petroleum products will undergo a structural
___________________ transformation in the short-term future. This will be more
pronounced in the road sector. Today, the fleet owners are having
only limited principal users, with whom they have a long-term
contract. Many of the tank Lorries used for transportation of
petrol and diesel have an evergreen contract with any of the four
oil- marketing companies. Secondly, as the entire principal user
companies are PSUs, there is security and loyalty from both sides.
At times, the fleet operators have used their collective bargaining
power and attempted to extract a rent from the PSU users.
From April 2002 onwards, nine private companies have been
permitted to market transportation fuels, namely, petrol, diesel
and aviation fuel. These companies are Oil & Natural Gas
Corporation (ONGC), Reliance Petroleum Ltd. (RPL), Gas
Authority of India Ltd (GAIL), Oil India Ltd (OIL), Mangalore
Refineries and Petrochemical Ltd (MRPL), Essar Oil Ltd, Cairns
Energy of UK, Petronet LNG Ltd and Nagarjuna Group. With the
entry of these firms, there will be stiff competition among the
users of fleet and a new tariff level will be drawn.
Second development goes in favour of fleet owners, which is that
Oil Companies are coming up with new customer serving
measures or loyalty programmes, which provide multiple service
packages for the fleet owners and transport operators. Those
measures are known as ‘smart fleet cards’, ‘one truck stop shop’,
etc.
Pipeline Transportation
The issue of transportation of oil by pipeline basically joins three
vertices, viz., (i) the liquid nature of oil products and principles of
hydraulics (ii) piping technology, and (iii) the commercial
UNIT 11: Supply Chain and
Transportation
119
prudence. The triangle created of these has the following features, Notes
which distinguish the pipeline mode of transportation from other
modes.
In case of pipeline transportation of petroleum products, the
carrier does not traverse, unlike other modes and only the
products move from source to destination. The carrier remains
immobile. Therefore, the energy consumption and the associated
costs, including environmental pollution, in moving the carrier up
and down, is not there in pipeline transportation, Pipeline can
negotiate terrain, which are inaccessible or accessible at
prohibitive cost to other mobile modes of transportation. Pipelines,
of course, have limitations and hazards.
Firstly, pipelines are capital intensive and technology driven
modes. The fixed costs are very high and variable costs are
negligible. Therefore, its commercial viability largely depends upon
high degree of utilization. Its minimum level of return is high,
which puts the threshold production volume at a level, which is
much higher than any other modes. In other words, pipeline needs
higher degree of support from throughput than other modes of
transport available to petroleum products. The high threshold
volume warrants matching infrastructure requirement at both
ends of the pipeline, typical infrastructure required for pipelines
are tanks, pumping unit and control and monitoring station.
Operating and servicing of all these are part of pipeline operations.
The hazards in pipeline transportation have two dimensions,
namely, technical and social. There are two major types of
problems with regards to technical hazards, namely, corrosion of
pipelines, and, second, is generation of static electricity arising out
of frictions. There are sound technological solutions available for
these two. But if these two aspects are not properly taken care of
either at the time of construction or during operation, any of these
can create hazards of serious nature. (The hazards, which are
social in nature, arise mostly from attempts of pilferage,
inadequate risk awareness associated with the pipeline and the
product that it carries).
Leaving aside these limitations and hazards, which have sound
technical and managerial solutions, the most important aspect in
pipeline transportation is its economics. As the fixed cost of
pipeline is huge, it has a large bearing on investment and
financing decision.
Petro Retailing Business
120
Notes Perspective Issues in Indian Pipeline Systems
India, with its vastness and peninsular size, pipeline
transportation of petroleum products is the most cost economic
proposition. The network of pipelines can be further augmented
with economic value in the supply chain of petroleum products.
Need for new pipeline opens up avenues for investment, financial
structuring and technological challenges. Some of the issues have
been discussed below.
Petronet Initiative
In view of the need for having a network of pipelines carrying
petroleum products across the country, some cross-country
pipelines have already been laid in India as listed above. In order
to build more of them, the following considerations were coming in
the way:
Firstly is that pipelines are natural monopoly. More number
of pipelines under the ownership of a single company would
mean strengthening of monopolistic condition. Therefore, it
was considered wise to unbundle the linkage between pipeline
owner and pipeline user.
Secondly, in view of the typical nature of cost and revenue
curves of pipeline projects, its financing has a non-
conventional structure. Moreover, with a view to having
assured stream of returns, it was felt to build in user’s
commitment into the project itself.
With these principal features in the mind, Petronet India Ltd.
(PIL) has been formed as a non-governmental financial holding
company by a directive of the Government of India for expeditious
development of pipeline network in the hold and will be progressed
in synchronization with the commissioning of EOL Refinery. It has
a 44 km offshore section cutting across Gulf of Kachchh. The
pipeline costs ` 375 crore, with a broad break up as given below:
122
Notes Summary
The petroleum supply chain comprises the transport of finished
fuels from the door of the refinery to consumers and the sale of the
products either in bulk or in small quantities in gas stations.
The distribution of finished products is made by pipeline, tanker,
truck, rail or barge. The quantities transported are smaller
(typically 10 to 50,000 tons) than in the case of crude oil.
Keywords
Manufacturing: The procedure of designing and building the
appropriate technical configuration is vital.
Oil Supply & Trading: These activities deal with the
procurement of raw material and bulk sales of products in
commodity markets.
Petro Transportation: It is the movement of petrol and
petroleum products from one location to another.
Supply Chain: The network of retailers, distributors,
transporters, storage facilities and suppliers that participate in the
sale, delivery and production of a particular product.
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
124
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 12: The Pump
125
Unit 12 Notes
Activity
Prepare a report on the petrol/diesel stations of HPCL.
___________________
The Pump ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
Petrol Pumps have in recent times gained a lot of importance in
the recent past. This is primarily due to the increase in the
number of cars in India every year. Cars are no more objects of
luxury in today’s India. It has happened to an essential commodity
now and hence the significance of Petrol Pumps as well. And as
population increases and simultaneously the number of vehicles,
it becomes even more necessary to have a chain of petrol pumps
for the convenience of the local people.
126
Notes
Vision
Through the procedure of ACE (Achieving Continuous Excellence),
Retail SBU developed a vision, which was co-created by the
human resources of the SBU. Based on the vision, cross-functional
sub-groups of Officers from marketing, finance and HR
department intimately interacted with customers in various
market segments for instance Highway, Rural, 2-wheeler/3-
wheeler and Car segments to build up a customer centric dynamic
business strategy. The SBU vision is given hereunder:
Highest performer in sales growth over industry.
Sustained profitability all the way through increased sales,
ARB earnings, cost optimization, branded fuels and branded
lubricants.
Customer delight at the point of interface. Fulfilling the
affirmed and latent needs of the customer through innovative
products and services.
Competent, committed and empowered employees.
Sense of pride and mutual trust and camaraderie. Conducting
business in a fair, transparent and principled manner.
Performance Profile
During the last few years, several activities were initiated to
realise the retail vision. The highlights of performance are:
Retail Business Unit recorded an expansion of 4.5% in MS and
0.9% negative growth in HSD.
Record number of 645 new retail outlets were commissioned.
Continuous efforts of the SBU have guaranteed a control of
76% of our network, which is highest in the country.
A new visual identity program “Project Akarshan” has been
rolled out.
As a part of the on-going “Focus 500” program, several retail
outlets have been modernised during the year.
127
HPCL has also introduced at its outlets numerous initiatives Notes
to strengthen the brand promises.
Over 15500 dealermen were covered through various training
programs focus on present business imperatives and
behavioural changes for delivering the “Club HP” promise.
Unique training program titled “Leading with Power”, “At the
Forefront” and “Positive Value Based Stress Free Supervision”
were accomplished for dealermen, forecourt managers and
dealers to drive the significance of quality, quantity, quick
service, courteous behaviour and stress free management
between the dealers and dealermen who interact with retail
customers.
In order to encourage dealermen at “Club HP” outlets Group
Personal Accident Insurance Scheme has been introduced.
Several dealermen were covered on computer education all the
way through HPCL NIIT Jyoti Program.
A number of dealermen were recognized under the “Spot &
Reward” Scheme.
The Scholarship Scheme for “Club HP” dealermen and
dependent children was extended during the year to inspire
the dealermen.
An exclusive “Club HP” “Good Citizen Award” was introduced
during the year to recognise and reward the customers in
auto/taxi segments for their outstanding service to society.
Numerous campaigns were conducted round the year to draw
customer pull at the retail outlets and rewarded and
recognised the customer for patronising outlets as an element
of brand building exercise.
For “Club HP” outlets mass media campaign was successfully
utilised to communicate the brand promise beneath the
banner “Club HP” “Achcha Lagta Hai”.
Corporate level tie up has been made with Tata Motors for
vehicle care centre. Tie up as well has been entered into with
US Pizza for pizza centres at out outlets. These tie-ups have
evinced excellent response from the customers.
Petro Retailing Business
128
Check Your Progress
Notes
Activity
Make an assignment on Fill in
the customer loyalty programmes by HPCL.
___________________ the blanks:
Branded Fuel
Information related to branded fuel is given below:
During the year, HPCL’s Branded Fuel “Power” has been
added to cover over 700 outlets in over 200 markets.
Turbojet is available in over 450 outlets in over 125 markets.
UNIT 12: The Pump
129
Non-fuel Business
Notes
Activity
HPCL has built a gainful Non-fuel Business with wide range of
Writeanarticleonfuel promise made by HPCL.
facilities to the customers. The non-fuel activities at the retail ___________________
outlets comprise ATM, take away food counter, “C” Store, vehicle ___________________
accessories, etc. This business is managed through tie-ups for
example Cafe Coffee Day, Diary Den, Western Union, leading
banks, US Pizza and Tata Motors.
Fuel Promise
A quality product is one that fulfils with prescribed specifications
and is free from any contamination or adulteration. To make
certain that consumers at HPCL petrol stations get contamination
free products, personnel at outlets check the products regularly.
In addition, sales officers carry out standard checks at all the
outlets to prevent any malpractices. The kerosene supplied by
HPCL beneath the public distribution system is doped with blue
dye for on-the-spot identification. So when a customer gets
kerosene that is blue in colour he/she can be assured it comes
from a reliable source.
The blue colour as well helps in detecting adulteration of any
motor fuel with kerosene through visual identification. Though
HPCL make sure of the quality of a product before it is passed on
to the consumer, it suggest that customer may carry out these
simple checks when in doubt.
130
Notes
Density Check (To Check Petrol and Diesel)
Use the following steps to density check:
To check this, one will need a 500 ml jar, hydrometer,
thermometer and ASTM (American Society for Testing of
Materials) conversion charts. A hydrometer is a very
uncomplicated instrument for measuring the density of any
liquid. All these are available at the HP retail outlets and are
made accessible in case one wish to check the products.
Fill about 3/4th of the jar with the product, through the nozzle
of the dispensing unit.
Dip the thermometer and the hydrometer in the jar as well as
record the temperature and density as indicated.
Convert the density recorded into density at 15 degree
centigrade with the assistance of the conversion chart. This
converted density is then compared with the density revealed
by the records maintained at the retail outlet on the basis of
the density recorded on delivery challans. (Density at 15
degree centigrade is mentioned on each delivery challan issued
by the supplying depot for every load sent to the retail outlets.)
If the disparity is more than +/– 0.0030, it requires further
testing at approved laboratory. In such case, the customer
should straight away get in touch with concerned Regional
Office.
Checking Lubricants
Lubricants available at HPCL retail outlets are factory sealed and
packed. Even then, while buying lubricants, check the seal of the
container for signs of tampering, date of manufacture and the
name of the manufacturer. For the convenience of 2/3 wheeler
drivers, HPCL retail outlets usually provide 2 T dispensers and
also keep tamper proof 2 T pouches.
131
Summary Notes
Keywords
Focus 500: It is an on-going program, several retail outlets have
been modernised during the year.
HPCL NIIT Jyoti Program: Several dealermen were covered on
computer education all the way through this program of HPCL.
Project Akarshan: A new visual identity program rolled out by
HPCL.
132
Notes Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 13: Petrol Station and Retail
Outlets
133
Unit 13 Notes
Introduction
For the most part, manned petrol stations today function just as
much as a local convenience store, which for that reason brings
along the additional security requirements of that market.
134 The security systems can help small retailers reduce “blind” spots
Notes with cautious positioning of video cameras; restricting access
to
Activity
Write an article___________________
on the Indian Oil petrol/Diesel Stations.
stock and cash with stand-alone access control; clamping down
on
registered theft by active video monitoring of all till activities;
___________________
gather high quality video evidence for prosecution; and even
reduce insurance costs by dipping the level of insurance claims.
XtraCare
Indian Oil’s XtraCare branded full-service petrol stations are a
consequence of a series of processes in retail design, product and
service upgradation, competence training, automation, loyalty
programmes, retail site management techniques – all
benchmarked to international standards. Today XtraCare petrol
UNIT 13: Petrol Station and Retail
Outlets
135
stations are one and the same with world-class petroleum Notes
retailing.
138
Training Programme for Pump Attendants of
Notes
Activity
eport on the training ___________________
XtraCare Retail
Outlets
programmes for pump attendants of XtraCare Retail Outlets.
IOCL carried out training programme for the pump attendants of
___________________
XtraCare petrol pumps. It was a 19 days programme where
___________________ experts was concerned in training pumps attendants of XtraCare
pumps from 10 o’clock in the morning to 5 o’clock in the evening.
Each group comprised 24 participants and along with training,
they are as well provided with lunch and tea.
This kind of session is conducted three times in a year intended
for the pump attendants as well as for the pump dealers. In this
particular training the topics that were dealt with are:
Personal hygiene
Forecourt and etiquettes
Operation and maintenance
Product push and its importance
Forecourt service step
In personal hygiene, these participants were made responsive of its
importance. They were rigorously instructed to wear the proper
uniform and also that the logo of XtraCare must be present on
their shirts and caps. They were trained the basic terminologies
with respect to the petrol pumps. Building customer relationship
and attracting more customers is one of the rationale of this
training program. For this, they were made to understand that
should always welcome their customers, offer them water and
cater to their needs like air check service and wiper service to their
vehicle.
Each pump attendant must be knowledgeable concerning the
operational activities at pump. These participants were as well
trained about how to maintain the dispensary units and the
tankers.
How to maintain an edge above the competitors is crucial to sell all
the products. The participants were initially given the information
regarding each product and then were told about its utility that
they should communicate to the customers.
They were made to realize the significance of informing each
customer about the products offered by Indian Oil. At the time of
dealing with the topic of forecourt service step, the participants
are
UNIT 13: Petrol Station and Retail
Outlets
139
given complete instructions regarding how to proceed when a Notes
customer arrives.
Greet the customer.
He should be asked for water.
Before filling petrol/diesel, reconfirm how much they require
and show them the meter reading as zero.
Inform them about the other products.
Provide additional facilities like air check and wiper service.
Ask whether they require a bill.
For the better understanding of participants, they were revealed
pictures and videos too demonstrating activities at the pump.
In the end hour of the session, the participants were made to carry
out all the activities that they were taught and their flaws were
corrected by the instructor.
Summary
Indian Oil was the pioneer in introduction state-of-the-art petrol
stations with digital dispensers, modern canopies, standardized
Petro Retailing Business
Keywords
Security: Security is the degree of resistance to, or protection
from, harm. It applies to any vulnerable and valuable asset, such
as a person, dwelling, community, nation, or organization.
Retail Outlets: A store that sells smaller quantities of products or
services to the general public.
Surveillance: Surveillance is another data collection method with
different strengths and weaknesses from surveys.
Video Surveillance: Video surveillance systems monitor activity
in public areas, businesses or commercial buildings for real-time or
later review.
Value Added Services: The term "value added services" is used to
refer to options that complement but a core service offering from
a company but are not as vital, necessary or important.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
142
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 14: Various Schemes in Retail
Business
143
Unit 14 Notes
Activity
Prepare a report to present the Indian Oil’s Initiatives.
Various Schemes
___________________
___________________
in Retail Business
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
Indian Oil pioneered differentiated offerings to meet the diverse
needs of its customers, be it through large format Swagat outlets
for the highway traffic, Kisan Seva Kendras for the rural
consumer, or even the XtraCare outlets for the discerning urban
customer. As we discussed in the previous unit, Indian Oil’s
XtraCare pump is a revolutionary initiative in petroleum retailing
that combines the best bouquet of quality, quantity and warm
service, with a guarantee to make your every visit a truly
rejuvenating experience.
In the present unit, we will study about the key retailing schemes
like Kisan Seva Kendra, Swagat, etc.
144 Dominos and Kamats for food courts, with ICICI Bank, Centurion
Notes
Bank, etc., for ATMs etc. to provide an exhilarating retail
experience to its customers.
In USA, QuikTrip also uses consumer experience to reinforce its
price-based strategy. Surveys of QuikTrip consumers show
extremely high value attached to their overall experience at the
pump premises. While QuikTrip ensures a warm and congenial
experience for its consumers by recruiting and grooming highly
motivated individuals, it also strikes the right chord with its
consumers by storing their favourite drinks and snacks.
QuikTrip’s management believes in reflecting an image of “we do
everything right” in all its direct and indirect consumer
interaction.
Check Your Progress
Fill in the blanks:
Tie-ups
The combination of the pump and the retail outlet is what drives
this model. IOC has gone ahead and tied-up with many FMCG and
farm implements companies for an exclusive access to these rural
outlets. One of the first FMCG companies to tie-up with KSK was
Dabur, now they have recently tied-up with AIRTEL for mobile.
The other tie-ups include National Seed Corporation and Indo Gulf
Petro Retailing Business
146 Fertilizers. There are many similar tie-ups in the pipeline and the
Notes company is working on the modalities of the deal.
Activity
Write an article on the Kisan Seva Kendras
___________________ and the Swagat outlets.
Ground Realities
___________________
At the ground level, there are many operational difficulties with
managing the retail outlet. The fuel sells on its own and the
villagers are happy that they are able to buy diesel and petrol at
their doorsteps. Earlier they had to travel at least 10 km to the
nearest petrol pump to buy fuel. But the dealers feel that they
don’t have the expertise of dealing with the wide range of
products that they are expected to sell, (from Fertilizer to
notebooks) and because they don’t have the whole range which a
typical grocery shop would have they find it difficult to attract
customers, and with the limited sales they are unwilling to put in a
separate person for the retail shop, which is essential. Then there
are issues related to credit and the market visits one has to make
to keep maintain the stocks.
Convenience Stores
In an effort to tap alternate revenue streams, Indian Oil is focused
on enhancing its Non-fuel Revenues (NFR) through its 195 million
sq. feet of retail space. Indian Oil has already mapped petrol
stations to study the tyre falls and assess their site potential with
the help of consultants, Technopak Advisors Pvt Ltd. A well-
structured roll out plan is already underway and petrol stations,
primarily in the North have been identified for a pilot study. The
NFR model developed will provide for sharing of revenue streams
with the dealer network to enable unlocking of existing retail
space value that both Indian Oil and its dealers command. Several
alliances have already been forged with leading brands like
Hindustan Unilever Ltd, Dabur, ICICI Bank, Ferns & Petals, MTR
Foods, PVR Cinema, UAE Exchange, Reliance Capital and DHL.
The concept of convenience stores has not yet taken off in India
and we believe that in the near term this may not be a profitable
opportunity for petroleum retailers. Our analysis of the Indian
consumer shows that their need for convenience is currently
reasonably well-satisfied at competitive prices by the unorganized
retail sector such as the neighbourhood ‘kirana’ store, the
‘thelawallah’ with his fresh vegetables and the friendly
‘paanwallah’. Most consumers in India today are unwilling to pay
the price premiums required to support the organized convenience
store business model; the ‘MRP’ regime also restricts the c-store
operators’ ability to charge a premium for the higher service levels
that it may provide. Coupled with this are the difficulties in
operating a profitable convenience store business model in India,
Petro Retailing Business
148 where the supply chain for most products remains highly
Notes
fragmented and inefficient.
Twenty Four Seven is planning to roll out 100 convenience stores
at IOC’s petrol pumps in major cities and towns of north India
during 2010–11. These stores will be well stocked with a wide
range of consumer goods, including groceries, ready-to-eat food
items, cosmetics and personal care products, magazines, music and
video CDs, etc. besides offering value-added services such as
couriers and movie tickets selectively.
Market research has revealed important lacunae in terms of time,
convenience, and ambience in the shopping experience of
households needs and by offering an upmarket ambience.
If one explores the product, categories that drive convenience store
shopping in the US, they are tobacco, soft drinks and beer. In
India, with a proliferation of tobacco and soft drink outlets and a
restriction on alcohol sale, it is evident that the driver categories in
India would be different. The critical issue hence is to develop a
product assortment that would drive both traffic and consumer
purchases; this being a function of the consumer group which the
brand targets. For example, for the ‘Routine Chore Doer’, the
product offer could hinge on fresh fruits and vegetable, e.g.,
a ‘Mother Dairy’ vegetable stall at every petrol pump.
Food
Store Appearance
Price
Basis of Differentiation
Image Distribution
Convenience
Service
Breadth of offerings
Source: AT Kearney
Summary
Evolution of retailing to its present form traces its origin to the
‘barter’ system prevalent in the pre-currency days. People
exchanged their surplus products with each other on a ‘perceived
value’. This perceived value was actually based on the need of both
the giver and the receiver. Retailing is defined as a business that
sells products and/or services to consumers for their personal or
Petro Retailing Business
150 family use. With respect to the wheel of retailing theory, a low
Notes
spot on the wheel, once occupied by a low-margin retailer
that has traded up, is left open for an innovative retailer that can
operate at a margin lower than those earned by existing retailers.
Keywords
Kisan Seva Kendra: Kisan Seva Kendra is an award-winning
retail outlet model pioneered by Indian Oil to cater to the needs of
customers in the rural segment.
Linked Retailing: Under this concept, the main product is the
anchor while some other product is retailed as add on.
Retailing: Retailing is defined as a business that sells products
and/or services to consumers for their personal or family use.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
UNIT 14: Various Schemes in Retail
Business
151
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf Notes
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
152
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 15: Case
Studies
153
Unit 15 Notes
Case Studies
Objectives
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
Contd...
Petro Retailing Business
154
Notes The transmission and marketing major, GAIL (India) transports
118 mscmd of gas from various sources. Of this, domestically produced gas is 92 mscmd inclu
Domestic refiners processed 4.4 per cent more crude oil in September from a year ago at 12.7
Hindustan Petroleum Corporation raised output by 33.9 per cent to 1.405 million tonnes.
Reliance Industries Ltd from its first refinery in Jamnagar processed 2.928 million tonnes of c
The consumption of petroleum products during the month stood at 11.289 million tonnes
1.197 million tonnes and LPG 1.288 million tonnes.
Question:
Critically evaluate the key reasons for rising demand of petroleum products and their imp
Source: http://www.thehindubusinessline.com
UNIT 15: Case Studies
155
Case Study 2: Castrol India: Buy Notes
` 419
158
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 16: Petroleum Pricing
159
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
BLOCK-IV
Detailed160Contents Petro Retailing Business
Notes F
UNIT___________________
16: PETROLEUM PRICING
UNIT 18: OPEC
Introduction
___________________ Introduction
Pricing of Petroleum Products
OPEC’s Role in Price Structuring
___________________
Physical Market
OPEC’s Oil Policy
___________________
Players in the Physical Market
OPEC’s Production Cut and Compliance
Paper Market
___________________
UNIT 19: PROMOTION
UNIT___________________
17: CRUDE OIL PRICING
Introduction
___________________
Introduction
Structure of Oil Industry
Tradable Crude and Non-tradable Crude
___________________ Crude Oil Pricing
OSP of NOCs
___________________ Oil Products’ Pricing
Factors Affecting Petroleum Prices
___________________ UNIT 20: CASE STUDIES
UNIT 16: Petroleum
Pricing
161
Unit 16 Notes
Activity
Write an article on the pricing of petroleum products.
___________________
Petroleum Pricing ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
The pricing of crude and petroleum products in the country has
been influenced by a multiplicity of politico-economic factors and
(oft-contradictory) interests of various actors and interest groups
involved in the matrix, such as the consumers, particularly the
vulnerable sections; the producers; refiners; marketing companies;
and the government. Until 1997–98, the domestic petroleum sector
in India was operating under Administered Pricing Mechanism
(APM) for refined petroleum products.
162
Physical Market
Notes
Activity
Prepare a written assignment on the players in the physicalThe
___________________
area
of physical market has been dealt with in the preceding
market.
section. Basically, it is the market, where physical oil is sold and
___________________ bought and the actual seller and actual buyer meet and enter into
a contract to deliver and accept the cargo at a price.
A refiner is the final buyer in the physical market, who buys crude
for processing and pays the price, which he cannot pass on to any
other buyer of crude. Besides the final buyer, there are many
buyers in this market, who buy crude and sell it at appropriate
time, maybe at the same place or at different places. They are:
(a) traders, and (b) refiners. Sellers in this market are: (a) the
original producers of crude oil, (b) traders, and (c) refiners.
For a refinery in India, purely from geographical proximity
(therefore freight economics) point of view, the physical crude oil
market presents itself in three regions: (a) Middle East, (b) West
Africa, and (c) Far East. The countries in Middle East, mainly
producing sour crude oils are Saudi Arabia, Kuwait, Abu Dhabi,
Yemen and Egypt. Countries in West Africa, mainly producing
sweet crude oils are Nigeria, Angola and Libya. Country in Far
East, mainly producing sweet crude oils, is Malaysia. Besides these
three regions, there are however more regions, which present
alternate economic sources, are Venezuela and Australia.
163
others. Each oil-producing country has one such company, which Notes
holds the ownership of the oil in their geographical territory.
1. National Oil Company: All such NOCs do not necessarily
play the same role for their respective countries. Some NOCs
are actively into crude oil selling business, refining business
and are in control of the sale and destination of their cargo.
They, in fact, allocate the quota among their buyers. They also
declare their price, which is called Official Selling Price (OSP).
They are the price makers in the market. Example of such
NOC is Saudi Aramco. Their OSP level determines the
revenue for their country on the one hand and sets the price
level in the market on the other. While fixing the OSP, these
companies do a balancing act on multiple fronts. Some of these
fronts are: (a) demand and supply of crude in the physical
market, (b) revenue for the producing country and margin for
the refineries (the buyers), (c) current production level and
investment for future oil fields, and (d) some other geo-
strategic fronts as having political and military dimensions.
There are some NOCs whose main role is to set the price for
their crude (OSP) and ensure revenue for their respective
country. They have given the act of marketing their crude
wholly or partly to some multinational oil company. Examples
of such NOCs are Egyptian General Petroleum Corporation
(EGPC), and Yemen Oil & Gas Company (YOG).
EGPC is given the marketing right of their crude Gulf of Suez
Mix to British Petroleum, while retaining with them the right
to fix the price (OSP) for their crude.
YOG holds ownership of certain portion of the crude oil,
Masila produced in Yemen and the ownership (equity) of the
remaining part rests with a multinational oil company, Nexen.
There is one more type of NOCs, like Petronas (of Malaysia),
who are quite diversified in their activities. One they are the
sale equity holder of Malaysian crude, viz., Labuan, Miri,
Tapis. Two, they declare OSP. Three, they market their crude.
Four, they have E&P activities in other countries like Sudan.
Five, they trade crude oils of other country’s origin. Six, they
run refineries and do domestic marketing of products. Seven,
they sell refined products to other countries. They are so
diversified that they even run universities for their country.
Petro Retailing Business
165
4. Refiners: The fourth and final category of players in the crude
oil market is the refiners. They are the users of crude oil and Notes
Activity
Make
are the ultimate buyers. They are the ones who pay the price,a report on the paper market and its role in the petroleum pricin
___________________
whatever may the level. At times they can also be the sellers of
___________________
crude oil, which they have bought. They do resell the crude oil
due to various reasons like: (a) to take opportunity in price
movement; (b) the swap the crude oil, inter grade or inter
month; and (c) unscheduled change in demand pattern.
Refiners have interest not only in the price they pay for the
crude oil; they also have interest in the value of crude, which
they realize from the refined products that are produced from
the same crude oil. Therefore, a particular type of crude oil has
an economic value for a particular refinery, which is otherwise
called as ‘Gross Product Worth’ (GPW). Given the GPW of a
type of crude oil for a particular refinery, the CFR (Cost and
Freight) price of crude determines the margin that a refinery
gets by processing a type of crude oil.
Paper Market
Paper markets are basically markets where right to crude oil is
traded. It is a mixture of crude oil market and financial market.
Here the players are not necessarily having any interest
whatsoever with oil. This market has multiple uses, the principal
among which is price risk management. Since oil price is volatile,
which creates risk for the buyer and seller of crude oil, this market
provides avenues where this risk can be transferred. This is an
integral part of oil market. This market consists of institutions like
Oil Exchanges, Financial Institutions and Brokers, in which
instruments like futures and swaps are bought and sold. The
futures and swap in the paper market help to form the price in the
physical market. However, this is beyond the scope of this
material.
166
Notes
Summary
The pricing of crude and petroleum products in the country has
been influenced by a multiplicity of politico-economic factors and
(oft-contradictory) interests of various actors and interest groups
involved in the matrix, such as the consumers, particularly the
vulnerable sections; the producers; refiners; marketing companies;
and the government. Until 1997–98, the domestic petroleum sector
in India was operating under Administered Pricing Mechanism
(APM) for refined petroleum products.
Paper market is actually a derivative market, where physical
crude is not available. Paper market is a backward extension of
physical market, where right on physical crude is traded and
thereby its future price is formed.
Keywords
Integrated MNCs: They are very powerful operators in the crude
oil market by virtue of their scale at operation, volume of
transaction and financial strength.
National Oil Company: They are actively into crude oil selling
business, refining business and are in control of the sale and
destination of their cargo. They allocate the quota among their
buyers. They also declare their price, which is called Official
Selling Price (OSP).
Paper Markets: These are basically markets where right to crude
oil is traded. It is a mixture of crude oil market and financial
market.
Physical Market: It is the market, where physical oil is sold and
bought and the actual seller and actual buyer meet and enter into
a contract to deliver and accept the cargo at a price.
UNIT 16: Petroleum Pricing
167
Refiners: They are the users of crude oil and are the ultimate Notes
buyers. They are the ones who pay the price, whatever may the
level.
Trading Companies: They buy crude oil from the market and sell
to others. They invariably have some equity holdings in some
crude oils somewhere in the world. Alternatively they have
purchase contract from the original crude oil producers.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
168
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 17: Crude Oil Pricing
169
Unit 17 Notes
Activity
Writeanarticle
___________________
Crude Oil Pricing thetradable-crude
___________________
non-tradable crude.
on and
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
The pricing mechanism was based on the concept of retention
price, by which refiners were allowed to retain out of their sale
proceeds – cost of crude, refining cost and a reasonable return on
investment. The same mechanism was extended to marketing and
distribution companies, which were compensated for operating
costs along with an assured return. In addition to these, the price
at which the finished products were finally sold was set by the
Government and was totally delinked from returns of oil
companies. The APM played a significant role in insulating oil
producers, refiners and marking companies from global oil price
fluctuations and fulfilled the socioeconomic objectives of the
government considerably but in the process failed to generate
adequate incentives for investment in the sector and thus failed
miserably to create a vibrant and globally competitive oil industry.
With the ushering of liberalization and economic reforms in 1991,
the policy makers increasingly began to feel that APM might no
longer work successfully as it had in the past and the energy
security of country would be at stake if a robust petroleum
industry is not created.
170 Arab Heavy, Arab Light, Arab Medium and Kuwaiti Crudes, are
Notes
sold by the respective NOC under annual contract and are bought
by the refiners directly.
The crude oil types other than these non-tradable types, which
change hands of multiple sellers, are available in spot market.
Physical crude oil market is such that it is to be booked at least
two months prior to the month of loading the cargo. For example,
generally, if a cargo is to be loaded any time in the month of
March, the loading terminal will plan the month’s loading in the
first week of February and the allocation of the cargo by the
original seller will be finalized by the first half of January.
Formula Price
When a refiner book a cargo says in January, for loading in March,
what is agreed between the buyer and seller in January is the
quantity and a price. The price has two elements. One is the basic
price (say B) and another is the premium and discount (say P).
This type of price is called floating price or formula price.
Invoice Price = B + P
At the time of booking, what is agreed between buyers is the ‘P’,
which remains fixed, as far as ‘B’ is concerned, it is usually linked
to the price of a Benchmark Crude or Official Selling Price (OSP) of
an NOC. The price of the Benchmark Crude is assessed by
independent price assessing agencies, like Platts, or Petroleum
Argus on daily basis.
Usually payment is made 30 days after the date of loading.
Therefore, the payable amount looks like the following:
171
This formula has the following characteristics: Notes
1. The price has been agreed in advance.
2. The major part of the price, that is the basic price, remains
relevant to the time when cargo is loaded (i.e. the pricing
period around the loading period; could be a month or five or
six days).
3. The basic price is market determined, as assessed by an
independent expert body in the Industry, which is acceptable
to the buyer and seller.
4. At the time of signing the contract, neither buyer nor the
seller has knowledge of the basic price. Their respective
fundamental position and knowledge of the market guide
them to agree the fixed part of the formula, that is premium or
discount (‘P’ in the equation).
5. ‘P’ also captures the quality difference of the cargo booked with
respect to the benchmark crude.
6. As it is a monthly average of the daily assessment, the price
gets moderated by the law of average.
7. Neither buyer nor the seller gets affected by the specific
loading window, as long as the loading window falls in the
calendar month (i.e., the pricing period).
This formula at times gets modified by taking average of, say, two
benchmark crudes for ‘B’, like Oman Dubai average. The practice
in the industry is to make the formula as objective as possible, so
that the value of the crude under deal is accurately captured,
without discriminating with either party. Industry has developed
many variants of this formula to suit the risk management
objective of the buyer and/or seller, but the spirit of the formula
remains the same.
Benchmark Crude
There are so many different varieties and grades of crude oil,
buyers and sellers in oil industry have found it easier to refer to a
limited number of references or benchmark crude oils. Other
varieties are then priced at a discount or premium, according to
their quality. The main criteria for a marker crude is for it to be
sold in sufficient volumes to provide liquidity (many buyers and
sellers) in the physical market as well as having similar physical
qualities of alternative crudes.
Petro Retailing Business
OSP of NOCs
NOCs with original hold on their country’s crude usually announce
the FOB price of their Crude oils for their term buyers. This rate is
applicable for all the cargoes loaded during a specified period and
uniform for all the buyers in the region, irrespective of the volume.
Some companies like Saudi Aramco and KPC, announces a
premium or discount to the average of Benchmark crude (Oman
and Dubai). They announce in the first week of the month for the
next month.
As distinguished from the above, company like ADNOC announces
an absolute number in the first week of the month, applicable for
all the cargo loaded in the previous month.
Some other companies like the NOC of Yemen and Nigeria
announces a premium or discount to Benchmark crude (Brent).
The applicable price is average of 5 or 6 days after the Bill of
Loading days.
UNIT 17: Crude Oil Pricing
173
The underlying principles in the OSP system are the following: Notes
1. It is a declared price (or posted price) by the seller, uniformly
applicable to all the buyers in the region.
There is no room for negotiation. Buyers have little choice with
regard to price.
2. While setting the price, the sellers usually make the price level
in line with the spot price in the respective destination
market.
The sellers also see that the buyer gets the value for the price they
pay. In other words, they see that the refiner gets his net back at
the price fixed by them.
In this process, a producer NOC, say Saudi Aramco, realizes
different FOB price (net back) for the same type of crude oil,
loaded for different destinations.
174 both for the same crude follows somewhat similar level. However,
Notes in thecrude oil market, Platts has more acceptability than Argus.
Activity
Make an assignment on the factors affecting
___________________ petroleum pricing.
Check Your Progress
___________________
Fill in the blanks:
1. ………………… is a declared price (or posted price) by
the seller, uniformly applicable to all the buyers in the
region.
2.is a leading energy news service agency,
set up by Mr Warren Platt in 1923.
Export/Import
The steady state stability gets disrupted by a number of factors,
suddenly bringing crude oil prices to the headlines. Demands
surge, refinery outages and supply cutbacks can all cause prices to
run up. Some developments, like refinery outages, logistics snags
or demand surges in a cold snap etc. cause a price spike. Prices
shoot up initially and then recede again when the supply and
UNIT 17: Crude Oil Pricing
175
demand balance has been re-established. Long-term factors, like Notes
OPEC cut or a recession, have long-term impacts. Like crude oil
price declines experienced during 1998 or the crude oil price
increase experienced during 2000, take longer time to return to
the underlying price trend. The marginal cost of a barrel of crude
oil differs not only from one country to another, but also from one
well to another. Both the varying reservoir characteristics and
the
physical characteristics of crude oil are important components of
the cost of producing crude oil. The costs can range from as little
as two dollar per barrel in the Middle East to more than 15 dollar
per barrel in some fields in the United States, including capital
recovery. It is interesting to note that technological advances in
finding and producing crude oil have made it possible to bring
once expensive deep water Gulf of Mexico oil into production for
less than 10 dollar per barrel.
More than the production cost, the supply and demand conditions
in the global market over all, and more particularly, in the main
refining centres: Singapore, Northwest Europe and the US Gulf
Coast influence the price. Crude oil market is essentially a global
auction; the highest bidder wins the supply. Like any auction, the
bidder does not want to pay too much. When markets are ‘strong’
(when demand is high and/or supply is low), the bidder must be
willing to pay a higher premium to capture the supply. When
markets are ‘weak’ (demand low and/or supply high), a bidder may
choose not to outbid competitors, waiting instead for later, possibly
lower priced supplies.
Prices in spot markets, cargo by cargo and transaction by
transaction, send a clear signal about the supply/demand balance.
Rising prices indicate that more supply is needed and falling
prices indicate that there is too much supply for the prevailing
demand level.
While most crude oil flows under term contract, its price (OSP)
varies with spot market. Futures market in Oil Exchanges also
provides information about the physical supply/demand balance as
well as the market’s expectations.
Seasonal swings are also an important underlying influence in the
supply/demand balance and hence in price fluctuations. Other
things being equal, crude oil markets would tend to be stronger in
the fourth quarter on a global basis, when demand is boosted both
by cold weather and by stock building. It is supposed to be weaker
Petro Retailing Business
176 in the late winter as global demand falls with warmer weather.
Notes
The marginal cost of a barrel of crude oil differs not only from one
country to another, but also from one well to another. Both the
varying reservoir characteristics and the physical characteristics
of crude oil are important components of the cost of producing
crude oil. The costs can range from as little as two dollar per
barrel in the Middle East to more than 15 dollar per barrel in
some fields in the United States, including capital recovery. It is
interesting to note that technological advances in finding and
producing crude oil have made it possible to bring once expensive
deep water Gulf of Mexico oil into production for less than 10
dollar per barrel.
The overall supply picture is, of course, influenced by the level of
inventories. Stocks keep the global supply system operating.
Stocks indicate whether any regional market has too little, too
much or just the right quantity of oil. When stocks in a given
market are high, they represent incremental supply immediately
available, so prices tend to be weak. The opposite is true in low
stock situation.
Price change patterns can vary between regions, depending on the
prevailing supply/demand conditions in the regional market,
especially in the short-term. That price response and the
differences in regional price movements are critical to the way the
crude oil market redistributes to rebalance after an upheaval.
Foreign Exchange
The relationship between exchange rates and oil prices is complex,
and the causality can run both from exchange rates to oil prices
and from oil prices to exchange rates. Typically, a depreciation of
the dollar would be expected to lead to a rise in the dollar price of
oil. As oil is priced in dollars, a lower exchange value of the dollar
reduces the foreign-currency price and thus boosts demand. To
clear the market, the dollar price of oil must then rise, assuming
(reasonably) that supply is not perfectly elastic.
177
prices indicate that more supply is needed Notes
and falling prices indicate that there is too much supply for the prevailing demand level.
A depreciation of the dollar would be expected to lead to ain the dollar price of oil.
Summary
The APM played a significant role in insulating oil producers,
refiners and marking companies from global oil price fluctuations
and fulfilled the socioeconomic objectives of the government
considerably but in the process failed to generate adequate
incentives for investment in the sector and thus failed miserably
to create a vibrant and globally competitive oil industry. With the
ushering of liberalization and economic reforms in 1991, the
policy makers increasingly began to feel that APM might no longer
work successfully as it had in the past and the energy security of
country would be at stake if a robust petroleum industry is not
created.
There are some types of crude oil in Middle East, which can only be
bought by annual contract and these crude oils are destination
specific. These are, therefore, called non-tradable crude. These
crude types, like Arab Heavy, Arab Light, Arab Medium and
Kuwaiti Crudes, are sold by the respective NOC under annual
contract and are bought by the refiners directly.
Keywords
Basic Price: It is the floating element and is linked to a
Benchmark Crude Price, which is assessed by a price assessing
agency on daily basis.
Brent: It is generally accepted to be the world benchmark.
Formula Price: The price has two elements. One is the basic price
(say B) and another is the premium and discount (say P). This
type of price is called floating price or formula price.
Petro Retailing Business
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 18: OPEC
179
Unit 18 Notes
Activity
Prepare an assignment on the
___________________
OPEC OPEC’s role inprice
___________________
structuring.
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
OPEC is the Organization of the Petroleum Exporting Countries.
It is an oil cartel whose mission is to coordinate the policies of the oil-
producing countries. The goal is to secure a steady income to the
member states and a secure supply of oil to the consumers. Those
who invest in petroleum activities should receive a fair return on
their investments.
181
4. Non-OPEC lifting costs tend to be higher than OPEC lifting
costs, which makes non-OPEC production more vulnerable to Notes
Activity
price collapses. Prolonged periods of low prices can drive Write an article on the OPEC’s Oil Policy.
___________________
higher cost producers out of business and make major oil
___________________
companies focus less on higher cost areas.
183
bottlenecks, hindering availability of crude at the point of Notes
consumption. Fourthly, the paper market and financial market
also plays a significant role in price formation of crude oil. OPEC
members do not participate in these markets and the forces
operating in these markets have dynamics, which are different
from those of physical oil market.
185
expertise in drilling, exploration and information technology. Notes
Indian companies having comparative advantage in these fields
need to be marketed in these countries. India’s premier companies
like ONGC Videsh Limited (OVL), the consultancy JV of ONGC,
IOC & GAIL (ONGlO) and Petroleum India International (PII) can
play constructive role in this venture.
Indian companies have to secure equity in overseas oil fields. OVL
has done well by doing this in Sakhalin, Iraq, Vietnam and Sudan.
This is an area where Multinational Oil Companies like British
Petroleum (BP), Total Elf Fina, Caltex-Chevron – Texaco and Shell
have considerable expertise world over. Indian companies have to
penetrate into this area, which require huge capital, risk taking
ability, institutional arrangement and above all managerial vision.
186
Check Your Progress
Notes
Activity
Make a presentation on Fill in
the OPEC’s production cut and compliance.
___________________ the blanks:
NON-OECD
187
SUPPLY Notes
FSU 12.8 13.3 13.5 13.5 13.5 13.7 13.5 13.7 13.6 13.5 13.6 13.6
Europe 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
China 3.8 3.9 4.0 4.1 4.1 4.2 4.1 4.2 4.2 4.1 4.0 4.1
Other Asia2 3.7 3.6 3.7 3.7 3.7 3.7 3.7 3.6 3.5 3.5 3.6 3.6
Latin America2,4 3.7 3.9 4.0 4.1 4.1 4.1 4.1 4.2 4.2 4.2 4.3 4.2
Middle East 1.7 1.7 1.7 1.7 1.7 1.8 1.7 1.8 1.7 1.7 1.5 1.6
Africa2 2.6 2.6 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.6 2.6 2.5
Total Non-OECD 28.4 29.1 29.6 29.7 29.8 30.0 29.8 30.1 29.8 29.7 29.7 29.8
Processing Gains3 2.0 2.0 2.0 2.1 2.1 2.1 2.1 2.2 2.1 2.1 2.2 2.2
Global Biofuels 4 1.4 1.6 1.5 2.0 2.2 1.9 1.9 1.6 2.0 2.2 1.9 1.9
Total Non-OPEC5 50.6 51.5 52.2 52.5 52.6 53.2 52.6 52.7 52.4 52.6 53.3 52.7
Non-OPEC 49.6 51.5 52.2 52.5 52.6 53.2 52.6 52.7 52.4 52.6 53.3 52.7
Historical
Composition2
OPEC
Crude6 31.6 29.1 29.2 29.0 29.4 29.3 29.2 29.9 29.3 29.8 30.2 29.8
NGLs 4.5 4.9 5.2 5.2 5.5 5.6 5.4 5.8 5.7 5.8 5.9 5.8
Total OPEC 36.1 34.0 34.4 34.2 34.9 34.9 34.6 35.6 35.1 35.6 36.1 35.6
OPEC Historical 37.1 34.0 34.4 34.2 34.9 34.9 34.6 35.6 35.1 35.6 36.1 35.6
Composition2
Total Supply7 86.7 85.5 86.5 86.8 87.5 88.1 87.2 88.3 87.4 88.2 89.4 88.3
STOCK CHANGES
AND
MISCELLANEOUS
Reported OECD
Industry 0.3 -0.1 0.4 0.9 -0.1 -0.8 0.1 -0.5 0.5 -0.1 -0.6 -0.2
Government 0.0 0.1 0.0 -0.1 -0.1 0.1 0.0 0.0 0.0 -0.4 0.1 -0.1
Total 0.3 0.0 0.4 0.9 -0.2 -0.7 0.1 -0.5 0.5 -0.5 -0.6 -0.3
Floating Storage/Oil 0.0 0.3 -0.2 0.1 -0.2 -0.3 -0.2 0.2 -0.2 -0.2 0.0 -0.1
in Transit
Miscellaneous to -0.3 -0.3 -0.6 -1.7 -1.2 -0.7 -1.0 -0.5 -0.8 -0.6 0.1 -0.4
balance8
Total Stock 0.0 0.0 -0.4 -0.8 -1.7 -1.7 -1.1 -0.8 -0.5 -1.3 -0.5 -0.8
Ch. & Misc
Memo items:
Call on OPEC crude 31.6 29.1 29.5 29.9 31.0 31.0 30.4 30.6 29.8 31.1 30.7 30.6
+ Stock ch.9
1 Measured as deliveries from refineries and primary stocks, comprises inland deliveries,
international marine bunkers, refinery fuel, crude for direct burning, oil from non-
conventional sources and other sources of supply.
2 Other Asia includes Indonesia throughout. Latin America excludes Ecuador throughout.
Africa excludes Angola throughout.
Total Non-OPEC excludes all countries that were members of OPEC at 1 January 2009.
Non-OPEC Historical Composition excludes countries that were OPEC members at that
point in time.
Total OPEC comprises all countries, which were OPEC members at 1 January 2009.
OPEC Historical Composition comprises countries, which were OPEC members at that
point in time.
3 Net volumetric gains and losses in the refining process (excludes net gain/loss in China
and non-OECD Europe) and marine transportation losses.
4 As of the July 2010 OMR, Global Biofuels comprise all world biofuel production including
fuel ethanol from the US and Brazil.
Petro Retailing Business
188 5 As of the March 2006 OMR, Venezuelan Orinoco heavy crude production is included
Notes within Venezuelan crude estimates. Orimulsion fuel remains within the OPEC NGL and non-
conventional category, but Orimulsion production reportedly ceased from January 2007.
6 Comprises crude oil, condensates, NGLs, oil from non-conventional sources and other
sources of supply.
7 Includes changes in non-reported stocks in OECD and non-OECD areas.
8 Equals the arithmetic difference between total demand minus total non-OPEC supply
minus OPEC NGLs.
9 Equals the “Call on OPEC + Stock Ch.” with “Miscellaneous to balance” added for
historical periods and with an average of “Miscellaneous to balance” for the most recent
8 quarters added for forecast periods.
Summary
Crude oil is a heterogeneous and composite raw material. Its value
is realized from the price, which its yields fetch in the product
market. Crude oil’s price is determined by plethora of forces
operating in both physical and financial market. Crude oil is
transformed into value added refined products, which have got
use value to its consumers. Crude oil is made available to a
refinery by transportation, which adds to its cost. Tax from
petroleum products is a major revenue item for governments of
all countries. Therefore, tax structure of a country has a bearing
on its cost. As various regions of the world are asymmetrically
endowed with crude oil, it moves from surplus region to deficit
consumption regions. Therefore, crude oil is a highly traded
commodity. A
UNIT 18: OPEC
189
refiner, who is the ultimate buyer of crude oil, pays for all these Notes
costs and realizes its margin by selling refined products, which are
processed out of crude oil.
Keywords
Cartel: A formal (explicit) agreement among competing firms. It is
a formal organization of producers and manufacturers that agree
to fix prices, marketing, and production.
OECD: The Organisation for Economic Cooperation and
Development is an international economic organisation of
34 countries founded in 1961 to stimulate economic progress and
world trade.
Statute: A formal written enactment of a legislative authority that
governs a state or city.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Petro Retailing Business
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 19:
Promotion
191
Unit 19 Notes
Activity
Prepare a report on the structure of oil industry.
___________________
Promotion ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
Crude oil, natural gas, refined products, and petrochemicals are all
sold into commodity markets. Commodities are mass-produced,
unspecialized products, with high fusibility, having characteristics
so similar that they are interchangeable. For example, light sweet
crude oil is fungible because a barrel produced in West Texas and
one produced in Saudi Arabia would produce similar mixes of
products if processed in the same refinery.
Taking a broad view of petroleum marketing it involves:
Transporting the product to a point where custody transfer is
feasible
Providing storage facilities wherever necessary
Balancing product and demand
Obtaining the best possible price.
193
Venezuela. Qatar joined in 1961 and was followed by Indonesia
and Libya in 1962. By 1979, the number of OPEC’s members Notes
Activity
totalled its present 13, including United Arab Emirates, Algeria, Make an assignment on the crude oil pricing.
___________________
Nigeria, Ecuador and Gabon. Furthermore, during the 1960s,
___________________
several national oil companies of the producing nations were
established, although in most cases without significant market
power.
194 During the 1950s, real oil prices tended to decline, except for the
Notes
years 1956–57 when the Suez Canal was closed. In this
atmosphere of price volatility, OPEC was formed in 1960. The two-
basing-point system was abandoned, at least for crude oil. Yet OPEC
did not succeed in stabilizing oil prices and preventing them from
falling. OPEC’s first effective attempt to raise prices in line with
demand growth and inflation took place in February 1971, when the
Tehran agreement was signed. As a result of this agreement, the
price of 40° API Arabian Gulf crude increased by 33 bbl plus 2 bbl
in settlement of freight disparities.
Up to that time, oil prices were posted by the major integrated oil
companies. However, these were realized or market selling prices,
which were determined by giving discounts of posted prices. The
posted prices, however, served as a basis for oil-producing
governments to calculate their royalty interests and income taxes
from the oil companies operating in their countries. OPEC was
able to seize the initiative, and official OPEC prices emerged.
After October 1973, as a “marker crude” 34° API Saudi Arabia
light became OPEC’s official reference crude oil. OPEC set a price
for Saudi Arabia light and let member governments set their own
prices for the different crudes reflecting the different locational,
physical and chemical characteristic of each crude.
Yom Kippurwar
Fe ars of shortage in US Post-w ar reconstruction Irania n revolution
Growth of Venezuelan Loss of Iranian Netback pricing Asian financial crisis
production supplies introduced
Pennsylvanian Russian Sumatra Discovery of East Texas field Suez crisis Iraq Invasion
oil boom oil exports production Spindletop, discovered invaded of Iraq
began began Texas Kuwait
120
110
100
90
80
70
60
50
40
30
20
10
1861-69 1870-79 1880-89 1890-99 1900-09 1910-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2010-19 2000-09 0
$ 2010
$ money of the day
195
Supply disruption from the Arabian Gulf because of Iran Notes
Revolution in 1979–1980 caused spot oil prices to jump to over
$40/bbl and official prices of OPEC’s crudes to rise accordingly. In
the early 1980s, spot and future markets were widely used at the
same time. In those conditions, spot and official prices declined
(Table 19.1). This led OPEC members to follow market-based
pricing systems. In February 1987, OPEC effectively terminated
market-priced sales and oil prices tended to stabilize around a
target price of $18/bbl.
196
Notes Check Your Progress
Fill in the blanks:
1. For oil products, there have been at least three markets
………………, ……………… and ……………….
2. Term contract sales, however, justify some discounting
for outlet security, and therefore fall between …………
and ……………….
Summary
Commodities are mass-produced, unspecialized products, with high
fusibility, having characteristics so similar that they are
interchangeable. For example, light sweet crude oil is fungible
because a barrel produced in West Texas and one produced in
Saudi Arabia would produce similar mixes of products if
processed in the same refinery.
Before World War I, the world oil market was dominated by four
major international oil companies: Shell, Standard Oil, Nobel and
Rothschild. The latter two companies were in Russia and were
liquidated as private companies by the 1917 Russian Revolution.
Another major company that was founded by the British
government was the Anglo-Persian Company (now British
Petroleum).
Before World War II, the world oil market (mainly US, the world’s
largest producer, consumer and a net exporter) was controlled by
the major oil companies. Thus, the single basing-point price system
was applied. Under this system, the price is quoted only for the
point of delivery. It equalled the f.o.b. price at the base, which was
the US coast of the Gulf of Mexico, plus transport and insurance
costs to its destination.
In principle and to a large extent, prices for oil products can be
regarded as reflecting the economic value-added in the chain from
production to marketing. Product prices are linked to crude prices
through the full-barrel refiner’s margin, which can be considered
as value-added in the processing of crude oil.
197
Keywords Notes
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Petro Retailing Business
198
Notes
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 20: Case
Studies
199
Unit 20 Notes
Case Studies
Objectives
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
200
Notes The roll out of “Club HP” began in a phased manner, initially
targeting 85 outlets in the cities of Mumbai, Delhi, Bangalore and
Kolkata. Encouraged by the initial experience, the “Club HP”
brand has been quickly expanded to cover over 1000 outlets in
all major cities and towns across India. The distinctive red and
blue Club HP logo is an all too familiar symbol, inviting motorists
looking for a quick and refreshing fuelling experience.
“Club HP” outlets are categorized as Standard, Mega and Max
depending on the levels of services and amenities available. Each
outlet will offer a bouquet of standardized services to consumers,
depending upon market requirements and logistical abilities.
Vehicle Care: The Club HP outlets have been carefully
selected to ensure that they can offer high quality vehicle
care. Each Club HP Mega and Max outlet is equipped with a
service station. In addition, the outlets will also provide
vehicle consumable and accessories, all under one roof.
More and more outlets will progressively upgrade to
“Authorised Service Stations” as part of our association with
various vehicle manufacturers.
Quick Care Points: Consumers are offered a free check-up
of vital elements such as engine oil, brake oil, battery water,
coolant, fan belt, radiator hose etc. by the specially trained
“Club HP” attendants. In addition, a quick inspection of the
tyres is done and recommendations given in case any
immediate action is required.
Digital Air Towers: The performance and safety of new
generation cars depend a lot on the correct air pressure
maintained in the tyres. The specially designed digital air
pressure equipment not only ensures accurate air pressure in
the shortest time but also adds to the comfort and safety of
travel.
‘Good Fuel Promise’ Towers: Consumers are offered the
facility to personally conduct simple tests with the help of
specially designed standard apparatus. A simple procedure
booklet is also provided to help anyone check the quality
and quantity of fuel. The consumers are also invited to fill in
the printed certificate booklet, which will be available at all
“Club HP” outlets in order to record their assessment. This
feedback is regularly screened by the HPCL team to plan
remedial actions or service upgrades in accordance.
Vehicle Finance and Insurance Related Counsel: HPCL
has tied up with leading vehicle insurance and finance
service providers for these activities, which include
assistance towards issuance and renewal of policies as well
as extension of loans for purchase of new or second hand
vehicles.
ATMs: HPCL has taken the lead in providing ATM facilities
at its outlets in association with leading banks and is
targeting over 400 ATMs very soon. Select Club HP outlets
have already been equipped with ATMs.
Contd...
UNIT 20: Case Studies
201
Bills Payments: HPCL has tied up with Skypak Financial Services, which is providing “Drop boxes” Notes
at all “Club HP” outlets in a pha
Communication Facilities: Each Club HP outlet is equipped with a payphone for the convenience of consumers. In addition, selec
HPCL: ICICI Co-branded Credit Cards- Customers visiting the “Club HP” outlets will be able to use the HPCL – ICICI Credit Cards to
Basic Amenities – Each “Club HP” outlet will extend basic amenities such as “safe drinking water” through water purifiers, hygienic
Question:
Read the case and summarise the facts.
Source: http://www.hindustanpetroleum.com
Petro Retailing Business
202
Notes
Case Study 2: LPG, Diesel Burn Oil Marketing Companies’
Pockets
With LPG consumption expected to show an increase of 10 per
cent in December, the OMCs feel that they will be able to break
even on cooking gas only if the retail price is doubled. It is not
only diesel but domestic LPG (cooking gas) too is becoming a
source of concern for the public sector oil marketing companies
(OMCs).
With LPG consumption expected to show an increase of 10 per
cent in December, the OMCs feel that they will be able to break
even on cooking gas only if the retail price is doubled.
The public sector OMCs – Indian Oil Corporation, Bharat
Petroleum Corporation, and Hindustan Petroleum Corporation –
sell domestic LPG, PDS kerosene and diesel at a Government-
controlled price.
Effective January 1, the desired increase in the retail-selling price
of domestic LPG, as assessed by the oil companies, is ` 366.28 for
every 14.2 kg cylinder.
Currently, domestic LPG price ranges from ` 345.35/cylinder in
Delhi to ` 365.10/cylinder in Kolkata. However, political
compulsions would restrict the Government from allowing such a
steep increase in domestic LPG prices.
“A situation has come where just a marginal increase of ` 20 or
` 50 a cylinder will not help. As the domestic price, which is
artificially controlled is not moving in tandem with the
international product price, the Government needs to take a
decision,” an oil company official said.
In November 2010, LPG consumption saw a growth of 8.9 per cent
year-on-year at 1.197 million tonnes.
“This increase in consumption has been mainly in domestic LPG
category due to subsidised rates. In fact, the subsidised rates have
also led to diversion of domestic LPG for use in commercial places
such as dhabas,” the official said.
Though diesel is seeing constant increase in demand, growth in
its sales, which makes for a third of the refined products
consumption, eased in November to an annual 3.8 per cent.
For December, the industry is expecting a growth of about 3-
5 per cent.
The desired increase in the retail-selling price of diesel is ` 6.99 a
litre. At present, diesel is being sold at ` 37.75 a litre in Delhi and
` 42.06 a litre in Mumbai.
Private retailers such as Essar and Reliance are also feeling the
burden, as they have to sell the fuel at a lower price to compete
with the public sector OMCs.
At present, private players are selling diesel at about ` 1–` 4
a litre (varying from State to State) higher than PSUs.
Contd...
UNIT 20: Case Studies
203
At the current crude oil price levels, the public sector OMCs are estimated to lose ` 72,812 crore onNotes
sale of petroleum products bel
Question:
Summarise the case facts in about 200 words.
Source: http://www.infraline.com/Details/lpg-diesel-burn-oil-marketing-cos-pocketslpg-
consumption-expected-to-show-an-increase-of-10-per-cent-in-december-100305.htm
Petro Retailing Business
204
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UNIT 21: Sales and Marketing
205
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
BLOCK-V
Detailed206Contents Petro Retailing Business
Notes F
UNIT___________________
21: SALES AND MARKETING
UNIT 23: PETROLEUM INDUSTRY FUTURE
Introduction
___________________ Introduction
Sales and Marketing of Petroleum Products
Future of Global Petroleum Industry
___________________
Crude Oil Marketing
Upstream Industry: Future of the North Sea
___________________
Natural Gas Marketing
Downstream Industry – Refining and Marketing
___________________ Future Oil Prices
UNIT 22: FRANCHISING AND BRAND
MANAGEMENT
___________________
UNIT 24: EMERGING ISSUES IN INDIAN OIL
Introduction
___________________ INDUSTRY
Franchising Management
___________________ Introduction
Brand Management
Import Parity Price
___________________
Basic Differences between Brand and
Managing Unannounced Surplus
Product
___________________
Petro Retailing in General Outlets – FMCG Stores
and Super Markets
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
In this unit, a general review of the industrial structure of world
oil market will be provided to explain the forces, which shape the
oil industry and influence oil pricing.
208 On the oil products side, the marketing was relatively simple in
Notes the past. There were essentially three main products: Motor
Activity
h the help of internet,___________________
collect more information on crude oil marketing.
Gasoline, Heating Oil and Heavy Oil. Motor gasoline markets
were, and remain, the most fragmented among the world’s oil
___________________
products. In the United States, which consumes about half of the
world’s gasoline supply, private service stations tend to be the
main marketing distributors. In the rest of the world, major
private or government companies own the outlets. However,
company or government-owned service stations tend not to
compete on a price basis, but on advertising and locational
advantages.
For the middle distillates, mainly heating oil, diesel fuel and
aviation jet fuel, the situation is much more complex. For heating
oil, competition is less among suppliers, which implies less
emphasis on advertising and brand identification. Diesel fuel sale,
however, is mostly for trucks and other heavy equipments such as
railroad engines, construction equipment and marine diesel
engines. Because sales tend to be in larger volumes than for motor
gasoline, marketing relies on price differentials. For aviation fuel,
it tends to be an especially profitable marketing area. This is due
to the large volumes involved and high quality requirements.
On the other hand, heavy fuel oil is mainly used for electric power
generation. It is always sold on a wholesale basis, and often under
long-term contracts, with prices related to the prices of coal and
natural gas.
209
Since crude is so easily transported by marine tanker, in remote Notes
areas of the world the development of a new field generally
includes building a pipeline connecting the field to a marine
loading terminal. This gives complete access to the world market.
An oil company may use its own tankers to ship to its refinery in
Europe or the US, but more often it will sell at the terminal to the
highly organized and efficient third-party market. Crude oil
traders responsible for procuring feedstocks for the world’s
refineries are in constant contact with the producers, negotiating
prices and arranging transportation.
When a new field is discovered in the US, the operator normally
connects it to the nearest crude oil pipeline and receives the per
barrel “posted price” published by the pipeline company. Producers
also have the option to rent space in the pipeline to transport their
crude. Because of the well-established market between producers
and refiners in the US and abroad, and because it is a fungible
product, no particular attempt is made by companies to run their
own crude in their own refineries.
210 major oil companies who controlled the foreign-produced crude, the
Notes TRC was
able to maintain relative price stability well into the
Activity
Present an assignment on the natural
___________________ gas marketing.
1960s.
___________________ By the early 1970s, the United States had lost its position of
leading producer in the world, and in fact had become a net
importer. This eliminated the TRC as a player, leaving the
multinationals to manage the international crude markets alone.
It also gave OPEC new life as it members realized that they now
dominated world crude supplies. In 1973, a wave of
nationalizations by the producing countries started. OPEC quickly
took control of the crude market and in October of 1973 more
than tripled prices. Since then, OPEC has tried to stabilize prices
by adjusting member’s production rates to meet market demand.
Their efforts have been successful at times, but at other times,
major price fluctuations have occurred. This is not surprising
considering the diversity of interests that exist between individual
member states. For example, OPEC member Iraq invaded fellow
member Kuwait in the Gulf war.
Another factor weakening OPEC is the substantial non-
OPEC production that has recently been developed around the
world. As of the late 1990s, OPEC production has been reduced to
only 40% of world production. It is significant, however, that
OPEC, particularly Saudi Arabia, still has virtually all the world’s
surplus producing capacity. This assures them continued
influence on crude prices.
211
place to a more easily transported liquid. Another approach is to Notes
bring demand to the gas field by building, for example, a fertilizer
plant in the remote location. The higher valued fertilizer can then
be economically transported to the consuming area.
Unlike crude oil, it is not feasible to build surface storage facilities
for gas. Gas is, in effect, stored in the reservoir and not produced
until it can be consumed. Underground gas storage usually using
depleted gas fields near the market, is a variant of this. In the US,
the bulk of gas production is in the southwest of the country while
the population and consumption is concentrated in the northeast.
Demand is heaviest in the winter, so the pipeline operates at
maximum rates during cold weather. In the summer, when
demand slows, production would be normally being reduced and
the pipeline operated at reduced levels. With underground
storage, the pipeline throughput is kept high. When the gas
reaches the northeast, instead of being consumed, it is injected
into the subsurface storage reservoir. During the next winter, the
gas is produced out of storage to augment the gas coming up the
pipeline.
With remote gas developments, the gas reserves are totally
committed to the project, which may last 20 years or longer. This
pattern prevails throughout most of the world. In recent years,
however the gas industry in the US has become a great deal more
flexible. Deregulation of the industry has freed up pricing, so short
term markets for gas, even “spot” markets, have now, developed.
The contract chain has been altered so that the producer no longer
must sell its gas to the pipeline company, who then sells it to the
consumer. Instead, the producer and consumer can make the deal
direct or through intermediary trading companies, and hire the
pipeline to transport it. This flexibility and efficiency is benefiting
all parties. Gas futures are now traded on financial markets,
much the same as are crude futures. Companies have become
quite sophisticated in placing hedges to cushion themselves from
short-term gas price fluctuations.
Summary
The main sectors involved in the oil industry have been reviewed.
It is found that high oil prices stimulate more investment in
exploration. In addition, it has been noted that the exploration and
development stage is part of the overall production operation in the
UNIT 21: Sales and Marketing
213
oil industry. Because of the high fixed cost of exploration and Notes
development, the oil industry tends to be a decreasing cost
industry. To convert crude oil into its useful finished product it has
to go through refining processes. Refining facilities are located
mainly near the consuming areas.
As far as marketing is concerned, crude oil and oil products have
in the past been marketed quite differently. With the increased
fragmentation of the oil industry, crude oil marketing is becoming
more like product marketing of the past. This has been
encouraged by the emergence of official exchanges in major oil
trading centres.
Keywords
Coast Refiner: It would typically deliver its surplus gasoline to
other marketers in the immediate area in trade for similar
volumes received from other refiners on the east coast, west coast,
and elsewhere.
Liquified Natural Gas: Liquified natural gas is an approach
where the gas is converted in place to a more easily transported
liquid.
Organisation of Petroleum Exporting Countries (OPEC): It
was formed in 1960 to give the producing countries a unified
voice in dealing with the western oil company’s crude pricing.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Petro Retailing Business
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 22: Franchising and Brand
Management
215
Unit 22 Notes
Activity
Prepare a report on franchising management and franchising models in petroleu
___________________
Management ___________________
Objectives
After completion of this unit, the students will be aware of the following
topics:
◢ Franchising Management
◢ Brand Management
◢ Basic Differences between Brand and Product
Introduction
To promote sales and increase market share, it is essential that
both franchisor and franchisees are vigilant about protecting and
promoting their most precious asset, the brand. The franchise
package normally includes a brand management, advertising or
marketing fee, but franchisees still have a responsibility to help
build the brand.
Franchisors should create and refine the franchise brand before
bringing franchisees on board, but brand building is on-going and
the franchise chain is only as strong as its weakest link.
Franchising Management
The word ‘franchise’ has been used to describe many different
kinds of business relationships. Industries such as fast food, real
estate and petroleum are already well recognized in franchising.
In recent years, we have seen new entrants involved in such
activities as internet services, energy supply, football and banking,
bringing with them a whole range of different needs and
broadening our perspective on franchising.
217
Accordingly, Petrol/Diesel network was predominantly Notes
company controlled while other products had a more loosely
structured dealer controlled network.
Lubricants and special products are also franchised to a non-
exclusive network.
However, over a period of time, some of the models have been
diluted with changing priorities.
218 Effort to reward ratio is initially much less than that for fuel
Notes
trade
Focus on category management
Most franchisees do not want to expose large fraction of
personal wealth at risk
Enhanced customer interaction – multiple touch points
An understanding of customer acquisition costs as an
investment for the long term rather than cost
Maintenance of standards and consistency of operations
Stricter financial control – MIS and data management
However, many franchisees are highly averse to any new
concepts/plans. Therefore, several key priorities for both
franchisors and franchisees need to be demarcated, considering the
following:
Creating a positive brand image and clear brand positioning
Creating high brand awareness & recall
Developing a sustained business model
Developing a strong national marketing policy
Choosing the right location
Selection of Franchisees – akin to selecting partners in
business
Understanding from day one that the real customer is the
buyer of the product or service that is sold, it is not the
Franchisee
Developing systems, structures, suppliers for achieving
consistency
Developing a flexible & low cost structure
There is a clear need to significantly strengthen partnership with
mutual obligations between the franchisor and franchisees in
terms of following:
Written contract
Partnership requiring delivery by both parties
Leverage of existing business system/brand equity
Finite period of operation-potential for renewal
UNIT 22: Franchising and Brand Management
219
Sharing of financial gain
Notes
Activity
Specific operational procedures to be adhered to
Make a written assignment on the concept and features of brand managem
___________________
True partnership with mutual obligations and focus on several
aspects in addition to financial returns ___________________
Brand Management
There was time in not so recent past when salt was retailed as
simple, plain salt till brands like Tata salt, Dandi, etc. marked
their entry. The petroleum sector was typically selling motor
spirit, high speed diesel, etc. till recently.
However, last couples of years have seen entry of speciality,
branded fuels like Speed, Hi-Speed, Josh, Premium, etc.
Why did that happen? In a stagnant market where the overall
demand is not growing at a satisfactory rate, one way to expand
margins is by expanding the market share. That means wresting
some of sales volumes from the competitors. Alternatively,
company can decide to charge a higher price than the competition.
Typically, customers are not willing to pay a higher price till the
merchandise is ‘perceived’ different from other. The perceived
value of the product differs in customers’ minds with respect to
product’s additional features. In times of increase competition,
companies often adopt strategies aimed either at increasing cost
competitiveness or at growing revenues. A strong brand helps in
shifting the demand curve as depicted in Figure 22.1.
Brand Personality is what distinguishes one brand from another.
It is the sum of intangible assets of the brand. It is the symbolic
aspect of brand. Southgate defines brand personality as the
human characteristics of the brand. For example, Harley Davidson
motorcycle is seen as a macho, freedom-seeking person.
Petro Retailing Business
220
Notes
221
represent perceptions which may or may not reflect objective Notes
reality…. as image of competence may be based upon the
appearance of a doctor’s office and the manners of his staff rather
than on the objective measure of the health of former patients.”
Brand personality is the sum total of all the significant tangible
and intangible assets that a brand possesses. Whereas, brand
image is how the brand is perceived by the consumer. It can be
said the brand personality is the cause while brand image is the
effect.
Following table highlights the difference.
Table 22.2: Difference between Brand Personality and Brand Image
Summary
The franchise package normally includes a brand management,
advertising or marketing fee, but franchisees still have a
responsibility to help build the brand.
Franchisors should create and refine the franchise brand before
bringing franchisees on board, but brand building is on-going and
the franchise chain is only as strong as its weakest link.
There was time in not so recent past when salt was retailed as
simple, plain salt till brands like Tata salt, Dandi, etc. marked
their entry. The petroleum sector was typically selling motor
spirit, high speed diesel, etc. till recently.
UNIT 22: Franchising and Brand Management
223
Lesson End Activity Notes
Keywords
Brand Image: Brand image is the totality of impressions about
the brand.
Brand Personality: Brand personality is the sum total of all the
significant tangible and intangible assets that a brand possesses.
Brands: Unique design, sign, symbol, words, or a combination of
these, employed in creating an image that identifies a product and
differentiates it from its competitors.
Product: The end result of the manufacturing process, to be
offered to the marketplace to satisfy a need or want.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Petro Retailing Business
224
Notes
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 23: Petroleum Industry Future
225
Unit 23 Notes
Introduction
The global oil industry has moved into a high profit market
condition and the short-term outlook appears promising.
Exploration and production technology is constantly improving,
creating the ability to find oil and gas in increasingly remote and
inaccessible locations. Oil and gas companies are growing wise to
consumer’s demands. With added pressure from governments,
cleaner fuels are being introduced on a continual basis. Growing
global populations are requiring more petroleum products,
responded to by an increase in global refinery capacity.
226
Upstream Industry: Future of the North Sea
Notes
Activity
Write an article on the upstream industry of the NorthThe
___________________
future of the North Sea is a two-sided coin. On one side, new
Sea.
investment has slumped due to the continued hangover from the
___________________ low oil price in 1998. On the other side, opportunities are enormous
for smaller, independent E&P companies, who are looking to re-
establish mature or even capped fields with the assistance of new
drilling technology. The UK Government have provided tax breaks
for such E&P companies, as a further sweetener to the
opportunities on offer in the UK sector of the North Sea.
In the IEO2011 Reference case, Mexico and the North Sea are the
only non-OPEC production areas that lose more than 1 million
barrels of liquids production per day from 2008 to 2035. The most
significant decline in non-OPEC liquids production is projected for
OECD Europe, with a decrease from 5.1 million barrels per day in
2008 to 3.0 million barrels per day in 2035. Most of the decline is
in North Sea production, which includes offshore operations by
Norway, the United Kingdom, the Netherlands and Germany.
Over time, fewer and fewer prospects capable of compensating for
declines in existing fields have been discovered. The drop in North
Sea liquids production does not vary significantly among the four
price cases, both because the projected production is based on
depletion of resources and because all the countries currently
producing liquids from North Sea operations are expected to
continue encouraging investment and providing open access to
development.
Another factor that has added to the low level of development work
has been the mergers of a large number of companies with the
investments in the North Sea.
1. Western Investment in Middle East: European and other
western oil majors are looking to expand their presence in
Saudi Arabia, following the kingdom’s latest investment
proposals to foreign oil companies, including Royal Dutch
Shell, Exxon mobil, Phillips, and Chevron Texaco. Saudi
Arabia alone accounts for over a quarter of all global oil
reserves. Hence, the large oil companies are queuing up for a
share of this long-term supply.
2. US Independents Prefer to Explore Overseas: More
independents are going overseas to search for oil and gas
because North American basins are mature, production is
UNIT 23: Petroleum Industry Future
227
declining and competition is fierce for E&P deals. Foreign Notes
basins have become much more attractive with regard to their
contract terms and their potential reserve size.
There is limited potential in the United States, unless
companies grow by acquisitions or trades. But this has been
labelled a ‘zero sum game’ where one side wins and the other
loses. Larger independents will be expected to start spending
more overseas, with the exception of the deep-water Gulf of
Mexico.
3. China: China is becoming more and more dependent on
imported oil as it looks towards the next decade. In fact, the
amount of imported oil could be as high as 40 per cent of its
total consumption. The inherent problem that is faced by
China is that there have been no new significant discoveries
for a number of years. China’s E&P future is not as bleak as it
may sound. Some geologists have claimed that there are some
significant untapped resources in the Songliao Basin in the
northeast and in the Bohai Sea in the west and northwest.
4. Asia Pacific Region: Oil producers in the Pacific Rim are
expected to increase production significantly with the use of
enhanced exploration and production technologies. Deep-water
fields offshore from the Philippines have improved the reserve
picture there and production is expected to reach almost 250
thousand barrels per day by 2005. Vietnam’s long-term
production potential also is still viewed with considerable
optimism, although exploration activity has been slower than
originally anticipated. Output levels from Vietnamese fields
are expected to exceed 500 thousand barrels per day by 2020.
5. Libya: Libya has been heralded with the title of “The no. 1
Exploration Hotspot” in Robertson Research International’s
survey in 1998.
Top ten exploration hotspots in the world as per the latest
survey are as follows:
(a) Libya
(b) Iran
(c) UK
(d) Australia
(e) Algeria
Petro Retailing Business
Electronic Trading
Both the International Petroleum Exchange (IPE) and the
American Petroleum Exchange (APE) are testing the water with
regard to ‘electronic trading’. The days of the trading floor pit and
‘open outcry’ may be numbered. The APE has recently set up an
internet based trading exchange for wholesale gasoline and diesel.
The IPE have developed a new system that will allow trading to be
carried out via the internet on a real time basis.
Environmental Issues
MTBE is an additive brought into produce a cleaner burning fuel.
However, MTBE is now thought by some to have carcinogenic
properties disputed by others and has now found its way into the
UNIT 23: Petroleum Industry Future
229
Californian water system probably from site contamination or Notes
inland lakes with motor vessels experiencing fuel leakage. The
Environmental lobby in California is very strong and has pushed
through the total ban before conclusive testing has been done. The
cost of development of the replacement additive will be high with
the end-user the ultimate financier.
Much has been made of the ‘greenhouse gas effect’, the Kyoto
Protocol and emission trading. A rather sobering thought, which
should produce a reduction in the hysteria surrounding the
subject, is a recent report, which suggested that just one large
volcano eruption produces more environmentally unfriendly gases
than the entire world production of ‘greenhouse gases’ for the
whole year.
Alternative Fuels
Alternative Fuelled Vehicle (AFV) is any vehicle capable of
operating on an alternative fuel, such as LPG, natural gas, alcohol
or electricity.
There are two configurations:
1. Dedicated, one fuel
2. Non-dedicated:
(a) Hi-fuelled,
(b) Flexible fuelled, and
(c) Duel fuelled.
Hi-fuelled can operate on either an alternative fuel or gasoline but
not at the same time plus they have the separate storage system.
Flexible fuelled can operate in either alternative or conventional
fuel or a combination – single storage and combustion system.
Duel fuelled can burn two fuels simultaneously, stored separately
and injected into the combustion chamber simultaneously. A
second variation of duel fuel has now become a front-runner –
conventional fuel plus fuel cells (electric).
The contenders for the alternative fuel crown are:
Liquid Petroleum Gas (Propane) LPG
Liquid Natural Gas (methane) LNG
Ethanol
Petro Retailing Business
230 Methanol
Notes
Hydrogen
Biodiesel
P-series Fuels
Both LPG and LNG are obtained from natural gas processing and
have been the most popular alternative for many years resulting
in the desire of major oil companies to become gas richer.
The other five can be obtained from renewable sources, either
crops/vegetable matter, sunlight, wood, or natural waste.
Biodiesel, as the name suggests, is the replacement for diesel and
is made primarily from vegetable oils (Soya) as well as animal
waste. It can be used with existing engines, stores safely and
produces a similar power output to conventional diesel engines.
Several large-scale fleet tests are underway and the early reports
are good, including reduced engine wear.
P-series fuel is a vegetable oil, animal plant waste sourced fuel,
used as an alternative to gasoline.
Electric vehicles are three types:
1. Battery powered,
2. Fuel cell, and
3. Hybrid – gasoline plus battery or fuel cell
Battery power still suffers from the high cost of batteries with a
relatively low power range. Both hybrid and fuel cell vehicles are
the fastest growing area of all alternative vehicle manufacturing.
The issues that currently affect AFV sales/production are:
The higher initial cost of the vehicle,
The total drive range limitation, and
Fuel supplies – lack of a network of retailers.
All forms of AFV will have an impact on the major oil companies,
either increased revenue from gas sales or reduced profits in petrol
retailing. Either way the full impact is expected to be felt until
2010, when the AFV ownership will be large enough to really hurt.
UNIT 23: Petroleum Industry Future
231
Check Your Progress
Notes
Activity
Fill in the blanks: Prepare a summarized report on the future oil prices.
___________________
1. …………………… can operate on either an alternative
___________________
fuel or gasoline but not at the same time plus they have
the separate storage system.
2. Flexible fuelled can operate in either alternative or
conventional fuel or a combination – ……………………
and …………………….
3. …………………… fuelled can burn two fuels
simultaneously, stored separately and injected into the
combustion chamber simultaneously.
232
Notes
233
world quite conscious of depleting resources. Most oil explored and Notes
produced by the world so far and will be produced over the next 20
years is termed “conventional” oil, which flows at high rates from
giant oilfields. There is also “non-conventional” oil, viz. heavy oil,
tar, sand oil and shale oil, oil obtained by enhanced recovery. But,
such oil represents a small and relatively expensive fraction of
total production and can be produced only at slow rates.
(Petroleum Review, Dec.1997, p.559).
World demand in the last decade has grown at 1.4 per cent an
year. It is predicted that the world’s midpoint of depletion will
come when 900–1,000 bn b have been produced (half the ultimate
reserves of 1,800–2,000 bn b) which with 811 bn b already
produced will exist for 4–7 years. The anticipation of shortages is
bound to lead to a radical increase in demand so that actual
Petro Retailing Business
234 shortages could be delayed for a few years and this will depend
Notes
upon the behaviour of Middle East producers. However, according
to IEA projections they will be supplying 50 per cent of the world’s
needs and by 2013 will be close to the midpoint of their own
depletion. It is essential to note here that 90 per cent of current oil
production comes from fields more than 2025 years old and 70 per
cent from fields more than 30 years old. It means that Middle East
producers with 65 per cent of world’s proven oil reserves will lead
in the supply side of world oil market.
Major OPEC oil producing countries are keeping the gap between
output and capacity smaller so that they can continue to execute
competitive sale price for their oil.
235
Check Your Progress Notes
Summary
Exploration and production technology is constantly improving,
creating the ability to find oil and gas in increasingly remote and
inaccessible locations. Oil and gas companies are growing wise to
consumer’s demands. With added pressure from governments,
cleaner fuels are being introduced on a continual basis. Growing
global populations are requiring more petroleum products,
responded to by an increase in global refinery capacity.
Keywords
Downstream: The main strategic assets are advantaged refineries
and significant retail positions in key markets.
P-series Fuel: P-series fuel is a vegetable oil, animal plant waste
sourced fuel, used as an alternative to gasoline.
Upstream: These were mainly large, low cost oil and gas fields.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 24: Emerging Issues in Indian Oil Industry
237
Unit 24 Notes
Activity
Write an article on import parity price.
___________________
Industry
Objectives
After completion of this unit, the students will be aware of the following
topics:
Introduction
Globalization is a venture into uncharted path. It has all the
elements of experimentation, observation, deriving experience and
fine-tuning. The experiment in Indian context is being carried out
in a liberal democratic framework, for which there is no precedent
available. The ingenuity of Indian professionals is the only support
and strength, on which the process is being advanced. As the
managers and policy-makers of Indian oil industry today look
forward, they come across issues, which are both daunting and
alluring, as they pose challenge to their search for excellence.
238 For a country like India, which imports 70 per cent of its oil also
Notes does import all the features of oil pricing with
it. The most
Activity
Make a report on managing unannounced
___________________ surplus.
commonly known problem associated with oil pricing is its
‘volatility’ and ‘opaqueness’ (or OPEC-ness). During APM era, the
___________________
OCC’s pool accounts were used to fame the volatility of the input
and used to send out a stable price line. In the absence of APM, the
existing mechanism of ‘import parity’ does not have the shock
absorber.
In a competitive market economy, the case for full and automatic
pass-through of international price changes to domestic retail
prices is strong, on both economic and institutional grounds. Full
pass-through allows for a correct price signal, which enhances
efficiency and does not expose the government to undue fiscal
volatility as a result of variable oil prices. However, most of the
developing country governments, India no exception, do not
implement automatic and full pass-through mechanism when
setting these prices. From a political economy perspective, full cost
pass-through may not be a robust policy reform. The issue also
needs to be examined from the point of view of consumer welfare
implication. For India, having come out of the ‘managed retail
price smoothing’ system, we need to consider various potential
pricing mechanisms, which diverge from full pass through and
provide a degree of price smoothing.
Technology
Technology is a veritable tool for sustainable developments world
over. Environmental degradation, greenhouse effect and pollution
of air and ground water are issues of serious concern which Indian
policy-makers have paid attention to.
In order to reduce pollution, unleaded petrol is being supplied
throughout the country from February 2000. Further, supply of
diesel with maximum 0.05 per cent sulphur content is being
supplied in metro cities.
As Indian economy gets more and more globalized Indian
consumer will have access to cheap and energy efficient goods
available outside India. For a country like India, it is necessary to
develop an energy technology vision on the basis of which
technology development and dissemination can be managed and
promoted. From the point of view of oil security, expanded access,
environmental benefits, an energy mix and a set of technologies
defining the production and consumption related to such a mix
would be an important element of development policy and strategy.
With increase in oil prices, different countries throughout the
world would have a much stronger incentive to improve the
efficiency at different stages of the energy cycle. After the oil price
shock of 1973/74, global energy intensity started moving down
significantly. Projections up to the end of this century indicate a
substantial decline in energy intensity. These changes would be
the result of innovation across the board not only in the energy
Petro Retailing Business
240 system of the global economy, but also in the economic structure
Notes
for the production of goods and services.
Security
Uninterrupted supply line of fuel is a concern for all countries,
developed and developing alike. It is more so for a country like
India, which is dependent largely upon war-prong source like
Middle East. Diversification of crude procurement source has been
attempted, and successfully so, by private refineries and also by
PSU refineries after de-canalization in April 2002. Efforts have
been stepped up by Indian companies like ONGC Videsh Limited
(OVL) and Reliance to secure crude acreage and equity in overseas
oil field like Indonesia, Sudan, Sakhalin, Iraq and some other
places. This is a notable step in the direction of security and self-
sufficiency. Economic diplomacy and overseas commercial venture
by Indian companies together would go a long way in securing
India’s interest in foreign soil. Augmentation of infrastructure in
terms of port facilities, tankage and pipeline to handle sizeable
parcel in quick operation is another necessity of theme. Creation
of strategic reserves for oil is a known solution and government in
collaboration with TERI is working towards its implementation.
Globalization of Indian oil industry is a positive step towards
having security of supply.
Self-reliance
Self-reliance in the oil sector does not necessarily mean only
having right on crude oil. Exploration and production activities in
the Indian basin must be promoted. The exploration of crude and
extraction of crude are two separate activities having their own
separate cost structure. Particularly, exploration is a risky job.
Even if oil is struck in a specified field, the available geological
data and techniques of measurement are inadequate to clearly
define the amount of crude oil that can be extracted from any field.
Hence, the assessment of the sale price of a discovery to another
firm that will undertake extraction of crude oil becomes difficult.
As a result, there are difficulties in the recovery of capital costs
sunk into exploration. Vertical link between exploration and
extraction has to be maintained through some institutional
arrangements. Some models on this issue have already been
worked out by Director General of Hydrocarbon.
UNIT 24: Emerging Issues in Indian Oil
Industry
241
Self-reliance in oil sector also would mean developing technical
capability within the country, and availability of capital and Notes
Activity
foreign exchange required for investment. Prepare an assignment on petro retailing in general outlets.
___________________
242
Notes
Food Service Outlets
This is an emerging sector in the non-petroleum range of products
from sandwiches to full branded fast food operations; and our
research in New Delhi indicates that 40 percent of car owners seek
food service facilities at petrol stations. The critical issues are what
services should be offered, and how should they be provided.
In the US, food prepared on-site for take-away is a significant
category of food service sales and caters to the habit of grazing the
eating ‘on-the-move’.
In India, eating-out is more of a social event, and thus the platform
of ‘Food-on-the-go’ may be less relevant. Our observation is that
convenience stores are likely to be ‘destinations and not ‘traffic
interceptors’ in India. Therefore, full-fledged fast food operations
could offer greater appeal at petroleum stations. The exact nature
of food service provided is a function of the target consumer; a
Barista coffee pub appeals to a very different consumer type from a
‘Chinese van’ consumer, but a Haldiram’s and a McDonald’s may
be complementary.
An interesting option could be to capitalize on the growth of
organized Indian fast food retailing, using relatively well-located
and spacious real estate (petrol stations) to establish ‘chat’ corners
jointly with brands such as Haldiram’s, particularly in the smaller
towns.
Petroleum marketers can adopt a number of operating models for
food service. From an alliance with an established brand such as
McDonald’s to the retailer’s own brand/label.
Factors to be considered in deciding which food service model to
adopt:
1. Space available (including parking)
2. Labour implications
3. Skills/resource requirements
4. Consumer demographics/psychographics
5. Competitive environment
Branded food service offers the benefit of immediate brand
recognition by consumers. It also provides assurance of quality,
freshness and consistency. In India, where the concept of food
UNIT 24: Emerging Issues in Indian Oil
Industry
243
service at petroleum stations itself is new, an alliance or joint Notes
venture is likely to be the most suitable operating model.
Ancillary Services
Ancillary services complement regular convenience stores and food
service by providing additional reasons for consumers to visit the
non-fuel area of the stations while increasing the retailers’ share of
the consumers’ wallet on each visit. The range of ancillary service
that can be sold through petroleum stations is large, and includes
ATMs, insurance sales agents, courier services, prepaid card sales,
laundry services, car wash, newspaper and magazine stand, and
even lotteries.
These include products like ATMs, Courier Services, Dormitory,
Insurance Counters, Automated car wash, Laundry, etc. Some oil
companies have put up pool tables at their petrol pumps. Even
swimming pools have been commissioned at large stations. Rub-off
from other products has been proven through some surveys
conducted by oil industry. One of the surveys conducted to link
ATM with fuel has established that about 60% of ATM customers
buy their fuel from the same RO.
244 At two ROs of a national oil company where McDonald’s outlet was
Notes
commissioned the company registers 225–350% of sales growth on
weekends (when compared to weekly average) when families visit
the McDonald outlet. That clearly indicates purchase of fuel while
footfall at the outlet is due to some non-fuel offering.
“Club HP” outlets are categorized as Standard, Mega and Max
depending on the levels of services and amenities available. Each
outlet will offer the following bouquet of standardized services to
consumers.
Vehicle Care: The Club HP outlets have been carefully selected to
ensure that they can offer high quality vehicle care. Each Club HP
Mega and Max outlet is equipped with a service station. In
addition, the outlets will also provide vehicle consumable and
accessories, all under one roof.
Quick Care Points: Consumers will be offered a free check-up of
vital elements such as engine oil, brake oil, battery water, coolant,
fan belt, radiator hose etc., by the specially trained. “Club HP”
attendants. In addition, a quick inspection of the lyres will be done
and recommendations given in case any immediate action is
required.
Digital Air Towers: The new generation cars depend heavily on
the correct air pressure being maintained in the tyres. The
specially procured digital air pressure equipment will ensure safe
and comfortable travel and also add to the life of the tiers.
Fuel Quality and Quantity Assurance Towers: Where
consumers will be able to personally conduct simple tests with the
help of specially designed standard apparatus. A simple procedure
booklet is also provided to help anyone check the quality and
quantity of fuel. The consumers will then fill in the printed
certificate booklet, which will be available at all “Club HP” outlets
in order to record their assessment. This feedback will be
regularly screened by the HPCL team who will take remedial
actions or upgrade services in accordance.
Vehicle Finance and Insurance Related Counsel: HPCL has tied-
up with IClCI Finance and ICICI Lombard for these services, which
include issuance and renewal of policies as well as extension of
loans for purchase of new or second hand vehicles.
ATMs: HPCL has taken the lead in providing ATM facilities.
UNIT 24: Emerging Issues in Indian Oil
Industry
245
Bills Payments: HPCL has tied up with Skypak Financial Notes
Services, which is providing “Drop boxes” at all “Club HP” outlets.
Communication Facilities: Each Club HP outlet is equipped
with a payphone for the convenience of consumers. In addition,
through the on-going tie-up with Satyam infoway, select outlets
will also provide high speed internet browsing and e-mail facility.
HPCL – ICICI co-branded Credit Cards and HPCL Smart
Cards: Customers visiting the “Club HP” outlets will be entitled to
apply for the HPCL – ICICI Credit Cards to reap the benefits
offered by this unique product. The “HP Smart 1”, a smart card
based loyalty program launched in Bangalore and Hyderabad, will
also be soon available at the Club HP outlets to reward loyal Club
HP customers. Basic Amenities-Each “Club HP” outlet will extend
basic amenities such as “safe drinking water” through water
purifiers, hygienic rest room facilities, food counters, basic
medicines and first aid facility. HPCL has also tied-up with Pepsi
to beverages and bottled water as well as snacks at all “Club HP”
outlets.
Our research among petroleum station consumers in New Delhi
indicates that over 40 percent of car users would like ATM and car
wash services to be provided at petrol stations. However, the key
question is how much would consumers be willing to pay for these
services? Car wash services are currently available through the
unorganized sector for as little as ` l50 per month at one’s
doorstep; can a petrol service station compete profitably with this?
Interestingly, the research also indicated that there may be a
latent demand for laundry services among taxi, truck and auto
drivers but not among urban private car owners.
246
Notes Summary
In this unit, attempt was made to provide a structural framework
of worldwide oil industry with linkage to Indian oil industry. The
business environment in terms of demand, supply and
consumption with historical base has been outlined. The likely
future trend with regard to exploration, asset holding, merger and
acquisitions have also been touched upon to provide a
rudimentary knowledge base. The issues of current interest, like
globalization, economic development and environment have also
been reflected upon.
Petroleum retailing companies have been successfully trying the
concept of FMCG stores and retailing through super markets for a
long time. The major categories under this “allied retailing” are
convenience stores (urban or rural), food services, and ancillary
services.
Keywords
Digital Air Towers: The new generation cars depend heavily on
the correct air pressure being maintained in the tyres.
Food Service Outlets: This is an emerging sector in the non-
petroleum range of products from sandwiches to full branded fast
food operations.
Market Price: It is a price at which the oil finds a buyer at that
point of time.
Quick Care Points: Consumers will be offered a free check-up of
vital elements such as engine oil, brake oil, battery water, coolant,
fan belt, radiator hose etc., by the specially trained.
Vehicle Care: The outlets will also provide vehicle consumable
and accessories, all under one roof.
Further Readings
Books
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and
Natural Gas Production’; Quorum books
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;
2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
and Development Strategies’; Gulf Elsevier; 2010
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
http://www.bp.com
www.iocl.com/
Petro Retailing Business
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Notes
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UNIT 25: Case
Studies
249
Unit 25 Notes
Case Studies
Objectives
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
250 integrate this information exchange directly to their internal back-office systems. This would
Notes Questions:
Write the case facts.
What do you infer from the case?
UNIT 25: Case Studies
251
Case Study 2: Indian Oil Corporation Limited Notes
254
Notes Officers and Regional Managers, hence it is easy to monitor and manage the sales process effi
Question:
Make a SWOT analysis of IOCL decision of deploy the CARE solution.
Source: http://www.microsoft.com/india/casestudies/microsoft-dynamics-crm-4.0/indian-oil-
corporation-limited/india-s-largest-oil-company-reduces-total-cost-of-ownership-by-30-
percent/ 4000009980
Glossary
255
Glossary Notes
Auto Care Services: Services that complement the fuel services such as
car wash, wheel and tyre services, car upholstery cleaning, minor repair
services, etc.
Conventional: Most oil explored and produced by the world so far and
will be produced over the next 20 years is termed “conventional” oil,
which flows at high rates from giant oilfields.
Digital Air Towers: The new generation cars depend heavily on the
correct air pressure being maintained in the tyres.
Downstream: The main strategic assets are advantaged refineries and
significant retail positions in key markets.
Dual Basing-point System: By this system, the Middle Eastern oil was
priced based on low prices from the Arabian Gulf, which were agreed by
the company and producing governments as equal to f.o.b. US Gulf parity
prices plus the transport cost from the Arabian Gulf to destination.
Formula Price: The price has two elements. One is the basic price
(say B) and another is the premium and discount (say P). This type of
price is called floating price or formula price.
Integrated MNCs: They are very powerful operators in the crude oil 257
Notes
market by virtue of their scale at operation, volume of transaction and
financial strength.
Kisan Seva Kendra: Kisan Seva Kendra is an award-winning retail
outlet model pioneered by Indian Oil to cater to the needs of customers
in the rural segment.
Linked Retailing: Under this concept, your main product is the anchor
while some other products one retailed as add on.
Liquified Natural Gas: Liquified natural gas is an approach where the
gas is converted in place to a more easily transported liquid.
Market Price: It is a price at which the oil finds a buyer at that point
of time.
National Oil Company: They are actively into crude oil selling
business, refining business and are in control of the sale and destination
of their cargo. They allocate the quota among their buyers. They also
declare their price, which is called Official Selling Price (OSP).
Non-conventional Oil: It includes heavy oil, tar, sand oil and shale oil,
oil obtained by enhanced recovery.
Non-tradable Crude: The types of crude oil in Middle East, which can
only be bought by annual contract and these crude oils are destination
specific are called non-tradable crude.
Oil Supply & Trading: These activities deal with the procurement of
raw material and bulk sales of products in commodity markets.
Petro Retailing Business
Parity Point: Points of parity are those elements that are considered
mandatory for a brand to be considered a legitimate competitor in its
specific category. It is what makes consumer consider your brand, along
with your competitors.
Petro Transportation: It is the movement of petrol and petroleum
products from one location to another.
Petroleum Exploration Licence (PEL): It is a title granted by the
NSW Government to individuals and companies who wish to explore for
Petroleum (oil & gas) for period up to five years.
Physical Market: It is the market, where physical oil is sold and bought
and the actual seller and actual buyer meet and enter into a contract to
deliver and accept the cargo at a price.
P-series Fuel: P-series fuel is a vegetable oil, animal plant waste sourced
fuel, used as an alternative to gasoline.
Refiners: They are the users of crude oil and are the ultimate buyers.
They are the ones who pay the price, whatever may the level.
Glossary
Trading Companies: They buy crude oil from the market and sell to
others. They invariably have some equity holdings in some crude oils
somewhere in the world. Alternatively they have purchase contract from
the original crude oil producers.
Upstream: These were mainly large, low cost oil and gas fields.
Value Added Services: The term "value added services" is used to refer
to options that complement but a core service offering from a company
but are not as vital, necessary or important.
Vehicle Care: The outlets will also provide vehicle consumable and
accessories, all under one roof.
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Notes
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