Petroleum, Gas and Chemical Logistics: Opportunities and pitfalls in India

Moving petroleum, gas and bulk liquid chemicals safely and cost effectively is not an easy task given the hazardous nature of the products. Given that India is emerging as one of the largest consumers of refined petroleum products and liquified petroleum gas, it is not surprising that the logistics effort to support this growth is receiving some attention.

The extent of vertical integration in the oil sector has varied over time and over countries, but of late the trend globally has been to focus and specialise on what you do best and outsource everything else. This is more visible in developed countries with the oil majors outsourcing many functions, including product storage or tank farm operations, transportation, pipeline operations and retailing because specialist providers of these services are able to deploy their own capital and provide these services at a lower cost thereby boosting the return on capital employed of the outsourcer.

State owned or state controlled oil firms, including those in India, have tended to be much more vertically integrated, jealously guarding all aspects of their operations, save some retail outlets and road transport logistics. Change, albeit slowly, is coming to the oil industry in India. As the subsidies for petrol, diesel and LPG fade away and the industry moves away from simply passing on the high cost of operations or inefficiencies to the government subsidy budget, more and more activities are being outsourced, delivering important cost savings to the state controlled oil marketing companies like BPLC, HPCL and IOCL. Despite the compelling business case for increasing outsourcing and focusing on core competencies, the biggest challenge that private sector firms face is organisational resistance within state controlled oil firms in India to a perceived loss of control and an aversion to dealing with the private sector.

Despite the much-heralded opening up of the Indian economy to inward investment and trade, the ease of doing business at the state and local level in India remains a serious challenge. This is reflected in the latest World Bank rankings where India managed to come in at 130, easily outranked by its BRIC partners. Poorly drafted laws and unrealistic regulations, rent seeking local officials, a plethora of licenses and permits and unequal enforcement make India a difficult environment for those firms wishing to abide by the law. Nevertheless, simply by dint of its sheer size and growth prospects for petroleum, gas and chemicals, India offers great opportunities for specialised logistics companies in storage and distribution that are willing to take the long view.

The future energy requirements of India are so large that it would not be possible to detail the opportunity in each one, but some deserve to be highlighted. For example, aviation, both domestic and international, is slated for rapid growth, with several new regional airports being built. This brings with it the requirement for aviation fuel logistics. India is a large and growing market for Natural Gas and Liquified Petroleum Gas (LPG), each requiring import and distribution facilities. Refineries need inter-modal logistics and containment to optimise their output of fuels and transport the refined products to markets where they are required.

With both the complexities and the opportunities described above, it would appear that the common sense approach for global players in oil, gas and chemical logistics would be to enter into the Indian market through the joint venture or acquisition route. Given the capital intensity of petroleum, gas and chemical logistics, well capitalised firms will clearly have an advantage, but capital on its own is insufficient to truly take advantage of the opportunities. Selection of an appropriate partner is critical in any joint venture, but especially true in India and in this sector. In the case of my own company, Aegis Logistics Limited, a joint venture with Itochu Corporation for LPG logistics, was two years in the making, with both partners evaluating the suitability of each other and what each party brought to the table. Well capitalised, reputable and professionally managed enterprises are able to deliver petroleum, gas and chemical logistics infrastructure at a considerably lower cost, offer logistics services at a lower cost and respond much more flexibly and rapidly than the state controlled oil firms themselves. They should be encouraged to pursue this opportunity to improve their return on capital employed by engaging with the private sector.

Raj Chandaria is vice-chairman and managing director of Aegis Logistics Limited, India′s leading provider of specialised logistics services for the oil, gas and chemical sector.