MDSO831D Petro Retailing Business PDF

Petro Retailing Business
Course Design
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Advisory Council
Chairman
Dr Parag Diwan
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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
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
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Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
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.
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Course Code: MDSO-831D
Course Name: Petro Retailing Business
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
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Contents
Block-I
Unit 1 Introduction to Petro Industry....................................................................................... 3
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Unit 2 The Customer................................................................................................................ 19
Unit 3 Customer Relationship in Petro Sector ....................................................................... 29
Unit 4 Production & Strategy in Petro Industry .................................................................... 41
Unit 5 Case Studies.................................................................................................................. 51
Block-II
Unit 6 New Exploration Licensing Policy ............................................................................... 59

Unit 7 Fuel Quality .................................................................................................................. 71
Unit 8 Fuel Adulteration ......................................................................................................... 83
Unit 9 Forecourt Design and Network.................................................................................... 97
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Unit 10 Case Studies................................................................................................................ 107
Block-III
Unit 11 Supply Chain and Transportation ............................................................................. 113

Unit 12 The Pump .................................................................................................................... 125
Unit 13 Petrol Station and Retail Outlets .............................................................................. 133
Unit 14 Various Schemes in Retail Business ......................................................................... 143
Block-IV
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Unit 16 Petroleum Pricing ....................................................................................................... 161

Unit 17 Crude Oil Pricing ........................................................................................................ 169
Unit 18 OPEC........................................................................................................................... 179
Unit 19 Promotion.................................................................................................................... 191
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Block-V
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Unit 21 Sales and Marketing .................................................................................................. 207
Unit 22 Franchising and Brand Management........................................................................ 215
Unit 23 Petroleum Industry Future........................................................................................ 225
Unit 24 Emerging Issues in Indian Oil Industry ................................................................... 237
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Glossary ............................................................................................................................................ 255
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UNIT 1: Introduction to Petro Industry
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1
Notes
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___________________
___________________
___________________
___________________
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BLOCK-I
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Detailed Contents Petro Retailing Business
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Notes F
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UNIT 1: INTRODUCTION TO PETRO INDUSTRY
___________________ UNIT 3: CUSTOMER RELATIONSHIP IN PETRO
SECTOR
z Introduction
___________________ z Introduction
z Petroleum Industry Structure
___________________ z Customer Relationship in Indian Petroleum Sector
z Geological System of India
___________________ z Initiatives Taken by Indian Oil Corporation Limited
z Exploration and Production Activities in Petro
to Improve CRM
Industry
___________________ CRM by Bharat Petroleum Corporation Limited
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z
z Refining and Marketing Activities in Petro Industry
___________________
UNIT 4: PRODUCTION & STRATEGY IN PETRO
UNIT 2: THE CUSTOMER
___________________ INDUSTRY
z Introduction
___________________ z Introduction
z People in Petro Industry
z Petroleum Production – Highly Regulated Industry
z
___________________
Customers’ Categorization and Recognition
z Exploration and Production
z ___________________
New Competitors
z Crude Oil Reserves
z Customer Loyalty Programmes
z Strategy of 11th Plan (2007–12)
UNIT 5: CASE STUDIES

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Unit 1
3
Notes
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Introduction to Petro Industry
___________________
___________________
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________
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\ Petroleum Industry Structure ___________________
\ Geological System of India ___________________
\ Exploration and Production Activities in Petro Industry
___________________
\ Refining and Marketing Activities in Petro Industry
___________________
___________________
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
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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
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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
4 and collaboration from a number of foreign experts. Technical

Notes assistance was also obtained during this period for carrying out
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Activity
___________________
Prepare a report on the aeromagnetic surveys over Rajasthan, Punjab, UP and Bihar.
petroleum industry structure.
___________________ 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.
___________________
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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).
Petroleum Industry Structure

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
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in upstream or downstream or both. The oil companies can be
grouped into:
z Exploration and production,
z Refining plus marketing,
z Pure refining, and
z Pure marketing.
In India, the E&P companies are Oil and Natural Gas Corporation
Ltd, (ONGC) and Oil India Ltd., (OIL) – both government-
controlled and companies in JV with NOCs. The primary producers
of oil and gas, ONGC and OIL, conduct exploration activities
across the country and in their territorial waters. On the other
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hand, the downstream oil companies include Indian Oil

Corporation (IOC), Bharat Petroleum Corporation Ltd., (BPCL),
Indo-Burmah Petroleum (IBP) and Hindustan Petroleum
Corporation (HPCL). Of these, IBP is a pure marketing
organisation – now a subsidiary of IOC – while the other three
have their own refineries and also market petroleum products.
Stand-alone refining companies like Kochi Refineries Ltd., (KRL) –
a subsidiary of BPCL – Chennai Petroleum Corporation Ltd., 5

(CPCL) and Bongaingaon Refineries and Petrochemicals Ltd., Notes
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Activity
(BRPL) both subsidiaries of IOC do not have any marketing rights ___________________
Write an article on the
and their products are marketed by marketing companies. geological system of India.
___________________
Mangalore Refineries and Petrochemicals Ltd., (MRPL), the first
joint sector refinery of the Aditya Birla Group and HPCL – now a ___________________
subsidiary of ONGC. ___________________
___________________
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Geological System of India ___________________
India has an estimated sedimentary area of 3.14 million square ___________________
kilometre, comprising 26 sedimentary basins. Before implementing
___________________
the New Exploration Licensing Policy (NELP), only 11% of Indian
sedimentary basins were under exploration. Under NELP, which ___________________
was approved by the Government in 1997 and operationalised ___________________

since January 1999, Government of India has awarded an area of
47.3% of Indian sedimentary basin area to E&P companies,
making a total of 58% of Indian sedimentary basin area under
exploration. 87 oil and gas discoveries have been made by
private/joint venture (JV) companies in 26 blocks. Under NELP,
about 640 million metric tonnes of oil equivalent hydrocarbon
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reserves have been added.
The sedimentary basins of India have been classified into four
categories:
Category I: Basins are proved petroliferous basins with
commercial production. Six basins fall under this category.
Category II: Basins are geographical forms with known
occurrences of hydrocarbons but from which no commercial
production has yet been obtained. Six basins fall under this
category.
Category III: Basins are those in which significant shows of
hydrocarbons have not yet been found but are found to be of highly
perspective. Two basins fall under this category.
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Category IV: Basins are those in which analogy with similar

hydrocarbon producing basins in the world, are considered to be
the perspective. Twelve basins fall under this category.
6
Check Your Progress
Notes
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Activity
___________________ Fill in the blanks:
Make an assignment on the
exploration and production
___________________ 1. The Oil Sector has two major activities – ………………
activities in petro industry.
and ……………… of crude oil and gas.
___________________
___________________
2. Exploration and Production is an ……………… activity
while refining, distribution and marketing are
___________________
classified as ……………… activities.
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___________________
___________________ Exploration and Production Activities in Petro Industry

___________________
The domain of ONGC and OIL, upstream E&P is a high risk and
___________________ high return capital-intensive business. ONGC explores oil across
___________________ the country and accounts for about 80 per cent of the crude
produced while OIL operates mostly in the North Eastern parts of
India. In E&P, there is high uncertainty with regard to striking of
oil in commercial quantities. The companies need to invest
significant risk capital and have to accept high ratio of failures
before discovery.
It was because of the exploratory efforts of ONGC and OIL that a
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number of oil and gas bearing structures were discovered in
Gujarat and Assam. Of these, the important ones were in Assam.
The Government made the search for foreign firms to join hands
with ONGC. The contract was signed with the USSR for offshore
seismic survey in the Gulf of Cambay, Arabian Sea and on the East
Coast. OIL, on the other hand, further developed their existing
fields and opened two new areas for exploration. India’s crude oil
production during this period rose from about 0.5 million tonnes to
5.66 million tonnes per annum. With recovery of the national
economy, exploration for oil was intensified. ONGC increased the
speed of exploration in not only the on land basins but also
extended it to the offshore areas. Discovery of oil in large
quantities at Bombay High opened up a new vista of oil exploration
in offshore areas. In order to develop the Bombay High field
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quickly, ONGC adopted the concept of “phased development”.

Production from Bombay High was started initially from two
platforms at the rate of 40,000 barrels of oil per day. Later, the oil
production from other platforms was also added to reach a
production rate exceeding 60,000 barrels of oil per day.
OIL, meanwhile, continued exploratory efforts in their licences in
upper Assam and increased their reserves by additional
discoveries. They had started exploration in Arunachal Pradesh 7

and stuck oil in the Kharsand areas. During the decade (1967–77), Notes
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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
___________________
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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
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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.
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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.
8 In the context of domestic upstream sector, some other typical

Notes constraints are:
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___________________
z Stagnant production level,
___________________
z Rapidly rising oil import bill,
___________________
z Increasing maturity of production acreage,
___________________
z A large unexplored/less explored terrain,
___________________
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z Requirements of large investments.
___________________
One way of meeting the deficit is what the government has decided
___________________
at present to provide more openings for the private sector in
___________________ exploration. If it is accepted by the private sector, then, at least,
___________________ technology and finance – two critical inputs – would be made
available. The chances of new discoveries are enhanced. Oil
___________________
production from old and depleting fields may be sustained over
longer periods by applying suitable enhanced oil recovery
techniques. Large investments need to be made to commence
production on a large scale. Production levels from existing wells
cannot be increased beyond a certain point.
The process of deregulation will benefit ONGC and OIL. The price
realisation of these two companies is at international rates,
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thereby, boosting profitability. While the costs for these companies
would remain the same, the total turnover will increase creating a
higher surplus, which would enable them to invest more in
exploration. The following salient features in the future strategy in
the upstream sector in India are emerging:
z Shift to new potential areas such as:
Mesozoic exploration in Kutch region and Saurashtra
offshore.
Deepwater exploration.
Andaman offshore basin as a possible outcome of
speculative survey activity.
Gas potential of central on land basins.
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z Consolidate the initiatives taken and seek greater private

participation through joint ventures to increase the inflow of
capital for exploration in the country, which would be
mutually beneficial to all parties.
z Greater thrust on acquiring foreign acreages/farm-in
opportunities.
z Increase the number of players in exploration and production 9

sector. Notes
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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 ___________________
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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.
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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:
z 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.
z The need to conserve oil and natural gas, petroleum products,
etc., rather than just meeting gap with increase in production
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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,
10 drilling, well logging, stimulation cementing and many other

Notes oilfield services. Capacity also exists for fabrication of offshore
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___________________ platforms, pipeline construction, coating and laying of pipelines,
etc. However, the existing facilities will be grossly inadequate to
___________________
meet many times higher demand, in future. Opportunities are
___________________
available to foreign companies to form joint ventures with domestic
___________________ companies to provide oil field equipment and services to the
___________________ national oil companies as well as to private companies operating in
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India.
___________________
___________________ New Exploration Licencing Policy (NELP)

___________________ One of the most important results of the GoI’s reform efforts has
___________________ been the introduction of competition in E&P through the New
Exploration and Licensing Policy (NELP). The NELP has certainly
___________________
weakened ONGC’s monopoly status in the upstream sector. By
bringing more competition to the sector, the NELP has also
enabled the greater use of benchmarks and industry standards for
monitoring ONGC’s performance.
Significant Success under NELP

India has an estimated sedimentary area of 3.14 million square
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kilometre, comprising 26 sedimentary basins. Before implementing
the New Exploration Licensing Policy (NELP), only 11% of Indian
sedimentary basins were under exploration. Under NELP, which
was approved by the Government in 1997 and operationalised
since January 1999, Government of India has awarded an area of
47.3% of Indian sedimentary basin area to E&P companies,
making a total of 58% of Indian sedimentary basin area under
exploration. 87 oil and gas discoveries have been made by
private/joint venture (JV) companies in 26 blocks. Under NELP,
about 640 million metric tonnes of oil equivalent hydrocarbon
reserves have been added. As on 01.10.2010, investments made by
Indian and foreign companies was of the order of US $ 14.8 billion.
At present, after concluding eight rounds of NELP, 235 production-
sharing contracts have been signed. The number of NELP blocks
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awarded in previous eight rounds is given in Table 1.1.

The ninth round of NELP (NELPIX) was launched on 15 October,
2010 and 34 exploration blocks including 8 deep-water, 7 shallow
water, 11 on-lands, and 8 Type-S on-lands were offered. On-land
blocks are spread over six states namely Assam (2), Gujarat (11),
Madhya Pradesh (2), Rajasthan (2), Tripura (1) and Uttar Pradesh
(1).
Table 1.1: Eight Rounds of Awarded NELP Blocks 11

Notes
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Activity
___________________
Present a written draft on the
refining and marketing
___________________
activities of petro industry.
___________________
___________________
___________________
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___________________
___________________
___________________
Source: Ministry of Petroleum and Natural Gas
___________________
Check Your Progress ___________________
Fill in the blanks:
1. NELP stands for …………………….
2. ONGC adopted the concept of ……………… Production
from Bombay High was started initially from two
platforms at the rate of 40,000 barrels of oil per day.
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Refining and Marketing Activities in Petro Industry
Refining, distribution and marketing, the downstream activities
are dominated by the four public sector oil companies – IOC,
HPCL, BPCL and IBP. Players like CPCL, KRL, BRPL, NRL and
MRPL are pure refining companies and are subsidiaries of IOC,
BPL and ONGC. As compared to the upstream sector, the
downstream sector has received a higher measure of privatisation.
When the country’s first refinery at Digboi, Assam, was
commissioned in India it had a capacity of just 0.25 million tonnes
per annum. Since then, the Indian refinery has witnessed rapid
growth. To meet the growing demand of petroleum products, the
refining capacity in the country has gradually increased over the
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years by setting up of new refineries in the country as well as by

expanding the refining capacity of the existing refineries. As of
June 2011, there are a total of 21 refineries in the country
comprising 17 (seventeen) in the Public Sector, 3 (three) in the
Private Sector and 1 (one) as a joint venture of BPCL & Oman Oil
Company. The country is not only self-sufficient in refining
capacity for its domestic consumption but also exports petroleum
12 products substantially. The total refining capacity in the country

Notes as on 1.6.2011 stands at 193.386 MMTPA. The company-wise
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___________________ location and capacity of the refineries as on 1.6.2011 is given in
Table 1.2:
___________________
___________________ Table 1.2: Total Capacity and Location of Refineries in India
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Contd...
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Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
* Million Metric Tonnes per Annum ___________________
Some of the key areas to enhance efficiency as well as value ___________________
addition would be: ___________________
z Optimisation of crude processing, ___________________
z Process control devises,

z Energy conversion and optimisation,
z Optimisation of refinery configuration.
Additions of value chains would be in the areas of:
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z Utilising residue for setting up power plants,
z Conversion of naphtha to paraxylene/PTA,
z Set up naphtha hydro-crackers for maximising yield of LPG.
In a decontrolled environment what is more significant is how fast
refineries adopt to the new kind of life. Public sector companies
have a strong infrastructural base. Though new players are better
equipped in terms of technology and freedom in operations – new
entrants would benefit from the latest technology. The refineries,
which are comfortably placed under APM, are now vulnerable to
any adverse changes. Private refineries may find the deregulated
scenario very challenging.
So far as the marketing of petroleum products is concerned, the
nation’s four oil-marketing companies have developed an extensive
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infrastructure, which can meet the needs of consumers across the

country. At the dawn of independence, marketing of petroleum
products was in the hands of the private companies. Later, public
sector companies were assigned the responsibility to manage the
marketing. We find that the growth of marketing and distribution
14 system for petroleum products in India has passed through three

Notes different phases, which are as follows:
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___________________
z Phase of dominance of the multinational companies.
___________________
z Phase of advent of public sector, its growth in coexistence with
___________________ transnational companies.
___________________ z Marketing by Government-owned companies and fulfilment of
___________________ socio-economic objectives.
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___________________ The development during the second phase started with actions
___________________ taken in the Industrial Policy Resolutions, 1956, to promote the
growth of petroleum sector under the Government Control. In
___________________
1959, the Indian Oil Company was formed for marketing of
___________________ petroleum products. The IOC geared up to face the competition of
___________________ transnational oil companies and by 1965 it had reached at 24%
market participation.
By 1975, it was meeting 65% of the nation’s demand of petroleum
products. The decline in the share of foreign oil companies during
this period had made it necessary for them to sell some of the
unremunerative assets to IOC at negotiated prices.
During the third phase the process of acquiring the assets of
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multinationals was completed. In 1981, the entire oil industry was
in fact in the control of the Government. The assets of all oil
companies were now the nation’s assets. The Government was
however concerned about the optimum utilisation of assets.
Liberalisation in the Marketing Sector

Keeping its promise of decontrolling pricing and control over
marketing structures, the Government of India, opened up retail
marketing of automotive transportation fuels (petrol, diesel) to
private and foreign companies. This marked the end of an era in
which only state owned HPCL, BPCL, IOC and IBP were allowed
to undertake retail marketing in automotive fuels. The players
who satisfy the entry criterion (i.e. investment of at least ` 20
(c
billion in oil exploration and production, refining, pipelines or

terminals) were allowed to set up retail network for marketing
petrol and diesel with immediate effect. The notification
dismantling the APM provided for appointment of a petroleum
regulator, who was expected to oversee the functioning of the
industry post-total decontrol. The Petroleum Regulatory Board Bill
has not been legislated yet and the petroleum regulator not
appointed. It was expected that post dismantling of APM, the 15

marketing companies would be free to price their products and Notes
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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
___________________
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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.
Check Your Progress

Fill in the blanks:
1. The total refining capacity in the country as on 1.6.2011
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stands at ………………….
2. The desired ………………… and ………………… pricing
of oil products can emerge only in a phased manner.
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
(c
companies can be grouped into Exploration and production,

Refining plus marketing, Pure refining and Pure marketing.
Lesson End Activity

Make a comparison between the growth in production activities of
private and public sector companies in India.
16
Keywords
Notes
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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
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___________________
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.
___________________
Questions for Discussion
1. Write a note on oil industry sector in India.
2. Discuss the development and classification of sedimentary
basins of India.
3. What are the recent exploration and production activity of
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petroleum products?
4. Write a note on New Exploration and Licensing Policy (NELP).
5. Discuss the recent development in refining and marketing
activities of petroleum products 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
(c
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 17
Notes
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http://petroleum.nic.in/
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
www.iocl.com/
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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18
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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UNIT 2: The Customer
Unit 2
19
Notes
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The Customer
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
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\ People in Petro Industry ___________________
\ Customers’ Categorization and Recognition ___________________
\ New Competitors
___________________
\ Customer Loyalty Programmes
___________________
___________________
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
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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,
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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
20 themselves, particularly during times when oil prices are high.

Notes Though these products and services have been in style in the West,
S
Activity
Make___________________
a report on the people in their importance is being recently felt in this region. Indian fuel
petro industry. retailers have begun offering grocery, foods, laundry facilities,
___________________
fresh foods, etc. at the convenience stores. UAE retailers are
___________________
advancing and adding similar facilities, to magnetize customers,
___________________ and make them spend more time and money at their facilities.
___________________ Petroleum retailing is a product and service, with differentiation
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feasible in either or both areas.
___________________
___________________
People in Petro Industry
___________________
The petroleum chain can be portrayed as a global supply-driven
___________________
structure with the main following actors:
___________________
z Suppliers of Crude Oil: As a natural resource, the crude oil
is located in definite areas of the World that typically are far
from the main consuming countries, by and large the OECD
(Organisation for Economic Co-operation and Development)
members. A significant part of the crude oil supply and
reserves is concentrated in the hands of an alliance: OPEC
(Organization of Petroleum Exporting Countries).
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z Refiners: With plants located all over the world moreover
closer to final consumers. The major reason for this fact is the
economies of scale of transporting crude oil in large
supertankers versus transporting the final product in smaller
lots, and the deliberate value of the refining assets. This latter
fact makes governments have a preference having some of the
refinery operations in their territories.
z Consumers: They are categorized into small consumers (e.g.,
car owners buying gasoline) and wholesale consumers (e.g.,
power stations using heavy oil, petrochemicals plants receiving
feedstock).
The petroleum downstream industry serves fundamentally two
types of customers:
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z Wholesale customers, composed by petrochemical facilities,

power plants, large fuel consumers (airlines, shipping
companies) and other industrial customers.
z Retail customers, who make use of the fuels essentially for
transportation and domestic heating.
Customers’ Categorization and Recognition 21

Notes
S
In developing products and services, the significant aspect is to Activity
___________________
understand your customer. Segmentation is a dominant tool to
customer’s categorization and
help marketers identify the requirements of the customers. ___________________
recognition.
For example, the petroleum consumers are segmented into five ___________________
segments: ___________________
Table 2.1: Characteristics and Spending Patterns of ___________________
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Petroleum Consumers
___________________
Segments Characteristics Spending Patterns
___________________
Road Warriors - Highly income, Middle aged - Pay by credit card
men - Use Premium gasoline ___________________
- High mileage - Occasional car wash
___________________
True Blues - Moderate high income - Pay cash
men/women - Use premium gasoline ___________________
- Brand Loyal
Generation F3 - Fuel, food and Fast - Drive a lot
- Men/Women under 25 - Snack heavily at
convenience store
Homebodies - Housewives Shuttling - Prefer stations in their
children town/own their route.
- No brand loyalty
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Price Shoppers - Tight budgets - Rarely use premium
- No brand loyalty
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.
Product and Service Development

Formerly the choice of target segment is identified, products and
services require to be tailored to their requirements. The target
customer must drive the value proposition, for both fuel and non-
fuel products in addition to services.
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Fuel Based Proposition: In certain markets, petroleum retailers

sell numerous grade fuels based on the octane ratings, with diverse
prices at different stations, where the customer can hunt for a
bargain. In many places where unleaded fuel is the standard,
2 grades are available, Octane 95 and 98. Though, the Octane
98 petrol accounts for less than 5% of the over 3.3 billion litres
22 consumed. This might be attributed to the 25% premium over the

Notes Octane 95 product price, which is managed by the government.
S
Activity
___________________
Prepare an assignment on the On the other hand, with the large high-end car population,
new competitors in petro an opportunity exists in the market to perk up the perception of
___________________
industry.
product superiority and get better the bottom line. In India too,
___________________
with the beginning of stringent pollution norms, coupled with the
___________________ growth in large cars, the better-quality product based opportunity
___________________ is large. The first mover benefit needs to be captured and
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capitalised through a merge of customer education and marketing
___________________
activities.
___________________
___________________ Check Your Progress
___________________ 1. OPEC stands for …………………….

2. …………………… are categorized into small consumers
and wholesale consumers.
New Competitors
The petroleum retailing market has not been entirely deregulated,
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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.
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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.
Site Rationalisation 23
Notes
S
Although site security is required, it is significant for
managements to keep an eye on performance of their existing and ___________________
new stations. Loss making stations have to be identified, and ___________________

corrective actions taken to make them profitable. If turnaround is
___________________
not feasible, it is best to close them and avert the resources for
___________________
other sites or activities.
___________________
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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.
Non-fuel Based Proposition

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To obtain a larger share of the customers’ wallet, non-fuel products
and services are essential. Non-fuel revenues contribute
considerably for the petroleum retailers. In many countries, it
averages 12%–15% for different players, and offers significant
opportunity for development in the region, particularly in India.
The non-fuel products and services can be largely grouped into
three categories:
z Convenience stores (C Stores)
z Auto Care Services
z Ancillary Services
Convenience Stores
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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.
24 Factors Contributing to the Success of C Store Proposition

Notes
S
Product mix forces the C-stores shopping. In the UK, Tobacco
___________________
(37%), confectionery & snacks (18%) and soft drinks (8%) are the
___________________ principal categories. In the UAE, due to the wide accessibility of
___________________ cigarettes in supermarkets, cigarette contribution is just 14%.
It will be the same case in India, where there are cigarette kiosks
___________________
at each nook and corner. The significant issue is to offer a product
___________________ assortment that drives the intended customer traffic. This could as
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___________________ well be in terms of offering fresh groceries, fresh foods, coffee, hot
snacks, etc. In addition, special promotions in terms of discounts
___________________
on high margin products can drive volumes (e.g. Fountain soft
___________________
drinks).
___________________
___________________
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Figure 2.1: Success Factors of C Stores
Store layout and outward show attract customers to spend more

time in the store. This can be based on study to track the
movement of customers, and therefore the likelihood of them
picking the product. Since operating C-stores call for different set
of capabilities in terms of supply chain management and sourcing,
the C-stores operations might be outsourced. In some countries, all
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operators deal the fresh foods management to the food suppliers

who refill stocks on consumption and take back the unused stock
based after expiry date. A concentrated risk model is an alliance or
complete outsourcing, particularly in the branded hot foods
category like pizzas, coffee, burgers, etc.
Auto Care Services 25

Notes
S
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 ___________________
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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
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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.
(c
Figure 2.2: Diagramatic Presentation of Ancillary Services

26 This gives the customer a one-stop-shop for the car’s annual

Notes check-up, and additional formalities, with the comfort of an
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Activity
___________________
Present a draft on the
air-conditioned facility, in less than 30 minutes judge against to
customer loyalty programs. 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
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___________________
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.
___________________
___________________ Customer Loyalty Programmes

___________________ The issue of acquiring/retaining customers and understanding
their requirements is very critical. Customer loyalty programmes
facilitate organisations worldwide to achieve these goals. The
loyalty program ensures that the customer limits the use of
competitors’ facilities, due to a variety of incentives, which are
offered to him. Secondly, it can capture the buying behaviour of the
customer in terms of the kinds of products, purchase frequency,
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amount spent, locations used, etc. Companies can use this precious
data to differentiate and develop their product and service
offerings, founded on the customers’ requirements, thereby
improving revenues and profitability. Fuel Cards are being applied
in the UAE and recently in India, but mainly for fleet
management. Investment in technology is obligatory, to link all the
forecourt and non-fuel facilities to a common data system. This
investment can go an extended way in understanding the
customer.
Therefore, a strategy based on building strong and differentiated
value propositions is predominantly relevant for petroleum
retailers, with an opportunity to build revenues and improve
profitability.
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Check Your Progress

Fill in the blanks:
1. ………………… cost competitiveness and services would
be the significant areas of competition.
2. ………………… revenues contribute considerably for the
petroleum retailers.
Summary 27
Notes
S
The petroleum chain can be portrayed as a global supply-driven
___________________
structure with the main people includes Suppliers of crude oil,
Refiners and Consumers. The consumers are categorized into small ___________________
consumers and wholesale consumers. ___________________
In order to face new competitors, site security is the key for ___________________
existing petro retail competitors. The other strategies include Site
___________________
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Rationalisation, Site Upgradation and Non-fuel Based Proposition.
___________________
The non-fuel products and services can be largely grouped into
three categories, which are Convenience stores (C-Stores), Auto ___________________
Care Services and Ancillary Services. ___________________
___________________
Lesson End Activity
___________________
Make a presentation on the customer and its role in the petroleum
industry.
Keywords
Ancillary Services: Services that include ATMs, laundry facilities
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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.

1. Write a note on different types of customer segments to whom
petroleum downstream industry serves.
2. Discuss the role of people in petro industry.
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3. Write a short note on customers’ categorization and recognition.

4. Who are the new competitors?
5. Briefly explain the customer loyalty programmes.
28
Further Readings
Notes
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___________________ 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
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___________________ Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
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UNIT 3: Customer Relationship in Petro Sector
Unit 3
29
Notes
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Activity
Customer Relationship in
___________________
customer relationship in Indian
___________________
Petroleum Sector.
Petro Sector ___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Customer Relationship in Indian Petroleum Sector
\ Initiatives Taken by Indian Oil Corporation Limited to Improve CRM ___________________
\ CRM by Bharat Petroleum Corporation Limited ___________________
___________________
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
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not be called as a relationship.
Relationship between any two parties is actually the interaction or
transaction done between the two over-times or consists of a
continuous series of synergistic 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.
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Customer Relationship in Indian Petroleum Sector

A number of initiatives have been taken by Indian petroleum
sector especially downstream to improve customer relationship
management to achieve better image, which ultimately provides
convenience to customer and more market share and profit to the
company. Some of the initiatives and innovations are as under:
30
Prepaid Petrocard
Notes
S
Activity It is a similar concept as in a cellular prepaid / postpaid card but
___________________
Prepare a report on the with a functional difference. “The company will provide a Prepaid/
initiatives taken by Indian
Oil ___________________
Corporation Limited to
postpaid Petrocard by which one can fill the tank from any of its
improve CRM. 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
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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)
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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.
Check Your Progress

Fill in the blanks:
1. ………………… between any two parties is actually the
interaction or transaction done between the two over-
times or consists of a continuous series of synergistic
episode of interaction many a times.
2. The company will provide a ……………… by which one
can fill the tank from any of its outlet at a discounted
constant price for a certain time period prevailing
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during the time period.
Initiatives Taken by Indian Oil Corporation Limited to

Improve CRM
The Marketing Mantra for Indian Oil Corporation Limited is to
continuously provide the best products and services at the most
reasonable cost. The “New Look” petrol/diesel service stations 31

selectively have Convenience shopping stores, snap services, quick Notes
S
Lube change, automatic car wash and multi-product dispensing ___________________
pumps. To facilitate easy transaction, many of the stations accept
___________________
major credit cards. In fact, IOCL and Citibank have launched a
special co-brand card, the “Indian Oil Citibank Card” which is not ___________________
only accepted at Indian Oil petrol stations but at many ___________________
restaurants, shops, airlines, etc. Also, IOCL’s tie-up with Coca-
___________________
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Cola ensures that selects petrol stations stock and dispenses
“Coke” – thus quenching the thirst of the vehicles and the ___________________
motorists. ___________________
A new concept of “Jubilee Retail Outlets” has also been launched to ___________________
set up petrol/diesel stations on highways with comprehensive value
___________________
added facilities for various customer segments, namely truckers,
___________________
farmers, tourists and passenger transport. These include hotels,
restaurants, parking lots, weighbridges, sale of tyres, batteries,
accessories, agricultural machinery repairs and recreational
facilities provided selectively. The first such retail outlet was
commissioned at Ongole, District Prakasam and Andhra Pradesh.
Indian Oil: Topping Up on Customer Loyalty

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In an effort to understand its customers, petroleum major Indian
Oil Corporation Ltd. (IOCL) has launched a customer outreach
programme, which involves not only the retail sales force but also
personnel from various departments of the organization. The
objective is two-fold and incorporates both HR and CRM shades.
Firstly, make the back-end departments more aware about the
retail function and secondly, to present a more humble face to
customers visiting IOCL outlets.
IOCL deputy general manager planning and economic studies
showed that the initiative enabled personnel from other
departments to be more sensitive to how a retail sales force works
at the ground level.
IOCL deputy general manager, who himself was part of the cross-
(c
functional team, said many a times the field force is engaged in

activities like understanding the dealers and their problems. “This
has led to the perception that IOCL has less visibility in customer
relationship management compared to competitors. The formation
of the cross-functional team which visited the petrol pumps is
aimed at understanding what the customers expect and also what
problems the dealers and the forecourt staff face,” he added.
32 “While the products that the players have on offer plays an

Notes important role, these days it is also the level of service and the
S
___________________ kind of service which are equally crucial. And in the retail arena,
where everyone is trying to woo the customers, reaching out to the
___________________
customer to tell them about the service becomes important. The
___________________
outreach programme becomes important in this case,” said a
___________________ consultant at a market research firm. A spokesperson for IOCL
___________________ said 80 officers from the western regional and marketing head
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office were divided into teams and they visited around 60 petrol
___________________
outlets in Mumbai and Navi Mumbai to support the retail sales
___________________ force in their functioning and also understand customer’s
___________________ expectation with regard to the service at petrol pumps. “The
___________________
objective of the outreach team called Customer Ambassadors (who
are drawn from various functions like information technology,
___________________
planning and HR) is to understand the functioning of the retail
sales force. We felt it was important for the other departments to
understand what happens at the ground level, both from the field
force as well as the customer’s perspective,” said IOCL deputy
general manager. While the programme is largely a customer
outreach initiative, it has shades of HR management as it gave the
back-end departments a chance to understand the rigors that
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retail sales force has to undergo. IOCL senior divisional consumer
sales manager (Mumbai region) said the entire exercise enabled
him to understand the process of interacting with retail customers,
which is a departure from his primary function of handling
customers like railways, defence and companies.
IOC to Offer more than Just Fuel

Indian Oil Corporation is tying up with large retailers to offer more
than just fuel to its customers. Together with major brands, such
as Food World and Hindustan Lever, Indian Oil is expanding retail
sales of ‘non-fuel’ products in its gas stations.
Its growth plans centre on giving ‘extra’ – Extra Mileage- Extra
Savings is a catch phrase at its outlets. Now the oil company is
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going the extra mile to offer its customers ‘non-fuel services’.

It makes sound business sense because growth in the number of
fuel pumps is outstripping increase in demand for fuel. Petrol sales
are increasing.
Apart from the existing players, the entry of private companies
into fuel sales is going up to the competition. So, to sell petrol and
diesel, companies need to attract people to their outlets by offering 33

more products and services. Notes
S
So what do the oil companies do? Petrol and diesel are the bread ___________________
and butter of their business. So, they start selling jam also. ___________________
Through an agreement with the retail chain, FoodWorld, the oil
___________________
company will offer space in select petrol bunks for the retailer to
set up shops. The agreement provides for FoodWorld to set up shop ___________________
in any of a selected list of Indian Oil’s petrol outlets. ___________________
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IOC is also talking to Sangam, the urban distribution arm for ___________________
Hindustan Lever products, to procure and supply products to its ___________________
convenience stores in the petrol bunks. Through these agreements,
___________________
the company will set up convenience stores either through the
FoodWorld chain, Sangam and run the businesses on its own. ___________________
It also provides ATM facilities, has pharmacies and restaurant and ___________________
boarding facilities at outlets located along the highways. “A large
basket of extras.” Apart from competition, other factors affect fuel
sales, particularly sales of diesel.
IOC Launches ‘Check and Win’

Indian Oil Corporation (IOC) has launched a novel consumer
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awareness programme at its petrol pumps in Hyderabad and
Secunderabad. In a press release, IOC announced the campaign
titled ‘Check and Win’ which invites customers visiting the petrol
pumps to test the quality of petrol and diesel hands on and qualify
for 123 prizes to be won against a bumper draw.
The customers just need to drive into any of the IOC outlets in the
twin cities and do two simple fuel tests to assure themselves as to
how pure the IOC oil was and fill in questionnaire to enter the
contest.
To enter the contest, the customers need not to buy anything from
IOC, not even fuel. The customers can also get instant gift from
IOC for filling the questionnaire.
IOC Getting Ready for Fully Automated Petrol Pumps

(c
Drive into the petrol station and fill the tank just by swiping your
petro-card like an ATM for withdrawing cash! This could be
possible at select IOC retail outlets across the country over the
next few months. Indian Oil Corporation plans to introduce fully
automated retail outlets at a number of locations across India, at a
huge investment. IOC is negotiating with a number of hardware
34 and software vendors for implementing the plan, according to a

Notes senior official.” The plan is to automate the entire retail outlet –
S
___________________ right from product supply to dispensing. IOC has chosen an
assortment of sites along highways, metros and smaller Cities
___________________
instead of focusing on the four metros alone. The plan is part of
___________________
IOC’s “Operation Everest” under which the company has selected
___________________ 1,000 outlets for introducing quality and quantity assurances to
___________________ customers. It plans to spin off a separate brand through these
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premium retail outlets, much like its PSU competitors Bharat
___________________
Petroleum and Hindustan Petroleum have done through their
___________________ ‘Pure for Sure’ and ‘Club HP’ initiatives. Both the companies have
___________________ already executed the idea of branded premium outlets supplying
___________________
the entire range of oil products – from premium and non-branded
transport fuels to engine oils, car-care and even consumer goods.
___________________
And IOC is being looked at as a late entrant into this market. Even
the concept of fully automated retail outlets has been recently
introduced by HPCL.
IOC was the first Indian company to introduce quality and
quantity assurances and premium fuels without hoopla. It was also
the first company to introduce high octane fuels back in 1995.
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IOC had introduced India’s first branded retail outlet – Top gear –
in 2000 but the venture did not take off because of high costs
involved in revamping every outlet. The company’s Operation
Everest also involves considerable investments.
IOC is looking at enhancing the ‘Corporate brand’ and in addition,
build sub-brands along various product lines and retail services.
IOC Fuels Cash Customers with Reward Programme

In a bid to reward its customers, oil retailer Indian Oil Corporation
kicked off an award programme for its cash customers. The cash
customers would earn reward points against such purchases
covering not just fuel but a whole host of other items including
lubricants and other IOC products. The new scheme would be open
on a subscription basis for a nominal fee in some retail outlets
(c
across 79 cities in the first phase. This would be extended to over

2,000 outlets later on. Customers enrolling for the programme
would receive a card to which reward points would be added every
time the card is used at select outlets against cash purchases.
Points in turn could be redeemed for items like vehicles,
electronics, tea sets and bags.
35
Check Your Progress
Notes
S
Activity
Fill in the blanks:
___________________
1. A new concept of ……………… has also been launched CRM measures taken by the
___________________
Bharat Petroleum Corporation
to set up petrol/diesel stations on highways with Limited.
___________________
comprehensive value added facilities for various
customer segments, namely truckers, farmers, tourists ___________________
and passenger transport. ___________________
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2. The …………… petrol/diesel service stations selectively ___________________
have Convenience shopping stores, snap services, quick
___________________
Lube change, automatic car wash and multi-product
___________________
dispensing pumps.
___________________
CRM by Bharat Petroleum Corporation Limited ___________________
Bharat Petroleum Corporation Limited, one of the largest public

sector oil marketing companies in India has 3 operating refineries
(including subsidiaries) and a strong network of marketing and
distribution of petroleum products across the country. BPCL is one
of the first few public sector companies who have leveraged
technology to become more efficient, reduce costs and achieve
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greater customer satisfaction.
Making a Difference through Innovative Retailing

Bharat Petroleum’s efforts have all along been to build a superior
understanding of customer needs and relentlessly work towards
fulfilling these needs. Bharat Petroleum is consciously working
towards providing added value to customers, both in fuel and non-
fuel areas. Initiatives, some of them pioneering efforts, have been
introduced based on need gaps articulated by consumers during
focus group discussions and extensive market research.
Bharat Petroleum’s efforts began with remodelling and upgrading
Retail Outlets to world class standards. Retail Outlets have been
equipped with state-of-the-art modern infrastructure, including
(c
the Multiproduct Dispensers to pre-set price and quantity of fuel

and Electronic Air Gauges facilitating precise inflation of tyres.
Attractive Canopies are suitably designed to provide shelter and
adequate lighting of the forecourt at most Retail Outlets.
On the Non-fuel front, Bharat Petroleum has introduced the
Errand Mall concept successfully at select markets. Called the
‘In and Out’, these malls offer the customer a broad range of
36 facilities and brands to choose from. ATM’s, Cybercafe, Courier

Notes services, Laundry, Photo Studio, Music, Fast Food, Greeting
S
___________________ Cards, Courier Services, Bill Payments, Movies/Entertainment
Tickets, etc. have made Bharat Petroleum’s Retail Outlets a
___________________
happening place and indeed a rewarding experience for motorists.
___________________
To make life more convenient and rewarding for customers, Bharat
___________________
Petroleum has introduced the ‘Petro Card™’ for individual
___________________ customers and the ‘SmartFleet Card’ for fleet owners. Using the
PE
___________________ Petro Card entitles the customer to PetroMiles under the
PetroBonus rewards programme.
___________________
Bharat Petroleum has also pioneered the concept of convenience
___________________
stores at select petrol pumps that operate under the name ‘Bazaar’.
___________________ These Bazaars provide a wide range of convenience items and fast
___________________ foods to customers in a clean, air-conditioned and friendly
environment.
Services
The following facilities are provided by the Bharat Petroleum to
enhance the customers:
Bazaar: Bharat Petroleum has pioneered the concept of
)U
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
(c
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
ATM, ICICI’s will have an ATM, an Internet Banking facility and 37

a Telebanking facility. These banks are also interested in Notes
S
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 ___________________
PE
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
)U
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.
Check Your Progress

(c
Fill in the blanks:

1. Bharat Petroleum has pioneered the concept of
Convenience Stores in the country, called ……………….
2. The convenience of the ……………… is that it removes
the restriction of timings of the traditional banking
system.
38
Summary
Notes
S
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
PE
convenience proposition where a number of typical household
___________________
errands are aggregated under one roof for the benefit of the
___________________ customers.
___________________
___________________ Lesson End Activity

___________________ What are the innovative facilities to be developed by the oil
corporations in India in order to enhance the customer delight?
Keywords
Bazaar: These Stores go a long way in meeting customers’
convenience needs on the road.
)U
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.

1. Explain the role of a customer in the petroleum sector.
2. What are the initiatives taken by Indian Oil Corporation
Limited to improve CRM?
3. What are the strategies require by the Petro retail companies
(c
in order to face the competition from new competitors?

4. Write a note on the topic of Customer Relation Management of
BPCL.
Further Readings 39
Notes
S
Books ___________________
Hannesson; ‘Petroleum Economics Issues and Strategies of Oil and ___________________

___________________
Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf; ___________________
2010
___________________
PE
___________________
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
)U
(c
40
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 4: Production & Strategy in Petro Industry
Unit 4
41
Notes
S
Activity
Production & Strategy in

___________________
petroleum production industry.
___________________
Petro Industry ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Petroleum Production – Highly Regulated Industry
\ Exploration and Production ___________________
\ Crude Oil Reserves ___________________

\ Strategy of 11th Plan (2007–12) ___________________
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
)U
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
(c
increase in production of crude oil would come from raising the

rate of accretion.
Petroleum Production – Highly Regulated Industry

The oil industry in India has been thoroughly regulated until very
recent past. All business decisions needed government sanction
42 and improving efficiency of refineries and marketing functions

Notes were the only avenues that companies had to improve for returns.
S
___________________ However, like many industries, the controls on oil industry have
been easing and been completely deregulated by 1.4.2002. India’s
___________________
oil industry was greatly insulated from international movement in
___________________
oil prices Beginning September, 1997, several of these regulations
___________________ began to be rolled back. Prices were decontrolled and administered
___________________ price mechanism was dismantled. The coming period will witness
PE
the India’s oil industry moving from regulated to competitive one.
___________________
Tariffs will decline, government intervention will be withdrawn
___________________ and the entry of private players will be encouraged.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Coal, oil and gas are important sources of ……………….
2. …………………… ratio indicates the length of time the
reserves would last if production is to continue at the
current level.
Exploration and Production

)U
Exploration and Production encompasses discovery and production
of oil and gas by undertaking geological and geophysical surveys
like remote sensing, airborne magnetic and field gravity to identify
the principal areas of adequate sediment cover. The areas thus
identified are assessed for the most likely hydrocarbon potential
through various methods of resource appraisal. Depending on the
resource estimated, available technology and the current economic
factors, each basin is ranked in terms of risk and reward and
exploration priorities assigned. Basins/areas of low to medium risk
and high to moderate reward are taken up first for systematic
exploration, which begins with detailed geological and regional
seismic surveys. The results of such surveys highlight area of cost
intensive exploratory inputs like seismic surveys on adequate grid
(c
and structural/parametric/information drilling. Favourable results

of these inputs lead to the next stage of exploration during which
targets are decided and prospects identified. Each prospect thus
demarcated is evaluated, techno-economically.
Exploratory Drilling: An exploratory well is required to confirm
the existence of oil and gas in a terrain and extract required
information from the geological history and the nature and 43

organisational aspects of reservoir. The surveys whether 2D or 3D Notes
S
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
___________________
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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.
Commercial Production: Commercial exploitation commences in
)U
accordance with the available infrastructure. Initially the reservoir
pressure would be adequate to push oil and gas to the surface but
pressure decreases with increase in production. The natural drive
mechanism can be scientifically used to maintain the rate of
production. However, secondary recovery methods, like injection of
additional energy will be needed only if there is a fall in production
with poor recovery rates. Enhanced Oil Recovery (EOR) techniques
involving injection of hot water, steam or addition of solvents could
also be used to increase production though, at current oil prices,
use of EOR may not be commercially viable.
Contracts and Licences: Commercial extraction of reservoirs can
begin after obtaining licences or contracts from the State
Governments. Such agreements are in the form of either licences
or what is called as production sharing contracts. In case of
(c
licences, the state’s interest is restricted to royalties and taxes and

licences will be free to produce and sell oil and gas without any
limitations. In the case of production sharing contract(s), the
National Oil Company is made a partner in the venture and initial
exploration costs would have to be borne by the contractor.
Revenues earned on production of oil and gas shall first set off the
44 costs incurred by the contractor and the balance amount shall be

Notes shared in a predetermined ratio.
S
___________________
Exploration and Development in the Ninth Plan: With
___________________ evolving geological concepts and experience in other parts of the
___________________ world it is seen that the less explored basins in India, e.g.,
Gondwana basins could be more prospective and need to be
___________________
accorded top priority for exploration. Exploration efforts should
___________________ spread over all the basins including unexplored/less explored
PE
___________________ having favourable geological formations. This requires a change in
exploration strategy. 3D technology has been identified as a major
___________________
seismic input for the development of the field as well as for
___________________
monitoring EOR processes.
___________________
Tools for Measuring Exploration Efficiency
___________________
The most commonly used parameter for measuring exploration
efficiency is the finding cost. The index is a good indicator of how
successful a petroleum firm is in finding and developing new
reserves at reasonable costs. Finding cost provides the cost per
barrel of finding and developing new reserves depending upon
what parameters have been used in deriving it. International E
)U
and P companies use three different definitions of finding costs,
which are:
z Exploration expenses and leasehold costs divided by the
reserve addition from exploratory efforts.
z Exploration expenses and leasehold costs divided by reserve
addition and revision.
z Exploration, leasehold and development costs divided by
reserve additions, revision and enhanced recovery or reserve
purchase.
Check Your Progress

Fill in the blanks:
1. …………………… is required to confirm the existence of
(c
oil and gas in a terrain and extract required

information from the geological history and the nature
and organisational aspects of reservoir.
2. …………………… is the phase in which oil which has
been explored can be commercially extracted.
Crude Oil Reserves 45

Notes
S
The definitions of reserves are given in several reports of the Activity
Make___________________
a report on the crude oil
international oil companies. The definitions given by Mobil
reserves.
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.
___________________
PE
Mobil’s recoverable hydrocarbon volume system has three main
___________________
classifications: the discovered classifications are reserves and
contingent resources while the undiscovered classification is ___________________
designated speculative potential. This schematic is shown in ___________________
Figure 4.1.
___________________
Discovered Undiscovered ___________________
Reserves (Economic, Contingent Reserves Speculative

currently producible) (uneconomic, not Potential
Currently productible)
)U
Proved Probable Possible
P1 P2 P3
Proved Proved Proved Geologic

P4 P5 P6 Risk
Pg
Associated Confidence Factors
Figure 4.1: Classification Scheme
Reserves are quantities of hydrocarbons in known reservoirs that

are estimated to be recoverable in future years under existing
economic and operating conditions. Contingent resources are
significant quantities of resources estimated to be recoverable but
(c
are not currently producible because of existing economic, political

environmental or technical conditions. Included in this category
are resources that are not producible because there are no
development plans and major capital commitments are required
for facilities such as offshore platforms, pipelines, or production
licence. Both reserves and contingent reserves are technically
46 categorised as proved, probable or possible, based on the relative

Notes degree of certainty as to the presence, recovery, ability and
S
___________________ economic viability considering all physical technical, political,
economic and regulatory factors.
___________________
___________________
Strategy of 11th Plan (2007–12)
___________________
During the 11th Plan, the strategy identified for E&P activities
___________________
PE
includes:
___________________
z Level playing field to public sector and private sector players
___________________ including foreign players and provision of comparable
___________________ incentives to all E&P companies.
___________________ z Pursue extensive exploration in non-producing and frontier
___________________
basins for knowledge building and new discoveries, including
in deep-sea offshore areas.
z Establishment of a ‘Knowledge Hub’ in India.
z Strengthening of DGH and upstream oil and gas regulations.
z Convergence of nomination regime into NELP Regime.
z Faster development of oil and gas discoveries.
)U
z Development of isolated and marginal fields and creation of
surface facilities.
z Provide infrastructure status to E&P companies and
competitive fiscal terms to attract significant investments in
the sector.
z Optimize recovery from ageing oil and gas fields.
z Continue to offer more CBM exploration blocks.
z 100 per cent speculative survey to carve out exploration blocks.
z Efforts to get methane gas through in-situ gasification of coal.
z Continuation of R&D efforts to exploit the potential of gas
hydrates.
R&D efforts and feasibility to understand the potential of oil
(c
z
shale.
z Availability of trained manpower and expertise in E&P sector.
z Continue technology acquisition and absorption along with
development of indigenous R&D and to ensure adequacy of
finances for R&D required for building knowledge
infrastructure.
z Make E&P operations compatible with the environment and 47

reduce discharges and emissions. Notes
S
z Continue to acquire acreages abroad for exploration as well as ___________________
production. ___________________
Exploration programme has been given in Table 4.1. ___________________
Table 4.1: Summary of XI Plan – Exploration Programme ___________________
Activity Unit ONGC OIL Private/ Total ___________________
PE
JV
___________________
Seismic surveys 2D km 54,359 10,865 63,200 128,424
Seismic surveys 3D Sq. km 76,398 6,350 67,825 150,573 ___________________
Exploratory drilling km 1,817.83 572.95 832 3,222.78 ___________________
(meterage)
Exploratory wells Nos. 651 149 300 1,100 ___________________
Reserves accretion IIH MMTOE 1,000.7 153.74 975 2,129.44 ___________________

Source: Ministry of Petroleum & Natural Gas
Based on the established reserves, present status of different

fields, input implementation schedules and health of reservoirs,
the crude oil and gas production profiles for XI Plan is prepared as
given below:
)U
Table 4.2: Proposed Crude Oil and Natural Gas
Production during XI Plan
Crude Oil Production (MMT)

2007-08 2008-09 2009-10 2010-11 2011-12 Total
ONGC 27.16 28.00 29.00 28.53 27.37 140.06
OIL 3.50 3.55 3.73 3.91 4.30 18.99
Pvt./JV 10.57 10.78 9.76 8.75 7.85 47.71
Total 41.23 42.33 42.49 41.19 39.51 206.76
Natural Gas Production (BCM)
2007-08 2008-09 2009-10 2010-11 2011-12 Total
ONGC 22.10 22.53 22.77 22.99 22.00 112.39
OIL 3.13 3.21 3.25 3.28 3.56 16.43
Pvt./JV 8.55 22.55 22.11 21.47 21.07 95.74
Total 33.78 48.29 48.13 47.73 46.63 224.56
(c
Source: Ministry of Petroleum & Natural Gas
Crude oil production during XI Plan period is about 23 per cent

higher than the X Plan. The increase in crude oil production will be
mainly due to contribution by private company, Cairn Energy Pty
Ltd., which will produce about 5–6 MMT per annum from
Rajasthan.
48 Natural gas production during XI Plan is about 41 per cent

Notes increase as against likely natural gas production in X Plan period.
S
___________________ This increase in gas production is mainly from K-G basin
production of 40 MMSCMD by RIL. The gas production may
___________________
further increase by development of GSPC discoveries and other
___________________ RIL’s discoveries in KG basin.
___________________
Problems and Areas of Concern
___________________
PE
A number of problems exist in the present set up that had
___________________
prompted the requirement of a change in policy and introduction of
___________________ NELP. The primary ones among them are:
___________________
z A stagnant oil production level: Domestic production has
___________________ not seen any significant improvements in the decade.
___________________ z A rapidly rising oil import bill: The domestic production
has not kept pace with the domestic demand for petro
products. As a result, oil import bill has been constantly rising
leading to heavy forex outflows.
z A falling rate of exploration and discovery.
The exploration and discovery achievements have been slipping in
the last few years. The reserve-accretion has been quite low and
)U
dropping over the last few years:
z A vast unexplored terrain,
z Large investment requirements,
z A lack of interest among the private sector, and
z Energy Security.
The government policy of restricting bids to a few blocks and a few
small and marginal fields has resulted in the lack of interest.
Check Your Progress

Fill in the blanks:
1. The …………………… classifications are reserves and
(c
contingent resources while the …………… classification

is designated speculative potential.
2. …………………… resources are significant quantities of
resources estimated to be recoverable but are not
currently producible because of existing economic,
political environmental or technical conditions.
Summary 49
Notes
S
Worldwide petroleum demand has been one of the major
___________________
determinants of trends in all activity in the oil and gas industry.
Economic forces determine the level of petroleum demand. ___________________
Sometimes political considerations make a deep imprint on the ___________________
scenario. Because of technological advances, the world oil demand
___________________
and supply picture has undergone a transformation. Yet, despite
these advances, technology cannot breathe new life into declining ___________________
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reserves of oil. The future trend points towards declining ___________________
production with a continuing increase in demand, a situation that ___________________
cannot be sustained for long. OPEC members with large reserves
___________________
and relatively low production capacity expansion costs can
accommodate sizeable increases in petroleum demand. OPEC ___________________
capacity utilisation is expected to increase sharply, reaching 95 per ___________________
cent by 2010. So, the rising global oil demand and declining reserve
and recovery rates could lead to a situation of rising oil-prices in
near future – when and by how much will depend on such
unknowns as the growth in global oil demand, the timing and
speed of production declines and the availability of suitable
substitutes.
)U
Lesson End Activity
Discuss the impact of globalisation on Indian oil sector.
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
(c
deeper reservoirs underlying productive fields where geological

conditions are believed to be favourable for the accumulation of
hydrocarbons.
50
Notes
S
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.
PE
___________________ 6. Write a note on crude oil reserves in India.
___________________
___________________ Further Readings

___________________
Books
___________________
2010
Publishing
)U
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
(c
UNIT 5: Case Studies
Unit 5
51
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
PE
___________________
Case Study 1: Trent’s Retail Success Story
___________________
In India, the company owned retail outlets belonging either to the
oil companies or to Bata, Usha and Singer. It is only in the first ___________________
decade of the twenty-first century that retailing has become a big
___________________
business and a number of shopping malls have come up. With a
large number of women in the workforce, some in positions of ___________________
authority, things like easy going shopping with the family, tailor-
made dresses and even home sewing are things of the past, at
least in the fast moving metro life. The customer wants one-stop
shops where she can get everything she needs. Places like Ansal
Plaza in Delhi cover a large range and a variety of products and
brands. Shopping there is an enjoyable experience with good air
conditioning and restaurants round the corner. Such places are
becoming increasingly popular for shoppers and window shoppers
)U
alike.
With this background, Trent stalled their store business with the
flagship brand ‘Westside’. It selected the handsome cricketer,
Yuvraj Singh as its brand ambassador. The flamboyant Yuvraj
Singh epitomizes the product and is creating waves in the market
for Trent.
Trent runs eight stores in the country, which are located in Delhi,
Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and Pune. The
management of Trent realized right in the beginning that the
most critical success factor for their store would be its location.
Therefore, the managing director of the firm himself is directly
involved in the following activities connected to the stores:
z Selection of location
z Setting up of infrastructure
z Interior decoration
z Staffing
(c
z Product range selection and periodic reviews for the range.

Having understood that retailing is going to be a major growth
area, Trent has set out to establish itself as a leading retailer in
the country. They plan to set up 75 stores in India and believe
that the eighth store has been the break-even point for the
company. (Trent defines break-even thus: with more stores, losses
come down. Corporate expenses minus the shop expenses as a
Contd...
52 ratio to revenue drop. In 2002, it would be 5 percent of sales down

Notes from 10 percent of the last year. Trent wants to bring it down to
S
just 1 percent eventually.)
___________________
The Genesis of Retail Business at Trent
___________________ In cosmetics, Lakme was the flagship brand for the Tata Group.
___________________
In 1992, with the opening of the country’s economy Tatas found
competition from international firms eating up into their market
___________________ share and profits. They went into a joint venture with the
country’s most powerful FMCG firm, the Levers who later bought
___________________ over the Lakme business from Tatas for ` 200 crore. Tatas felt
PE
that the time was ripe for entering the retail trade a belief that
___________________
was well supported by their consultants, who were involved in the
___________________ Tatas’ diversification plans. At the same time, the Littlewoods
group of the UK wanted to exit from India and was looking for
___________________ buyers for their store in Bangalore. In 1998, the Tatas bought the
store for ` 5 crore with which they were committed to the retail
___________________
trade. At this point, the name Lakme was changed to Trent. In
___________________ fact, Lakme’s store in Moscow had given some useful experience
to Tata in retailing earlier.
Trent had already got some competitors; however the brand
differentiated itself by selling under its own brand Westside as
against the competitors who were trading multiple foreign and
Indian brands. Their product portfolio includes apparels and
furnishing materials under the Westside brand, covering 90 per
cent of trade. The rest 10 per cent were lingerie toys and
cosmetics. Going for their own brand helped as they could
)U
innovate the products to suit the customers and their pockets
with no middlemen to cover for discounts. They could position the
product to suit the middle and upper-middle class who could not
afford the high-price foreign brands being sold by its competitors.
Shopper’s Stop has targeted the upper 5 per cent of the market
with expensive brands, whereas Westside caters to the large
middle and upper-middle class of customers. With no middlemen
and total control on their product offering, Trent can fix prices,
which are affordable to their segment customers and yet provide
for better profit margins than the other retail chains can boast of.
In the middle and upper-middle class segment, Trent faces
competition from Pantaloon and the Big Bazaar. Trent’s USP is to
relate better to the customers through the following strategy:
z Product Styling
z Product Affordability
z Product Quality
Trent gains its sustainable competitive advantage through their
(c
customer service. They have the unique ‘No questions asked, not
even a bill’ return and exchange policy. This has developed a trust
among the customers that a product they have purchased today,
will be taken back by the store, should it fall short of their
expectations. The store’s record reveals that hardly any customer
uses this offer. In fact, they come to buy again as they feel that
the shop is totally confident of its product, quality, styling and
price.
Contd...
53
One of the critical success facto for the store is its merchandize
source. They have skilled buyer who have the pulse the designs in Notes
S
demand. Trent has invested in training their buyer and in
developing a vendor base across the country, to make a quality ___________________
product, as per their customers’ requirements round the country. ___________________
With captive vendors, Trent claims that their products, and
unique designs, are available at their story only. ___________________
Trent gives utmost importance to the selection of the store site, ___________________
with five members of the senior management concentrating on
the subject. These manage conduct a survey and research before ___________________
PE
the CEO approves the location after a final inspection. The areas
they cover are as follows: ___________________
z Demographics of the population ___________________

z The market segments available ___________________
z The demand potential of the area
___________________
z Car ownership of the area
___________________
z The buying patterns
z Lifestyle of potential customers
z 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
prices to go up. Besides, Trent has the Tata model of success to
)U
emulate, and the name Tata itself spells success.
Question:
Do a SWOT analysis of the firm, redefine its vision and mission to
suit the latest market trends for retail trade. Give your
recommendations for continued success of the firm.
(c
54
Case Study 2: Case at Louis Vuitton
Notes
S
The retail industry is poised to grow as foreign investors show
___________________ much interest in the emerging Indian market.
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
A Louis Vuitton store in Mumbai. Several exclusive brands have
found quality spaces in the Indian market.
For the retail industry in India, things have never looked better.
Until a couple of yea ago, it was a fragmented whole of about
15 million entities, considered the largest in the world. In their
attempt to scale up in size, Indian retailers are more or less
adopting the various models that have succeeded in the West. Yet
Indian retail trade is still not organized or large-scale. Krish Iyer,
)U
chief executive officer of Piramyd Retail, said: “The organized
retail industry in India is a mere three per cent [estimated at
` 35,000 crore], which goes to highlight the huge opportunity
available, and is poised to grow to ` 110,000 crore by 2010.”
Except for Pantaloon Retail (India), which is on average opening
three-four stores a month, and the FoodWorld Supermarkets
Limited, which has about 96 stores countrywide, most other
players have been unable to scale up fast enough, make huge
investments to build a high-quality mall and manage it to ensure
good returns. (RPG started FoodWorld in 1996. In 1999, the
group’s retail arm, Spencer & Co., entered into a joint venture
with International Dairy Farm of Hong Kong to run the
supermarket chain. Earlier this year the two partners parted
ways, with RPG retaining 49 of these stores.)
Neither has it been profitable for the smaller players, though
many of them see the profits accruing in the not-so-distant future.
Almost all retailers and investors queried see it as an industry
that is going to thrive and create job opportunities in the process.
(c
The sheer popularity of malls and their immense potential to

combine entertainment, dining and shopping and provide 24/7
services are attracting retailers.
India is truly opening up its economy to the world by showing
interest in established global players like the successful American
retailer Wal-Mart. It has several things to recommend itself to
local and foreign players. Apart from having the largest
Contd...
population of under 25 in the world and a 400-million strong 55

middle and upper middle classes, India has one of the fastest Notes
S
growing economies in the world. Its Gross Domestic Product
(GDP) reached 8.1 per cent between April 2004 and June 2005 ___________________
from 7.6 per cent in the corresponding period the previous year
and the rate of inflation has fallen. ___________________
Krish Iyer said that with the services sector leading the robust ___________________
GDP growth in the past decade, the retail sector would be the
next big thing for India. In fact the global management-consulting ___________________
firm A.T. Kearney in its Global Retail Development Index (GRDI),
___________________
PE
a survey to help retailers choose their destination for investment,
has ranked India first among 30 emerging markets. The firm’s ___________________
another annual survey, the Foreign Direct Investment Confidence
Index (FDICI), has indicated that corporate executives are ___________________
optimistic that China and India are the world’s most favoured
___________________
destinations for Foreign Direct Investment (FDI).
For India, the boom is set to drive the economy. Banks, real estate ___________________
moguls, textile giants of yesteryear and petro majors are all keen
___________________
to invest in this sector. However, long-term funding, development
of retail infrastructure and planning are challenges that could
impede the growth of the sector. In addition, the lack of trained
and skilled labour is being felt. This has not prevented brands
such as Hugo Boss, Louis Vuitton and Daks, from finding quality
spaces in the Indian market. Many exclusive brands are tying up
with Indian manufacturers to source quality garments. India is
delivering value-propositions on a number of fronts.
)U
V. Vaidyanathan, Country Head, Retail Banking, ICICI Bank,
speaking at the Shopping Centres and Retail Conference in
Mumbai recently, said that in 2000 there were three malls in
India and in 2003 there were about 25. This year, close to 200
malls are either being developed or are on paper. Vaidyanathan
said that retailers and developers needed to consider factors such
as zoning laws and positioning of specialty or entertainment
malls.
The silver lining for the industry is that Indian consumers have a
higher purchasing power now.
Considering the nascent status of the sector and the
transformation of the Indian buyer, factors such as the ever-
changing consumer preferences, the demand for value-for-money
deals and convenience, and the threat of foreign investment (the
largest Indian retailer has a turnover of ` 1,000 crore while
Wal-Mart has a turnover of over $200 billion) cause concern
among local players.
(c
Retailers are demanding the easing of labour laws and the

regulations on acquiring real estate and getting FDI to promote
areas such as food supply chain infrastructure. Retailers and
developers are also now grappling with the question of how best
to develop and manage their malls, moving gradually away from
the ‘build and sell’ model.
In the past year alone, even small cities and towns have
witnessed the growth of malls. Places such as Nagpur, Ludhiana,
Contd...
56 Chandigarh, Gurgaon, Thiruvananthapuram, Coimbatore,

Notes Ahmedabad and Pune, which have a large number of people with
S
purchasing power, are the latest attractions for retailers.
___________________
Crossword, the book retailer, has had such a success in
___________________ Ahmedabad and Pune that it has tripled its retail space in both
cities.
___________________
According to Kishore Biyani, managing director, Pantaloon Retail,
___________________ the Indian market currently has about 50 million square feet of
retail space to offer. Pantaloon Retail has signed up for 20 per
___________________ cent of that space. It currently has 2.1 million sq. ft. in retail
PE
space and wants to double this by next year.
___________________
Despite the favourable factors highlighted by the GRDI ranking
___________________ and the FDICI report, Krish Iyer feels that the key challenge will
be to promote growth through employment generation and
___________________
demographic transition.
___________________ As a huge investment is required to realize the potential of the
___________________
retail sector, FDI is being viewed as a serious option. Also
availability and management of talent as well as speedy
implementation of plans are the needs of the hour, he says.
For the mall culture and retail business to succeed, retailers must
constantly rework their strategies to attract customers and
reinvent their products.
Question:
Read and summarise the case in about 200 words.
)U
(c
UNIT 6: New Exploration Licensing Policy
a
57
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-II
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(c
58
Notes F
S
UNIT 6: NEW EXPLORATION LICENSING POLICY
___________________ UNIT 8: FUEL ADULTERATION
z Introduction z Introduction
___________________
z Concept of NELP z Committees and Task Forces Constituted in India
___________________ for Checking Fuel Adulteration
z Salient Features of NELP
___________________ z Consumers Front: Anti-adulteration Tips
z Offering of Blocks under NELP-IX
z Hindustan Petroleum Corporation Limited –
z Demand and Supply of Petroleum Product
___________________ Quality Management Initiatives
PE
___________________
UNIT 7: FUEL QUALITY
UNIT 9: FORECOURT DESIGN AND NETWORK
z Introduction
___________________
z Introduction
z Fuel Industry
___________________ z Objective of the Transportation and Logistics
z Fuel Quality Problems
___________________ z Market Segments and Transportation Legs
z Indian Initiatives to Control Fuel Adulteration
z Transportation in Petro Industry – A Multi-modal
___________________
z View of the Fuel Quality in India Operation

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(c
Unit 6
59
Notes
S
Activity
New Exploration Licensing Policy

___________________
Write an essay on the NELP
and the potentials of Indian
___________________
Hydrocarbon Sector.
___________________
Objectives
___________________
topics: ___________________
PE
\ 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
)U
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
(c
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
60 capital required to invest in exploration business. It is precisely in

Notes this perspective that the Government of India has embarked upon
S
___________________ the process of inviting the private investment into the oil sector.
The remarkable development in this context has been the
___________________
promulgation of New Exploration Licensing Policy (NELP). With
___________________
it, the Government hopes to eliminate the country’s demand-
___________________ supply gap and build up pressure on import of crude and
___________________ petroleum products.
PE
___________________ So far, attempts to induct the private sector have borne, at best,
mixed results. There have been nine bidding rounds for awarding
___________________
blocks for exploration. They have not attracted foreign direct
___________________
investment in a desired manner. The very expectation that the
___________________ prospective investors should participate in biddings seems to have
___________________ not been achieved. Indian oilfields are perceived to be of low
prospectivity and also there is poor coverage of seismic data. There
is, therefore, a case for revising the NELP in the interest of getting
a larger number of international majors involved even if, in the
process, a larger proportion of the resultant crude production has
to be shared with the companies concerned.
Potentials of Indian Hydrocarbon Sector

)U
India is endowed with large sedimentary basins that can be tapped
for oil and natural gas. Out of 28 billion tonnes of hydrocarbon
resources, only about 6.8 billion tonnes have been converted to
reserves. Based on recent analysis carried out by Directorate
General of Hydrocarbons (DGH) and analogy with other producing
sedimentary areas of the world it is felt that, so far, in India, we
have upgraded less than half of possible production reserves. India
is in a position to produce/establish at least as much more oil and
gas reserves as has been done so far without any major success.
Studies reveal that major parts of the sedimentary areas of the
country are still unexplored. As per the data of the total 3.14
million square kilometre of sedimentary areas about 1.02 million
square kilometre, i.e., 34 per cent remains totally unexplored and
(c
another 1.58 million square kilometre, i.e., 50.32 per cent remains
inadequate or poorly explored. Deep-water areas also remain
almost completely unexplored. Deep-water potential of Indian
waters is estimated to be in the range of 5 to 9 billion tonnes of
hydrocarbon resources. DGH has recently carried out satellite
gravity, 2D seismic and gravity, magnetic surveys of the Eastern
offshore and Andaman seas and these deep water areas have now
been opened up for exploration. It appears that resources of deep 61

waters are likely to be several times higher than what was Notes
S
Activity
anticipated earlier. Along the East Coast alone about 30 new ___________________
Make a report on the salient
geological plays/structures have been mapped with limited data features of NELP.
___________________
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
___________________
PE
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. ___________________
___________________
Fill in the blanks:
1. ………………… potential of Indian waters is estimated
to be in the range of 5 to 9 billion tonnes of hydrocarbon
resources.
2. …………………… has recently carried out satellite
gravity, 2D seismic and gravity, magnetic surveys of
)U
the Eastern offshore and Andaman seas and these deep
water areas have now been opened up for exploration.
Salient Features of NELP

In order to increase the quantum of investments into this sector
and to achieve a greater level of self-sufficiency in Oil Production
the government recently announced the NELP. This is now
expected to offer a level playing field to all the companies entering
this sector and thus would address the major grouse of many of the
private sector companies. The policy is expected to be set into
motion and in the first phase, nine blocks in the Western, Eastern
and the Andaman Offshore areas are being offered for open
bidding. The national oil companies too will have to compete in this
(c
process if they want to carry out operations in these areas.

The salient features of NELP are elaborated below:
z There will be no mandatory state participation through
ONGC/OIL nor will there be any carried interest of the state.
z ONGC and OIL to compete for obtaining the petroleum
exploration licences on competitive basis instead of the
62 existing system of granting them PELs on nomination basis.

Notes At the same time, ONGC and OIL will also get some fiscal and
S
___________________ contract terms available to private companies.
___________________ z Open availability of exploration acreages to provide a
___________________ continuous window of opportunities to oil companies. The
acreages will be demarcated on a grid system and pending
___________________
preparation of the grid, blocks will be carved out for offer.
___________________
PE
z Companies will be able to choose and propose acreages.
___________________
z Freedom to the contractors for marketing of crude oil and gas
___________________
in the domestic market.
___________________
z Royalty payments for crude oil at the rate of 12.5% for the on
___________________ land areas and 10% for offshore areas and 10% royalty on
___________________ natural gas both for on land and offshore; half of the royalty
from the offshore area will be credited to a hydrocarbon
development fund to promote and fund exploration related
activities such as acquisition of geological data on poorly
explored basins, promotion of investment opportunities in the
upstream sector, institution building, etc.
z To encourage exploration in deep water and frontier areas
)U
royalty will be changed at half the prevailing rate for normal
offshore area for deep water offshore areas beyond 400m
bathymetry for the first 7 years after commencement of
commercial production.
z Cess, which was earlier levied on crude production, has been
abolished for the blocks offered under NELP and there will be
no signature, discovery and production bonuses.
z Companies will be exempted from payments of import duty on
the goods imported for petroleum operations.
z A seven-year tax-holiday from the date of commencement of
commercial production available for northeast region.
z Contractor will be provided fiscal stability during the entire
(c
period of contracts.
z A separate petroleum tax code will be put in place to facilitate
investors.
z A revised model contract will be prepared and will be made
available to the companies.
The New Exploration Licensing Policy involves: 63

Notes
S
z National oil companies to compete with private sector for Activity
licences. ___________________
Prepare an assignment on
offering of blocks under
z Exploration blocks to be allotted on open acreage system. ___________________
NELP-IX.
___________________
z Freedom to choose and propose with companies.
___________________
z No compulsory state participation or carried interest.
___________________
PE
z Freedom to contractors to market crude and gas discovered.
___________________
z No payments of signature, discovery or production.
___________________
z Royalty: 12.5% for on land, 10% for offshore, 5% for deep
___________________
offshore for first 7 years.
___________________
z Infrastructure status to E&P sector.
___________________
z Tax holiday for 7 years for production in North East Regions.
z International prices to national oil companies under NELP.
z Cess on crude oil produced under NELP abolished.
Check Your Progress

Fill in the blanks:
)U
1. Under NELP, royalty payments for crude oil are at the
rate of ………… % for the on-land areas and ………… %
for offshore areas and ………… % royalty on natural
gas both for on-land and offshore.
2. A ……………………-year tax-holiday from the date of
commencement of commercial production available for
northeast region.
Offering of Blocks under NELP-IX

With a view to bring more area under exploration, the Ninth bid
round of New Exploration Licensing Policy (NELP-IX) has been
launched on 15th October 2010 at Delhi and first road-show was
(c
held at Mumbai on 18.10.2010. Under NELP-IX, 34 exploration

blocks including 8 deep-water blocks, 7 shallow water blocks, 11
on-land blocks and 8 Type-S on land blocks have been offered.
On-land blocks are spread over six states namely, Assam (2),
Gujarat (11), Madhya Pradesh (2), Rajasthan (2), Tripura (1) and
Uttar Pradesh (1).
64 The NELP terms are widely regarded as the best in the world for
Notes attracting greater investment in the upstream oil and gas sector.
S
___________________ The NELP terms are far superior to earlier terms offered by the
government as can be seen from the comparative Table 6.1. The
___________________
main differences between earlier rounds of bidding for exploration
___________________
blocks and NELP are shown in Table 6.1.
___________________
Table 6.1: New Exploration Licensing Policy
___________________
PE
Terms Earlier Rounds NELP
___________________ Royalty/Cess Companies were exempted from Companies to bear
Payment payment of royalty and cess. royalty, cess has
___________________ ONGC/OIL to bear Royalty/Cess on been exempted.
behalf of private companies as per
___________________
the fiscal package approved by
government.
___________________
Participating 0-40% participating interest NOCs No participation by
___________________ Interest by NOCs at their option (except for JVEP, NOCs as
where NOCs had to take 25-40% Government
participating interest from nominee.
beginning of contract.
Carried interest of NOCs had 30% carried interest No carried interest
NOCs (except for JVEP, where they have by NOCs.
working interest from the
beginning), which is exercisable on
commercial discovery.
)U
NELP Terms Beneficial to National Oil Companies
The following benefits are applicable to National Oil Companies:
z NOCs are exempted from payment of cess under NELP
(a concession of almost US $3.0/bbl).
z The maximum royalty rate under NELP is 12.5% of
international price as against 20% of the administered price in
non-NELP areas.
z Incentive for deep water exploration with only half of the
royalty payable in the initial seven years from the
commencement of commercial production.
z Exemption from customs duty.
(c
z NOCs to get international price on their production of oil and

gas.
z Seven years tax holidays from the date of commencement of
commercial production.
z Liberal depreciation provision will make companies eligible for
further tax adjustments.
z Contribution made to site restoration fund scheme is 65

deductible in the year of contribution as against in the year of Notes
S
Activity
Site Restoration as per the earlier provision of the Income Tax. ___________________
Present a written draft on the
demand and supply of
NELP Terms Beneficial to Private Investors ___________________
petroleum products.
___________________
All the above benefits are applicable to private investors also. In
addition, following benefits will also apply: ___________________
Carried interests of NOCs at 30% have been abolished. ___________________
PE
z
___________________
z Companies are free to have 100% participating interest as
earlier up to 40% participating interest was to be held by ___________________
NOCs. This will also provide operational flexibility to the ___________________
companies in selecting partners of their choice.
___________________
z A true ‘level playing field’ established as a block reserved for
___________________
NOCs.
India imported 69% of her crude oil requirement; 88.7 million
tonnes of crude oil and products were imported at a cost of
` 84,400 crore (US $ 18 billion). To reduce the dependence on
import, the Government has given impetus to exploration in the
country and discovery of more oil and gas. Ninety-one blocks have
)U
been awarded under the New Exploration Licensing Policy (NELP)
in the last four years in comparison to 22 blocks in the previous
10 years.
Check Your Progress

Fill in the blanks:
1. India imported ………… % of her crude oil requirement.
2. …………………… blocks have been awarded under the
New Exploration Licensing Policy (NELP) in the last
four years in comparison to 22 blocks in the previous
10 years.
Demand and Supply of Petroleum Product

(c
Recently, macro-trends are occurring in the world petroleum

industry especially, oil, natural gas and refining. Other notable
changes are also taking place in restructuring, reform and
introduction of compilation and consolidation. All this affect the
demand and supply of petroleum product to a large extent.
66
Global Oil Demand
Notes
S
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.
___________________
PE
___________________ Global Oil Supply
___________________ If we look back over the past few years, we notice several factors
affecting the worldwide crude oil supply. There was the Persian
___________________
Gulf war, which removed oil production capacity from the market
___________________ by eliminating output from Iraq and temporarily eliminating
___________________ output from Kuwait. The worldwide crude oil supply situation
changed markedly following the conflict in the Persian Gulf. After
a brief period of uncertainty that drove up the price of crude oil in
late 1990 and early 1991, the market experienced an extended
period of price stability. The war and subsequent outcome resulted
in a substantial volume of crude oil capacity being removed from
the market. The removal of this capacity contributed greatly to the
)U
period of price stability. For a substantial number of years there
was excess production capacity in the world, which put downward
pressure on prices. Most of that excess capacity was in the OPEC
countries. With the loss of the production capacity of Kuwait and
Iraq, a substantial portion of the excess capacity was eliminated.
There was even some danger of temporary supply shortages when
demand moved up late in 1990, during the winter heating season.
To satisfy the increase in world liquids demand in the Reference
case, liquids production increases by 26.6 million barrels per day
from 2008 to 2035, including the production of both conventional
liquid supplies (crude oil and lease condensate, natural gas plant
liquids, and refinery gain) and unconventional supplies (biofuels,
oil sands, extra-heavy oil, coal-to-liquids [CTL], gas-to-liquids
[GTL], and shale oil). In the Reference case, sustained high world
(c
oil prices allow for the economic development of unconventional

resources and the use of Enhanced Oil Recovery (EOR)
technologies to increase production of conventional resources. High
world oil prices also incentivise the development of additional
conventional resources through technically difficult, high-risk, and
very expensive projects, including wells in ultra-deep water and
the Arctic.
67
Check Your Progress
Notes
S
Fill in the blanks:
___________________
1. OECD stands for ……………………. ___________________
2. The worldwide crude oil supply situation changed ___________________
markedly following the conflict of …………………….
___________________
___________________
PE
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
)U
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
(c
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.
The industry is about to witness a distinct transformation in the
near future and this calls for massive investment with long
gestation gaps. The Government is encouraging private capital –
both domestic and foreign – and for this, procedures are being
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
S
___________________ 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
PE
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.
___________________
Lesson End Activity
With the help of internet, make a comparison between the oil
supply by OPEC and Non-OPEC countries.
Keywords
)U
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.

1. Discuss the trends in production of crude oil and gas in India.
2. Highlight the silent features of NELP.
3. Discuss the nature and scope of New Exploration and
Licensing Policy.
4. Write a note on trends in oil demand of the world.
(c
5. What are the key forecasts of oil demand made by EIA?

Further Readings 69
Notes
S
Books ___________________

___________________
2010
___________________
PE
___________________
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
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70
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 7: Fuel Quality
Unit 7
71
Notes
S
Activity
Fuel Quality
___________________
Write an article on the fuel
industry in India.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ 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.
)U
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
(c
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.
72 The country has 36,936 petrol pumps. Of the overall retail outlets,
Notes state run Indian Oil, Bharat Petroleum and Hindustan Petroleum
S
___________________ own 34,304 pumps whereas the remaining belong to the private
sector.
___________________
___________________ The PSU giants have been tying up with a variety of FMCG and
other companies to promote forecourt retail. With the fast growth
___________________
being witnessed in the fast food industry, BPCL has entered into
___________________ agreements with both of the Joint venture partners of McDonald’s
PE
___________________ operating in India – Hardcastle restaurants Private Limited and
Connaught Plaza Restaurants Private limited. BPCL as well
___________________
signed an agreement with Nirulas Corner House Private Limited
___________________
for setting up Nirulas restaurants in the network. These QSR
___________________ alliances, while pleasing the image of the retail network, will serve
___________________ as a differentiating customer value proposition. BPCL furthermore
operates the In&Out convenience stores at various petrol pumps.
Go after the footsteps of global oil marketing companies, Indian Oil
has decided to come in the retrial business at some 2,000 of its
16,455 retail outlets. Indian Oil is planning to partner with
existing retailers, for instance Apollo for pharmacies, Subhiksha,
bookseller Crossword and Café Coffee Day. This is alike in concept
)U
to the ‘In&Out’ retail store format at competitor Bharat Petroleum
Corp Ltd., which has formed deliberate alliances with major brand
owners, retailers and music stores Planet M and Music World,
among others. Indian Oil expects the retail business to add a total
turnover of around ` 3,000 crore when rolled out fully.
Internationally, petrol pump-based convenience stores have
developed into large businesses with corporations such as Royal
Dutch Shell Pic., Caltex Australia Petroleum Pty Ltd and BP. The
enlargement in highway infrastructure courtesy the Golden
Quadrilateral project and the impending competition in oil
retailing, seem to be the two key drivers. Moreover, with land
becoming costlier, there is restricted scope for urban growth. Little
wonder then that almost 70% of all new outlets are coming up on
highways.
(c
In the midst of the private sector players, Reliance Industries

outlets were selling approximately four times the average sales of
PSU outlets. The sales volumes of RIL, outlets fell considerably
after PSU oil retailers were prevented by the government from
raising prices.
73
Check Your Progress
Notes
S
Activity
Fill in the blanks:
___________________
Make a slideshow on the fuel
1. ………………-based convenience stores have developed quality problems.
___________________
into large businesses with corporations.
___________________
2. Reliance Industries outlets were selling approximately
___________________
……………… times the average sales of PSU outlets.
___________________
PE
Fuel Quality Problems ___________________
___________________
Sometimes fuel quality problems can cause enormously hard-to-find
engine drivability problems and repeat failures of fuel system ___________________
components. There will be an effective way for an individual to ___________________
check the basics of fuels quality.
___________________
)U
Figure 7.1: Battery Powered fuel Siphon
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.
(c
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.
74
Why Test Fuel Quality
Notes
S
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,
___________________
PE
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.
How to Test for Fuel Quality

)U
An individual do not have to be a scientist to find out how much
alcohol is in fuel. Take a fuel sample from the test vehicle and
graduated cylinder to the 90 ml mark. Subsequent step is adding
10 ml of water to the graduated cylinder to bring the total contents
to 100 millilitres.
(c
Figure 7.2: GM Fuel Pump
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
that the different fluids separate. Usually wait an hour or two 75

before examine the cylinder. Notes
S
Activity
Because water is heavier than gasoline, the water will settle to the ___________________
Prepare a report on the
bottom of the cylinder along with the alcohol that is in the fuel. initiatives taken to control fuel
___________________
adulteration.
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 ___________________
PE
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.
Check Your Progress

Fill in the blanks:
)U
1. If the alcohol concentration goes beyond …………% by
volume this can cause the engine to run lean.
2. Even though there are several safe ways to remove fuel
from tank, it is being recommended that one may
pick up a special …………… from the auto parts store.
Indian Initiatives to Control Fuel Adulteration

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. Off late India has also
taken some initiatives to deal with this problem. As per the
Ministry of Petroleum & Natural Gas, following steps have been
undertaken to control Adulteration of Fuel in the country:
(c
1. The Ministry of Petroleum & Natural Gas has caused oil

companies takes various steps listed below to detect/prevent
adulteration of MS/HSD at retail outlets:
(i) Filter paper test,
(ii) Furfural doping of PDS kerosene,
76 (iii) Density checks,

Notes
S
(iv) Blue dyeing of kerosene,
___________________
(v) Regular/surprise inspection of retail outlets,
___________________
(vi) Joint inspection of retail outlets by the industry teams,
___________________
(vii) Regular/surprise inspection by mobile laboratories,
___________________
___________________
(viii) Special vigilance drives, etc.
PE
___________________ 2. Further, in order to prevent diversion of kerosene meant for
distribution under PDS for adulteration, MoPNG has directed
___________________
the oil companies to ensure upliftment by the wholesalers as
___________________ under:
___________________
(i) 60% by 10th of the month
___________________
(ii) 25% during next week, and
(iii) Balance 15% during the following week.
3. MoPNG has also advised State/UT Government from time to
time
(i) To ensure upliftment of fuel by the wholesellers from oil
companies as per upliftment pattern.
)U
(ii) To identify loopholes in the distribution system.
(iii) To review scale of distribution.
4. MS/HSD control order has been amended for providing testing
of MS/HSD for various parameters of specification apart from
density like Octane No. of MS, Cetane No. of HSD, and any
other parameter of MS/HSD specification indicated in the
order.
5. The state Govt. authorities are empowered under the MS/HSD
control order to conduct inspections at the retail outlets and
take appropriate action against the erring dealers in case of
any malpractices/irregularities detected.
6. MoPNG has also amended the control order making it
(c
mandatory for the parallel marketers to file end use certificate

from their industrial customers.
7. An independent fuel-testing laboratory has been set up at
Noida as directed by Hon’ble Supreme court and as desired by
EPCA for testing of samples drawn from retail outlets in the
NCT/NCR.
8. MoPNG have issued two control orders namely (i) the solvent, 77
Raffinate and Slop (acquisition, sale, storage and prevention of Notes
S
use in automobile) order, 2000 in order to prevent
___________________
unauthorized usage of these products for adulteration of
MS/HSD at retail outlets. ___________________
___________________
9. In addition to above, following measures are at advanced stage
of implementation to prevent adulteration of MS/HSD: ___________________
(i) Oil companies are undertaking trial of various marker ___________________
PE
systems to detect/prevent adulteration of MS/HSD. ___________________
(ii) Oil companies are examining the feasibility of replacing ___________________
the existing sealing system for the tanks carrying
___________________
MS/HSD with Assa Abloy Security locking system in order
to prevent en-route adulteration of MS/HSD by ___________________
transportation/Tank truck crew. ___________________
(iii) MoPNG has directed the oil companies to increase the
number of mobile laboratories.
(iv) Oil companies are setting up a number of laboratories
equipped with facilities like CFR engines to test
octane/cetane number of MS/HSD sample etc. all over the
country.
)U
10. Following methods are practiced for checking kerosene
adulteration in MS:
(i) Filter paper test
(ii) ASTM Distillation
However, both these methods are qualitative in nature and
detection of low level of adulteration with SKO is not possible.
For this IOCL (R&D) has done substantial work and based on
the findings, addition of 20-ppm furfural was recommended.
11. A method using GC as a powerful laboratory-based tool for
detecting hydrocarbon-based adulteration was suggested. In
this original GC Finger prints (chromatogram) on as many
potential base fuels (pure fuels) such as automotive gasoline,
(c
diesel fuels and kerosene were essential. The approach was to

generate chromatogram of the fuels procured from the market
and then to compare the same against the chromatogram of
the so-called pure fuel for the hydrocarbons like hexane,
heptane, etc. Any deviation in the concentration of hexane,
heptane, etc. in the fuel amounted to adulteration. Though this
method of detection of adulteration was later declared to be
78 erroneous, arbitrary and irrelevant as it is claimed that there

Notes is nothing like pure gasoline, kerosene and diesel. Classically
S
Activity
___________________
Present a draft on the view of any of these fuels can be blended with different hydrocarbon
fuel quality in India. streams of refinery meeting the product specifications
___________________
characteristics as per relevant Indian and International
___________________
norms.
___________________
Check Your Progress
___________________
PE
___________________ 1. The state Govt. authorities are empowered under the

……………… control order to conduct inspections at the
___________________
retail outlets and take appropriate action against the
___________________ erring dealers in case of any malpractices/irregularities
___________________ detected.
2. Any deviation in the concentration of hexane, heptane,
etc. in the fuel amounted to ……………….
View of the Fuel Quality in India

It comprises the following:
)U
z Unleaded Gasoline: Introduced in 1995 and 100% in 2000
z 1% Benzene Content in Gasoline: Introduced in NCT
(National Capital Territory) afterwards extended to NCR
(National Capital Region) & Mumbai.
z 0.05 % Sulphur content in gasoline: Introduced in NCR,
Extended to Mumbai, Kolkata and Chennai.
z 0.05 % sulphur content in diesel: Introduced in the NCT
and Extended to NCR, Mumbai, Kolkata & Chennai.
Present Indian Fuel Status

It has been described below:
z Presently, BIS 2000 Specifications for Gasoline and Diesel are
(c
followed in India.
z In the Metro-Cities, Euro-II Equivalent Fuel is supplied. The
only difference being the Sulphur content, which is 500 PPM
for both, Gasoline and Diesel in the Metro Cities; and, 1000
PPM for Gasoline and 2500 PPM for Diesel in the rest of the
country.
z Additionally, Gasoline with Benzene content of 1.0 Vol.-% 79

Max. has been introduced in the NCR of Delhi and Greater Notes
S
Mumbai.
___________________
z Gasoline with Benzene content of 3.0 Vol.-% Max. has been ___________________
introduced in Kolkata and Chennai.
___________________
z CNG, LPG, Ethanol Blends are used in Specified Areas.
___________________
Road Map for Vehicular Emission Norms in India ___________________
PE
___________________
Emission Norms of Bharat Stage I, II & III
___________________
z Bharat Stage II (EQ. TO EU II NORM) Emission Norms for
4-Wheelers to be applicable from 1.4.2005 ___________________
___________________
z Bharat Stage III (EQ. TO EU III NORM) Emission Norms for
4-Wheelers to be applicable from 1.4.2010 ___________________
z Bharat Stage II Emission Norms for 2 & 3-Wheelers to be

applicable from 1.4.2005
z Bharat Stage III Emission Norms for 2 & 3-Wheelers to be
applicable from 1.4.2008 and not later than 1.4.2010.
For Cities of Delhi/National Capital Region, Mumbai, Kolkata,
)U
Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat,
Kanpur and Agra:
z Bharat Stage-II Emission Norms for 4-Wheelers have already
been implemented in the Cities of Delhi, Mumbai, Kolkata and
Chennai.
z Bharat Stage-II Emission Norms for 4-Wheelers was
implemented for the cities of Bangalore, Hyderabad,
Ahmedabad, Agra, Kanpur, Pune and Surat.
z Bharat Stage-III Emission Norms for 4-Wheelers implemented
from 1.4.2005 for all the 11 Cities mentioned above.
z Bharat Stage-IV Emission Norms for 4-Wheelers implemented
from 1.4.2010 for all the 11 Cities mentioned above.
(c
Check Your Progress

Fill in the blanks:
1. Presently, BIS 2000 Specifications for ……………… and
……………… are followed in India.
2. Gasoline with ……………… content of 3.0 Vol.-% Max.
has been introduced in Kolkata and Chennai.
80
Summary
Notes
S
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
PE
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.
___________________
___________________
Lesson End Activity
Compare the fuel quality standards of India with other nations.
Keywords
BIS: Bureau of Indian Standards, the National Standards Body of
India.
)U
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.

(c
1. Describe the fuel quality standards in India.

2. What are the fuel quality issues or problems faced by the
customers?
3. Discuss briefly about the fuel industry.
4. List the fuel quality problems.
5. What are the Indian initiatives to control fuel adulteration? 81

Notes
S
6. Write a short note on the view of the fuel quality in India.
___________________
Further Readings ___________________
___________________
Books
___________________
___________________
PE
___________________
___________________
2010
___________________
Publishing ___________________
___________________
Web Readings
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http://www.eia.gov
http://www.bp.com
www.iocl.com/
(c
82
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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(c
UNIT 8: Fuel Adulteration
Unit 8
83
Notes
S
Activity
Fuel Adulteration
___________________
Write a report on the
committees and task forces
___________________
constituted in India for
checking fuel adulteration.
___________________
Objectives
___________________
topics: ___________________
PE
\ Committees and Task Forces Constituted in India for Checking Fuel ___________________
Adulteration
___________________
\ Consumers Front: Anti-adulteration Tips
\ Hindustan Petroleum Corporation Limited – Quality Management ___________________
Initiatives
___________________
___________________
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.
Committees and Task Forces Constituted in India for

)U
Checking Fuel Adulteration
BIS Study Group on Adulteration

Bureau of Indian Standards (BIS) has constituted a task force to
look into various aspects of fuel adulteration. The terms of
reference of the study include reviewing current methods for
testing of petroleum products, identifying strengths and
limitations of currently used methods, reviewing of intermediate
testing protocols and identification and validation of possible test
methods.
Biocode Marker System

Upon successful demonstration of technique, field trails were
(c
conducted at Sabarmati Terminal, Ahmedabad. However, the

marker did not meet the requirements due to inconsistency in
doping and tedious process of testing the samples.
Spectrace Technique
M/s Rohm & HAAS have developed a new NDT for checking fuel
adulteration. Based on successful demonstration, the same has
84 been recommended for field trial at HPCL terminal at Vashi. The

Notes result of this trial reveals that chemical characteristics of the
S
___________________ doped MS are in line with the BIS specifications and the marker
responds to addition of adulterants in different proportions. The
___________________
marker was also found to be stable. More trials with this technique
___________________
are scheduled to be carried out in Delhi.
___________________
R&D Marker System
___________________
PE
___________________ IOCL R&D has developed a chemical based marker system, which
is to be field tried at Devenghunti terminal of IOC near Bangalore.
___________________
Study group of the Task force evaluated various type of marker
___________________ system. Evaluation was done jointly by IOC R& D and BPCL R&D
___________________ at IOC, R&D centre.
___________________
CPCB Working Group on Adulteration
Central Pollution control Board has constituted a Working Group
to formulate fuel specifications under the Inter-Ministerial
Committee to formulate Auto Oil Programme constituted by
MOEF. One of the terms of reference was to draw a strategy for
monitoring the fuel quality at the petrol pumps to check
adulteration.
)U
MoPNG Task Force on Adulteration
Ministry of Petroleum & Natural Gas has constituted a Task Force
to examine the use of solvent, raffinate and slop in automobile fuel.
The Task Force identified various possible fuel adulterants for
gasoline and diesel. The recommendations of this Task Force are:
z The chemicals/solvents, which are potential adulterants, are
presently cheaper than gasoline and diesel. The prices of these
solvents should be brought at par with conventional fuels to
discourage adulteration.
z If prices cannot be increased for any reason, then the solvents
should be included under the Solvent, Raffinate and Slop
(c
(Acquisition, Sale, Storage and Prevention of use in

Automobile) Order, 2000. Any petroleum derivatives having a
density 0.66 to 0.94 g/ml at 15 degrees centigrade and/or
boiling range 35 to 380 degrees centigrade may be covered
under the subject control order. The samples from the
suspected stocks would be tested in any authorized
laboratories for full BIS specifications compliance.
z The Task Force felt that return streams from petrochemical 85

plants to the refineries may be getting diverted for Notes
S
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. ___________________
___________________
PE
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.
)U
Auto Fuel Policy Report
A Committee of Experts was constituted by the Government of
India to lay down the road map for auto fuel policy in the country.
Besides other issues, the Committee also recognized the problems
of fuel adulteration and recommended the following:
z Expansion of the tank lorry locking system introduced in
metro cities to other cities.
z Depending on the results of the pilot projects for the use of
special markers to detect and prevent adulteration in petrol
and diesel, a scheme for the use of these markers on
commercial basis be implemented.
z Encouraging setting up of consumer pumps by the transport
(c
companies operating city public transport.

z Independent inspection and checks by agencies other than the
oil companies.
z Setting up of an independent anti-adulteration cell and the
joint inspection approach put in place in the NCT of Delhi
under the directions of the Supreme Court has brought about
86 improvements in fuel quality. Inspections by joint teams of

Notes anti-adulteration cell state civil supplies and State Pollution
S
Activity
___________________
Prepare a chart on the Control Boards in polluted cities should be taken up.
anti-adulteration tips from the
___________________
consumers’ front. z Responsibility for dispensing the right quality of fuels should
___________________ be made obligatory to the oil companies.
___________________ Check Your Progress

___________________
Fill in the blanks:
PE
___________________
1. ………………… has constituted a task force to look into
___________________ various aspects of fuel adulteration.
___________________
2. …………………… has constituted a Working Group to
___________________ formulate fuel specifications under the Inter-
___________________ Ministerial Committee to formulate Auto Oil
Programme constituted by MOEF.
3. ……………… has constituted a Task Force to examine
the use of solvent, raffinate and slop in automobile fuel.
Consumers Front: Anti-adulteration Tips

Consumers are the sufferers of adulteration malpractice. Any
)U
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:
Filter Paper Test: Initially the mouth of nozzle is cleaned to
remove stains. Afterward, a drop of petrol is put on the filter paper
from the nozzle. The petrol dropped on the filter paper is allowed
to evaporate for 2 minutes. The petrol should evaporate without
leaving any stain on the filter paper. If the colour left on the paper
is pinkish, it is the colour of MS and not a stain. Dealers are
probable to provide filter paper to customers on demand.
Density Test: This is a very easy test. This test takes
approximately 5 to 10 minutes. Product is taken in a glass jar and
(c
then a Hydrometer (separate Hydrometers for MS and HSD)

available with the dealer is dipped in the product. A Thermometer
is too immersed into the product jar simultaneously without
touching the walls of the jar. The readings of Thermometer and
Hydrometer are taken. Afterward, with the help of a conversion
chart, the density is converted to 150C and this is compared with
the recorded density/reference density, which can be seen from the 87

density register maintained by the dealer. If the variation between Notes
S
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, ___________________
PE
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
)U
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:
z 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
(c
the Oil Company.

z 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.
88 z By-product Outlet: Refiners and Petrochemical complexes

Notes must not be allowed to sell any by-product or intermediate
S
___________________ product to the market but only to a refinery for further
processing into specification products. Products like slack wax,
___________________
tank sludge must also be considered for refinery processing.
___________________
z By-product Disposal Follow-up: In case any by-products are
___________________
sold out or the final disposal of by-products from chemical
___________________ processing, solvent preparation, solvent regeneration units,
PE
___________________ etc. require to be transparent and the disposal and ultimate
usage pattern need to be verified at regular intervals.
___________________
___________________
z Passport for Transport Fuel Batches: Transport fuels must
have passport containing principal characteristics, which the
___________________
batch will carry till the retail outlets. This will assist in
___________________ identification of adulterants at the outlets. Appropriate
analytical methods for this need to be established.
Furthermore, there should be expansion of the tank lorry
locking system introduced in metros to other cities.
z Legal Framework: There is extra need to develop legally
binding and legally enforceable penalty system. Penalty
system should be harsh and imposed upstream. In case of an
)U
abuse in fuel market the penalty should be imposed on all
concerned along the supply chain-the company, transporters
and dealers and the actions taken must be exemplary to
discourage adulteration practice.
z Sample Collection & Analysis: A lawfully acceptable system
of sample collection and analysis in accredited laboratories of
selected parameters and full specification testing requires to
be worked out and implemented.
z Independent Sample Testing: Setting up of a self-governing
anti-adulteration cell and the joint inspection approach put in
place in NCT of Delhi beneath the directions of the Supreme
Court brought about improvement in fuel quality. Inspections
by cooperative teams of anti-adulteration cell, state civil
(c
supplies and state pollution control boards officials in polluted

cities must be taken up.
z Surprise Checking: Rigorous surprise checking of samples
from pumps must be carried out independently and in case of
non-compliance; the responsible oil company may be named
and highlighted in media. This will force the oil companies to
protect their brand image and ultimately mount pressure on 89

the oil companies to be efficiently vigilant about the quality of Notes
S
fuels sold in their retail outlets. ___________________
z 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 ___________________
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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.
___________________
z 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.
z 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
)U
z
companies similar to “Pure for Sure” as initiated by BPCL
needs to be encouraged by the Government.
z Awareness: Consumer organizations at city/town level with
essential support of concerned authorities can serve as
watchdog to check adulteration.
Check Your Progress

Fill in the blanks:
1. Voluntary initiatives of the oil companies similar to
…………………… as initiated by BPCL needs to be
encouraged by the Government.
2. Consumer organizations at city/town level with
(c
essential support of concerned authorities can serve as

…………………… to check adulteration.
90
Hindustan Petroleum Corporation Limited – Quality
Notes
Management Initiatives
S
Activity
___________________
Present a summarized
document on the quality HPCL is a Government of India Enterprise with a Navratna
___________________
management initiatives
undertaken by HPCL.
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
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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
High Quality Personalized “Vehicle and Consumer Care”

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”
)U
through a select set of outlets. Developed after an exhaustive
research of over a year, which included collecting feedback from
over 13,000 respondents in several key markets across the country,
the “Club HP” concept aims to provide the assurance of “Quick
Fills”, “Expert, Personalised Service”, “Total Vehicle Management”
and “Consumer Conveniences”.
While designing the bouquet of services for Club HP outlets, there
has been reliability upon the feedback received directly from
consumers. It is being realized that consumers are highly conscious
of the fuel that goes into their vehicles – each “Club HP” outlet
carries the assurance of HPCL’s ‘Good Fuel Promise’ and delivers
the right quality and quantity of the products on offer. Fuel is
delivered to these outlets in tank trucks fitted with tamper proof
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locks and a high degree of control is kept by the HPCL staff to

ensure that quality standards are strictly enforced.
The “Club HP” concept also recognizes the fact that the consumer
today places very high importance on vehicle care and at the same
time expects other value added services from a fuel retail outlet
that help him take care of diverse activities under one roof and in
the shortest possible time. The Club HP outlets provide a distinct 91

set of basic and value added offerings which include “Efficient & Notes
S
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, ___________________
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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.
)U
“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.
z 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.
z Quick Care Points: Consumers are offered a free check-up of
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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.
z Digital Air Towers: The performance and safety of new
generation cars depend a lot on the correct air pressure
92 maintained in the tyres. The specially designed digital air

Notes pressure equipment not only ensures accurate air pressure in
S
___________________ the shortest time but also adds to the comfort and safety of
travel.
___________________
___________________ z ‘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
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___________________ 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.
___________________ z 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.
z ATMs: HPCL has taken the lead in providing ATM facilities at
its outlets in association with leading banks and is targeting
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over 400 ATMs very soon. Select Club HP outlets have already
been equipped with ATMs.
z Bills Payments: HPCL has tied up with Skypak Financial
Services, which is providing “Drop boxes” at all “Club HP”
outlets in a phased manner. Consumers can utilize these drop
boxes to pay bills relating to a variety of service providers. All
one has to do is drop the bill and payment instrument
(Cheque/Demand Draft) for the designated service provider
and Skypak will route the same to the correct destination at no
extra cost.
z Communication Facilities: Each Club HP outlet is equipped
with a pay – phone for the convenience of consumers. In
addition, select outlets will also provide high speed internet
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browsing and e-mail facility.

z HPCL: ICICI Co-branded Credit Cards-Customers visiting the
“Club HP” outlets will be able to use the HPCL – ICICI Credit
Cards to reap the higher reward points offered by this unique
product.
z Basic Amenities: Each “Club HP” outlet will extend basic 93

amenities such as “safe drinking water” through water Notes
S
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 ___________________
___________________
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Check Your Progress
___________________
Fill in the blanks:
___________________
1. HPCL has tied up with Skypak Financial Services
___________________
which is providing …………………… at all “Club HP”
outlets. ___________________
2. More and more outlets will progressively upgrade to ___________________
………………… as part of our association with various

vehicle manufacturers.
Summary
The Committees and Task Forces Constituted in India for Checking
)U
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”
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through a select set of outlets.
Lesson End Activity

Make a presentation on the fuel-adulteration in India.
94
Keywords
Notes
S
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.
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___________________
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.

1. Explain the committees and task forces constituted in India for
checking fuel adulteration.
2. Discuss the anti-adulteration tips from the consumers’ front.
)U
3. What are the functions of Anti-adulteration cell?
4. What are the different test applied by the customer in order to
check the fuel quality?
5. Explain the quality management initiatives taken by the
HPCL.
Further Readings
Books
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2010
Publishing
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning 95

and Development Strategies’; Gulf Elsevier; 2010 Notes
S
___________________
Web Readings
___________________
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
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www.iocl.com/ ___________________
___________________
___________________
___________________
___________________
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96
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 9: Forecourt Design and Network
Unit 9
97
Notes
S
Activity
Forecourt Design and Network

___________________
objectives of the transportation
and___________________
logistics.
___________________
Objectives
___________________
topics: ___________________
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\ Objective of the Transportation and Logistics ___________________
\ Market Segments and Transportation Legs ___________________
\ Transportation in Petro Industry – A Multi-modal Operation
___________________
___________________
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
)U
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.
Objective of the Transportation and Logistics

Logistics and transportation of Petroleum and its products is a
cost, which every consumer in this country bears either directly or
indirectly. It is important that the whole gamut of activities is
(c
surveyed and put together at a macro-conceptual level for better

appreciation by researchers, policy-makers and practitioners in the
field.
It is believed that optimization in logistics and transportation of
Petrol and its products can indeed create value in the whole end to
end supply chain management. This unit attempts to bring all
interrelated issues together, so that areas of optimization can be
98 identified and models can be developed for integrated planning to

Notes capture the value in the chain of activity.
S
___________________
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
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___________________ 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.
Sectoral Use of Petroleum Products

Petroleum products are used primarily in three sectors, viz.,
household, transport and industrial. As large segment of our
population still uses bio-fuels and agricultural wastes in the
household sector for domestic energy requirement, petroleum
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products are not used in a significant way in the domestic sector.
However, use of bio fuels in household sector is sensitive from
environmental point of view and the dependence of household
sector on mineral fuels is increasing very fast. Out of the total
production of LPG, 80 per cent is used in domestic sector and its
use is increasing by 9 per cent per annum. During the last decade,
transport sector has consumed 35 per cent of total petroleum
products and the industry has used 17 per cent and the share of
power generation comes to 4 per cent. With the increasing trend of
industrialization and urbanization, use of fossil fuel is going to
increase in all sectors and, to that extent, the transportation
activities are going to multiply in volume and complexity.
Check Your Progress

(c
Fill in the blanks:

1. Petroleum products are used primarily in three sectors,
viz., ……………, …………… and ………………….
2. With the increasing trend of industrialization and
urbanization, use of ………………… is going to increase
in all sectors.
Market Segments and Transportation Legs 99

Notes
S
From the logistics point of view, petroleum products traverse three Activity
___________________
Write an article on the market
intermediate points, taking resort to multi modal transportation
segments and transportation
system as depicted below: legs.___________________
Table 9.1: Three Intermediate Points of Petroleum Products ___________________
Sr. No. Origin Destination Mode ___________________
1. Primary supply Secondary supply Cross country ___________________
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point, i.e., Refineries points, i.e., Major Pipelines, Coastal
(both coastal and inland), Terminals and Ships, Rail and ___________________
and Port locations Tap off points Road
___________________
2. Secondary supply points Distribution storage Rail,
points (Depots) and Road and ___________________
major customers Pipelines
3. Depots Retail outlets and Road ___________________
customers
___________________
Critical Transportation Features

Transportation of petroleum products is a specialized economic
activity, distinct from that of other commodities. The features,
which make it distinct and complex, are as follows:
1. Petroleum products are hazardous and inflammable.
)U
Therefore, safety of the vehicle and its operating environment
is a very significant feature of transporting petroleum
products.
2. Petroleum products are transported in bulk liquid and gas
form. Therefore, it needs specialized containers, built
exclusively for handling those products.
3. Petroleum products are quality sensitive. Therefore, it
becomes the responsibility of the transport operators to
maintain quality of the products at all stages of handling, i.e.,
loading, unloading and transporting. Products like Aviation
Fuel, food grade Hexane are very sensitive from the quality
point of view. Many a time, this requires dedicated transport
carriers.
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4. Petroleum products are volatile and liquid. Therefore, products

suffer loss, real or apparent, during transit. The loss has
financial and environmental impact. A transport operator can
play a crucial role in saving this loss.
5. Efficient handling of loading, unloading and transportation of
petroleum products need exclusive infrastructure, many of
100 which are built and operated by agencies other than Oil
Notes Companies. Pipelines need pumping and storage stations. Oil
S
___________________ 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
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___________________ 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.
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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.
Table 9.2: Modes & Operators in Transportation
Mode Operators Companies Comments

(not exhaustive)
Pipeline Oil Companies ONGC, IOC, Public sector and JVs, shared
BPC, HPC, GAIL, pattern of use
Petronet
Shipping Large Shipping SCT Both public and private
Companies Barge Great Eastern players are competing with
operators Shipping each other, some sectors still
Essar Shipping reserved for public sector
Barge operators
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Rail Indian Railways Indian Railways Monopoly operation,

Oil Companies have
created some assets for own
use purpose
Road Oil Companies, Large number of Free market, multiple
Fleet operators transport players, localized
and end users operators operation
101
Check Your Progress
Notes
S
Activity
Fill in the blanks:
___________________
Present a draft on the
1. Petroleum products are ……………… and inflammable. transportation in petro industry.
___________________
2. Petroleum products are transported in bulk liquid and
___________________
……………… form.
___________________
Transportation in Petro Industry – A Multi-modal ___________________
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Operation ___________________
___________________
No other tradable commodity travels so much as petroleum
products do. From well to wheel, it is a long chain of ___________________
transportation, storage, handling and value addition. Depending ___________________
upon distance between source and intermediate destination and
___________________
the size of the parcel, the modes of transportation varies. In the
current state of technology and commercial viability, following are
the four modes of transportation, which are being adopted in India:
1. Ocean transportation, by tankers of various sizes, ranging
from five thousand tonne capacity till 50 thousand tonne
capacity, mostly along both stretches of the Indian coast.
)U
2. Pipelines of various lengths and diameters.
3. Rail wagons of various types ranging from 20 to 55 tonnes
carrying capacity.
4. Tank Lorries of various capacities, ranging from 10 kilolitres
to 25 kilolitres.
Volume, Distance and Mode
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
(c
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).
102 4. Export of products (from Indian market to international

Notes market).
S
___________________
5. Coastal movement of products produced in the Indian
___________________ Refineries (from Indian Refineries to other Coastal Terminals
___________________ in India).
___________________ Pipeline Transportation

___________________
Transportation of petroleum products, crude oil and gas through
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___________________ 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
)U
this, there are 17 crude oil pipelines of 7425 km, with capacity of
transporting 105.55 MMT. The details are as follows:
Table 9.3: Details of Product Pipelines under Operation

(c
Source: Ministry of Petroleum and Natural Gas

Rail Transportation 103

Notes
S
With the increase in petroleum pipeline network, the railways
have lost their first position in transportation of petro products. It ___________________
now has the third biggest market share in transporting these, after ___________________
the coastal mode and pipelines. The fourth spot is occupied by road
___________________
transport.
___________________
While the railways have been losing market share, the volume
they carry has remained flat. Pipelines moved up from the fourth ___________________
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spot to the second in 2010–11. “There has been growth in line ___________________
share and simultaneous decrease in railways’ share in
___________________
transportation, mainly on account of increased utilisation of
___________________
pipelines network across the country,” said an official at the
Petroleum Products Planning and Analysis Cell (PPAC), a wing of ___________________
the petroleum ministry. ___________________
According to Indian Railways, they carried 23.7 million tonnes of
petroleum oil lubricants in April-October 2011, a negligible change
over last year’s corresponding volume of 23.2 mt. This is happening
even as the volume of total goods carried by the railways increased
nearly four per cent to 537 mt in the same period of the year.
Road Transportation
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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.
Check Your Progress

Fill in the blanks:
(c
1. ………………… 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.
2. ……………… transportation now has the third biggest
market share in transporting petroleum products.
104
Summary
Notes
S
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
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___________________ with IOC. In the transportation chain, there are multiple players
___________________ and each link provides room for investment and cost optimization.
___________________
___________________
Lesson End Activity
___________________ With the help of internet, find out more about forecourt design and
network.
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
)U
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.

1. What are the critical features if oil transportation?
2. Discuss the concept of integrated operation.
(c
3. What are the key modes of oil transportation?

4. Discuss the process of marketing of transportation fuels in
India.
Further Readings 105

Notes
S
Books ___________________

___________________
2010
___________________
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___________________
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
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106
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Unit 10
107
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
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___________________
Case Study 1: Laundry Services to Fuel HLL-BPCL Retail
Strategy ___________________
___________________
The neighbourhood dhobiwalla may soon face some serious
competition from unexpected quarters. He may have to compete ___________________
with India’s oil major Bharat Petroleum Corporation Ltd (BPCL)
and FMCG major Hindustan Lever Ltd, with the two corporate ___________________
giants planning to offer laundry services through the oil
company’s petrol retail outlets.
As oil companies are stepping on the gas to enhance their brand
equity by offering a bouquet of services at the retail points in an
effort to capture a larger part of the consumers mind share, BPCL
has identified laundry as one of the services that could become
part of its retail offering. “We had launched this service at a few
outlets in Mumbai some time ago and the response has been good.
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We will now be re-working the scheme and launching it on a
larger scale in the near future,” says Mr Rakesh Mehra, BPCL’s
General Manager (Retail), Western Region.
Taking a cue from the retailing strategies of oil MNCs in the
developed countries, BPCL had tied up with HLL to offer
customers to its select outlets the facility of laundry service, with
the oil major managing the “front-end” of the operation and HLL
handling the “back-end”. Customers could drop their laundry at
the select petrol outlets when they come to fill up their vehicles
and collect them within 24 or 48 hours.
While for BPCL this service was part of its new customer-friendly
retailing strategy, HLL looked at the scheme as an instrument to
push up sales of its Surf brand of detergent—in fact the service
was called ‘Surf laundry service’. HLL had planned to launch its
own laundry service some time ago, but the scheme did not take
off. Now, as petrol stations are widely recognised to be one of the
highest traffic aggregators, HLL will be eyeing this project as a
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new avenue to push up sales of its detergents.

Laundry is not the only service that BPCL has on its retail radar.
“Very soon we will be launching vehicle care and Internet kiosks
at select outlets. Our plan is to introduce the vehicle care service,
including sale of vehicle accessories, at about 100 outlets across
the country soon,” according to Mr Mehra.
The oil major has dramatically altered the lexicon of oil retailing
by introducing of a string of innovative services by tying up with
Contd...
108 other retail majors. After introducing the ‘Pure for Sure’, Petro
Notes Card, Smart Fleet and OSTS (One Stop Truckers Shop), BPCL
S
had launched its convenience retailing initiative under the ‘In &
___________________ Out’ brand.
___________________ The In & Out chain of convenience stores have been set up in 234
out of its total 6,000 petrol retail outlets, with plans underway to
___________________ increase the number to 400 by the end of the current fiscal and
600 by next financial year. These stores offer a wide range of
___________________
services, including ATMs of leading banks, music stores from
___________________ Planet M and Music World, beverages from Pepsi, coffee and
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snacks from Café Coffee Day and a variety of impulse buys like
___________________ confectionery, snacks, convenience foods, toiletries and select
range of branded groceries and other FMCG products.
___________________
BPCL has exclusive tie-ups with FMCG majors such as ITC,
___________________ Cadbury and Frito-Lay for providing these services.
___________________ The latest addition of the oil company is the launch of its E-
charge electronic prepaid service through its In & Out stores
___________________ through a tie-up with E-Charge (Tech) Pvt ltd, a subsidiary of
Mercantile Pacific Group that offers electronic delivery systems
for prepaid mobile cards.
Question:
Critically evaluate the HLL-BPCL retail strategy.
Source: http://www.thehindubusinessline.in
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Case Study 2: India, Nepal to Take Forward ` 100-cr Oil 109

Pipeline Project Notes
S
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.” ___________________
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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
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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
(c
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...
110
Sources said New Delhi has agreed to do away with the Duty
Notes Refund Procedure for the benefit of traders from Nepal.
S
___________________ Questions:
___________________ 1. Write the case facts.

2. Discuss what you infer from the case.
___________________
Source: http://www.thehindubusinessline.com
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 11: Supply Chain and Transportation
111
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-III
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112
Notes F
S
UNIT 11: SUPPLY CHAIN AND TRANSPORTATION
___________________ UNIT 13: PETROL STATION AND RETAIL
OUTLETS
z Introduction
___________________ z Introduction
z Supply Chain and Logistics
___________________ z Petrol Station Security
z Marketing of Transportation Fuels in India
___________________ z Indian Oil–Petrol/Diesel Stations
z Pipeline Transportation
z XtraCare
z Perspective Issues in Indian Pipeline Systems
___________________
PE
z Training Programme for Pump Attendants of
___________________
UNIT 12: THE PUMP XtraCare Retail Outlets
z Introduction
___________________
UNIT 14: VARIOUS SCHEMES IN RETAIL
z Petrol/Diesel Stations of HPCL
___________________ BUSINESS
z Customer Loyalty Programmes by HPCL z Introduction
___________________
z Fuel Promise z Indian Oil’s Initiatives
___________________
z Concept of Kisan Seva Kendra (KSK)
z Concept of Swagat Outlets
z Convenience Stores

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(c
Unit 11
113
Notes
S
Activity
Supply Chain and Transportation

___________________
Write an article on supply
chain and logistics.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Supply Chain and Logistics ___________________
\ Marketing of Transportation Fuels in India ___________________
\ Pipeline Transportation
___________________
\ Perspective Issues in Indian Pipeline Systems
___________________
___________________
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
)U
(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.
Supply Chain and Logistics

Sales may target the direct delivery to big consumers (e.g., heating
oil, heavy oil for power plants) or the retail selling through a
network of service stations. In the case of the network of service
stations, fuel retailing is a well-differentiated part of the business
where marketing strategies are critical. Fuel retailing is similar in
some aspects to the consumer products goods industry. Therefore,
this part of the business presents rather different challenges in
supply chain than the refining or upstream activities, less focused
(c
on final consumer needs.

The downstream petroleum supply chain can be characterized as a
global supply-driven structure with the main following actors:
z Suppliers of Crude Oil: As a natural resource, the crude oil
is located in certain areas of the World that usually are far
from the main consuming countries, mostly the OECD
114 (Organisation for Economic Cooperation and Development)

Notes members. An important part of the crude oil supply and
S
___________________ reserves is concentrated in the hands of a cartel: OPEC
(Organization of Petroleum Exporting Countries).
___________________
___________________ z Refiners: With plants located all over the world and closer to
final consumers. The main reason for this fact is the economies
___________________
of scale of transporting crude oil in big supertankers versus
___________________ transporting the final product in smaller lots, and the strategic
PE
___________________ value of the refining assets. This latter fact makes
governments prefer having some of the refinery operations in
___________________
their territories.
___________________
z Consumers: They are divided into small consumers (e.g., car
___________________
owners buying gasoline) and wholesale consumers (e.g., power
___________________ stations using heavy oil, petrochemicals plants receiving
feedstock).
These actors are involved in the main activities that configure the
downstream supply chain:
z Oil Supply & Trading: These activities deal with the
procurement of raw material and bulk sales of products in
commodity markets. In the case of crude oils, for each of the
)U
available grades, it is necessary to assess the price, quality,
timing, and distance to the refinery in order to decide the
optimal acquisition. Additionally, the refiner has to carefully
monitor the price risk and manage the inventory.
z Manufacturing: The procedure of designing and building the
appropriate technical configuration is vital. Moreover, the
refiner needs to plan and schedule production levels, and
finally manage the efficiency and safety of all operations.
z Distribution: Similar to the refinery case, the network must
be designed in an optimal way and set up. Moreover, the
transportation of fuels throughout the network, needs focused
planning and scheduling (either by truck, tanker, rail, pipeline
or barge).
(c
z Sales & Marketing: In the last step of the supply chain,

managers are confronted with pricing decisions, the use of
efficient tools for demand management, and the seizure of
market opportunities in an increasingly competitive
environment.
The supply chain decisions are conditioned by some industry- 115

specific factors: Notes
S
z Frequent “make versus buy” decisions that change ___________________
continuously as a function of prices and transportation costs ___________________
(commoditized market)
___________________
z A supplier base (mainly crude oil producing countries) with
___________________
extensive negotiation power
___________________
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z Complex inventory decision-making given the volatility in
___________________
prices
___________________
Supply Chain Challenges and Opportunities ___________________
Due to the complexities and issues, the downstream oil business as ___________________
a whole faces a series of challenges.
___________________
In many of the geographical areas, fuel demand growth is weak.
However, product trading has increased as a result of insufficient
refining capacity in the main consuming areas. This creates a
pressure on margins in regions with a deficit, because finished
products start flowing from the regions with a surplus (such as
with the imports of gasoline from Europe to the US). On the other
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hand, this situation creates new markets in other countries for
local refiners and opportunities for increased efficiency in the
overall supply chain.
The quality issues are becoming especially constraining as the new
fuels specification demand more complex processing and expensive
investment in new equipment. These investments do not always
provide an attractive return but are in many cases required to
keep the refinery operating. In the case of the US, for example, the
varying state-by-state standards have led to a “boutique” market.
Nevertheless, the quality compliance complexity offers an
opportunity for differentiation, and even brand building around
some of the chemical characteristics of the fuels.
The environmental regulations and compliance rules (greenhouse
(c
effect gases emissions, soil pollution, etc.) are also becoming

increasingly severe, making the operation of the existing facilities
or the construction of new ones even more expensive and intricate.
Moreover, the liabilities in case of environmental damage and
public image vulnerabilities are becoming big hurdles for the
industry.
116 Finally, the geopolitical factors surrounding crude oil production

Notes and the mentioned high volatility of petroleum prices in the
S
Activity
___________________
Prepare an assignment on international markets introduce additional components of
marketing of transportation complexity and variability in the operations of the downstream
___________________
fuels in India.
supply chains. However, the volatility creates opportunities for
___________________
profit as the companies can use the forward and futures markets to
___________________ capture additional value in their downstream activities (e.g., by
___________________ freezing the refining margin using oil futures).
PE
___________________ If we consider the cost structure of the industry, the oil
downstream has been significantly reducing operating costs.
___________________
However, this cost reduction has not been reflected in better net
___________________
margins as there has been a continuous and nearly parallel
___________________ pressure also in gross margins. As a result, the net margins have
___________________ remained consistently below even during periods of high oil prices.
Check Your Progress

Fill in the blanks:
1. Consumers are divided into ………………… consumers
and ………………… consumers.
2. ………………… activities deal with the procurement of
)U
raw material and bulk sales of products in commodity
markets.
Marketing of Transportation Fuels in India

It is described as follows:
z The process of liberalization of the downstream sector in India
began in February 1993, with the decanalising of imports of
Superior Kerosene Oil (SKO), Liquefied Petroleum Gas (LPG)
and Furnace Oil (FO) and allowing private marketers to
import and sell these products at market-determined prices.
z In November 1997, the Government of India passed a
resolution to allow marketing rights for transportation fuels –
(c
Motor Spirit (MS), High Speed Diesel (HSD), and Aviation

Turbine Fuel (ATF) conditional on owning and operating
refineries with an investment of at least ` 2000 crore or oil
exploration and production companies producing at least three
million tonnes of crude oil annually.
z With the dismantling of the APM, the GOI has amended the 117
provisions of the resolution of 1997, in line with announcement Notes
S
of the India Hydrocarbon Vision – 2025, under which ___________________
marketing rights are also available to a company investing or
___________________
proposing to invest ` 2000 crore (about US $ 415 million), in
exploration and production (E&P), refining, pipelines, or ___________________
terminals. The Government to its satisfaction will do the ___________________
valuation of the investments.
___________________
PE
z In case of future investments, the time frame for making such
___________________
investments in the eligible activities would be counted as ten
___________________
years from the date of grant of authorization for marketing of
transportation fuels. A bank guarantee of ` 500 crore would ___________________
have to be provided to the GOI, which would be discharged on ___________________
completion of the investment of ` 2000 crore.
___________________
z Every eligible company would get only one authorization for
marketing transportation fuels, and the authorization for
marketing transportation fuels, and the authorization will not
be transferable without permission of the GOI.
z The Company seeking authorization to market transportation
fuels will be required to make an application in a specified
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form.
z There shall be no limit to the quantum and size of the scheme
and the number and location of retail outlets.
z The marketing scheme shall contain details of:
The source of supply of products to be marketed;
Tankage and other infrastructure proposed to be
established along with their capacity;
Means of transportation of products to depots and to RO’s;
The number of locations of RO’s proposed to be established
and details of their storage and dispensing capacity;
The total quantum and type of products to be covered
(c
under the marketing scheme.

z Company will have to follow GOI/Regulatory board guidelines
on retail service obligations (to make available MS and HSD to
retail consumers throughout the specified working hours) and
marketing service obligations (to set up retail outlets in remote
areas and low service areas) that are set up from time to time
in public interest.
118
Structural Shifts Envisaged in Transportation of Petroleum
Notes
Products
S
Activity
Make___________________
a written draft on Transportation of Petroleum products will undergo a structural
pipeline transportation of
___________________
petroleum and its products. 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-
PE
___________________ 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
)U
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.
Check Your Progress

Fill in the blanks:
1. Transportation of Petroleum products will undergo a
…………… in the short-term future.
2. At times, the fleet operators have used their ……………
power and attempted to extract a rent from the PSU
(c
users.
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
prudence. The triangle created of these has the following features, 119
which distinguish the pipeline mode of transportation from other Notes
S
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 ___________________
PE
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
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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
(c
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.
120
Perspective Issues in Indian Pipeline Systems
Notes
S
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.
PE
___________________
___________________
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:
z 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.
)U
z 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:
(c
Table 11.1: Development of Pipeline Network
Head of Expenditure ` Crore Forex

Co II
Land and site development civil work 6 4
Mainline pipes, materials and construction 100 168
Process design 15 1
Contd...
Preliminary/pre-operative expenses 4 0 121

IDC/Financing charges 31 0 Notes
S
Contingency and escalation provision 20 23 ___________________
Capital cost 177 196
___________________
MM on working capital 2 0
Total cost (` 375 Crore) 179 1 ___________________
The return from investment of the above magnitude solely depends ___________________
upon the tariff for the throughput processed. The tariff as worked ___________________
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out by Oil Coordination Committee is ` 120 per MT, which is ___________________
expected to rise to ` 207 per MT in the post APM period, i.e., April
___________________
2002 onwards for Vadinar Kandla section. Throughput is expected
to rise from 5.41 MMT per annum to 9.66 MMT per annum by ___________________
2012–13. ___________________
User’s commitment into this kind of projects either through take or ___________________
pay contract or through joint venture partnership is very
important from the point of view of steady stream of revenue,
which would justify rate of return. With the cost of project at ` 375
crore and tariff of ` 207 per MT of throughput, the financial
indicators of the project are given below:
Table 11.2: Financial Indicators of the Project

)U
Project Indicators 00-01 01-02 02-03 03-04
Equity Internal Rate of Return (per cent) 20.91
Project Internal Rate of Return (per cent) 16.04
Project payback period (years) 6.05
Average Debt Service Coverage Ratio 2.12
Income (` Crore) 54.1 66.2 105.2 107.3
Profit before Debt Interest and Tax (` Crore) 35.4 45.1 82.2 82.8
Profit after Tax (` Crore) (7.1) (5.5) 28.3 30.8
Check Your Progress

Fill in the blanks:
1. The issue of transportation of oil by pipeline basically
joins three vertices: …………………, ………………… and
(c
………………….
2. Pipelines are ………………… intensive and technology
driven modes.
122
Summary
Notes
S
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.
PE
___________________
Lesson End Activity
___________________
___________________ Make a comparison between different modes of oil transportation

in India.
___________________
___________________
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.
)U
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.

1. Write a note on supply chain and logistics.
2. Explain the marketing of transportation fuels in India.
3. Discuss structural shifts envisaged in transportation of
petroleum products.
(c
4. Describe the pipeline transportation.

5. Write a note on structural shifts envisaged in transportation of
petroleum.
6. Explain the aspects of supply chain challenges and
opportunities in petro industry.
Further Readings 123

Notes
S
Books ___________________

___________________
2010
___________________
PE
___________________
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
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(c
124
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 12: The Pump
Unit 12
125
Notes
S
Activity
The Pump
___________________
petrol/diesel stations of HPCL.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Petrol/Diesel Stations of HPCL ___________________
\ Customer Loyalty Programmes by HPCL ___________________
\ Fuel Promise
___________________
___________________
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
)U
even more necessary to have a chain of petrol pumps for the
convenience of the local people.
Petrol/Diesel Stations of HPCL

The HPCL retail outlets believe in maintenance. Maintaining not
just the vehicle, but also a steady relationship with the consumer.
And to do so, provide better and efficient services. HPCL
petrol/diesel stations take care of not only their customer fuelling
needs, but also complete vehicle care. The HPCL petrol/diesel
stations stock related products like tyres, batteries and accessories,
so that customers do not have to go shopping. All their other value-
added services ensure that customer vehicle is well looked after.
And while they share customer concern for his vehicle, HPCL also
(c
value their customer time. So they bring conveniences that allow

customer to carry out his/her banking activities, make important
calls or send an e-mail, and even shop for essential grocery items.
Complete attention for customer and his vehicle at one stop. The
HP retail outlet simply drive in, anytime, anywhere.
126
Vision
Notes
S
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
PE
___________________ strategy. The SBU vision is given hereunder:
___________________ z Highest performer in sales growth over industry.
___________________ z Sustained profitability all the way through increased sales,
___________________ ARB earnings, cost optimization, branded fuels and branded
lubricants.
___________________
z Customer delight at the point of interface. Fulfilling the
affirmed and latent needs of the customer through innovative
products and services.
z Competent, committed and empowered employees.
z Sense of pride and mutual trust and camaraderie. Conducting
business in a fair, transparent and principled manner.
)U
Performance Profile
During the last few years, several activities were initiated to
realise the retail vision. The highlights of performance are:
z Retail Business Unit recorded an expansion of 4.5% in MS and
0.9% negative growth in HSD.
z Record number of 645 new retail outlets were commissioned.
z Continuous efforts of the SBU have guaranteed a control of
76% of our network, which is highest in the country.
z A new visual identity program “Project Akarshan” has been
rolled out.
(c
z As a part of the on-going “Focus 500” program, several retail

outlets have been modernised during the year.
Retail Outlet Branding

It is described as follows:
z HPCL has over 1250 “Club HP” outlets.
UNIT 12: The Pump
z HPCL has also introduced at its outlets numerous initiatives 127

to strengthen the brand promises. Notes
S
z Over 15500 dealermen were covered through various training ___________________
programs focus on present business imperatives and ___________________
behavioural changes for delivering the “Club HP” promise.
___________________
z Unique training program titled “Leading with Power”, “At the
___________________
Forefront” and “Positive Value Based Stress Free Supervision”
___________________
PE
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.
___________________
z In order to encourage dealermen at “Club HP” outlets Group
___________________
Personal Accident Insurance Scheme has been introduced.
z Several dealermen were covered on computer education all the
way through HPCL NIIT Jyoti Program.
z A number of dealermen were recognized under the “Spot &
Reward” Scheme.
z The Scholarship Scheme for “Club HP” dealermen and
)U
dependent children was extended during the year to inspire
the dealermen.
z 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.
z 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.
z For “Club HP” outlets mass media campaign was successfully
utilised to communicate the brand promise beneath the banner
“Club HP” “Achcha Lagta Hai”.
(c
z 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.
128
Check Your Progress
Notes
S
Activity
customer loyalty programmes
___________________ 1. A new visual identity program ………………… has been
by HPCL.
rolled out by HPCL.
___________________
___________________
2. HPCL has over 1250 ………………… outlets.
___________________
PE
Customer Loyalty Programmes by HPCL
___________________
HPCL has over 1.2 million cards under the different card-based
___________________
loyalty programmes.
___________________
___________________ Quality Assurance Initiatives

___________________ It includes the following:
z HPCL Quality Assurance initiative beneath the banner “Good
Fuel Promise” has been given push through various pioneering
initiatives. HPCL has pioneered the perception of exclusive
Mobile Labs to strengthen the commitment of “Good Fuel
Promise” at the retail outlets. 10 Mobile Labs have been
specially made during the year for conducting quality
)U
assurance checks solely at “Club HP” Outlets.
z It has also finalised the International Agency M/s. Bureau
Veritas for conducting Surveillance Audit of “Club HP”
Outlets.
z A unique scheme was introduced to cover Retail Outlets under
ISO Accreditation. 53 Retail outlets have been credited during
the year.
All through the year, 40 retail outlets in Mumbai and Vashi were
covered under the Retail Automation program. The program which
was pioneered as an exclusive initiative last year is based on the
international practice of quality assurance through quantity
checks.
(c
Branded Fuel
Information related to branded fuel is given below:
z During the year, HPCL’s Branded Fuel “Power” has been
added to cover over 700 outlets in over 200 markets.
z Turbojet is available in over 450 outlets in over 125 markets.
UNIT 12: The Pump
Non-fuel Business 129

Notes
S
HPCL has built a gainful Non-fuel Business with wide range of Activity
facilities to the customers. The non-fuel activities at the retail ___________________
Write an article on fuel
promise made by HPCL.
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.
___________________
PE
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.
)U
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.
Filter Paper Test

To check the petrol we can use filter paper test. To do this test, we
should follow the following steps:
z Ask friendly HP dealer for a filter paper.
z Clean the mouth of the nozzle to remove stains.
z Put a drop of petrol on the filter paper from the nozzle.
(c
z The drop of petrol should evaporate in about 2 minutes

without leaving a stain on the filter paper.
z If you notice a stain, then there is a prospect that the petrol is
adulterated. (At times, the area of the filter paper where the
drop of petrol was put remains pinkish, it is the colour of the
petrol and must not be mistaken for a stain.)
130
Density Check (To Check Petrol and Diesel)
Notes
S
Use the following steps to density check:
___________________
z 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
___________________
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made accessible in case one wish to check the products.
___________________
z Fill about 3/4th of the jar with the product, through the nozzle
___________________
of the dispensing unit.
___________________
z Dip the thermometer and the hydrometer in the jar as well as
___________________ record the temperature and density as indicated.
___________________ z 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.)
)U
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.
Check Your Progress

(c
Fill in the blanks:

1. A quality product is one that fulfils with prescribed
specifications and is free from any ……………….
2. The kerosene supplied by HPCL beneath the public
distribution system is doped with ……………… dye for
on-the-spot identification.
UNIT 12: The Pump
Summary 131
Notes
S
The HPCL retail outlets built steady relationship with their
___________________
consumer by providing better and efficient services concerning to
customer fuelling needs and related products like tyres, batteries ___________________
and accessories. All their value added services ensure that ___________________
customer vehicle is well looked after. HPCL also value their
___________________
customer time. So they bring conveniences that allow customer to
carry out his/her banking activities, make important calls or send ___________________
PE
an e-mail, and even shop for essential grocery items. Complete ___________________
attention for customer and his vehicle at one stop. HPCL Quality ___________________
Assurance initiative beneath the banner “Good Fuel Promise” has
___________________
been given push through various pioneering initiatives.
___________________
Lesson End Activity ___________________
With the help of internet, find out more on the petrol pumps across
India. Make a chart to present the information you collected.
Keywords
Focus 500: It is an on-going program, several retail outlets have
)U
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.

1. Describe about the petrol/diesel stations of HPCL.
2. Explain the various customer loyalty programmes run by
HPCL.
3. What do you understand by fuel promise?
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4. Describe the quality assurance initiatives undertaken by

HPCL.
132
Further Readings
Notes
S
___________________ Books
___________________ Natural Gas Production’; Quorum books
___________________ Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;

___________________
2010
PE
___________________ Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf
Publishing
___________________
___________________
___________________
___________________
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
)U
(c
UNIT 13: Petrol Station and Retail Outlets
Unit 13
133
Notes
S
Petrol Station and Retail Outlets
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
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\ Petrol Station Security ___________________
\ Indian Oil–Petrol/Diesel Stations ___________________
\ XtraCare
___________________
\ Training Programme for Pump Attendants of XtraCare Retail Outlets
___________________
___________________
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.
Petrol Station Security

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The pumps have to be continually monitored recording all
activities and providing irrefutable evidence in the happening of a
crime. Furthermore, all the activities in the store have to be
monitored just like any other commercial store, making certain
that employees and customers are kept safe at all times. Various
security solution organizations offer an all-encompassing security
system to protect your establishment.
z Video surveillance of pumps and store
z Intrusion alarms securing the facility at off hours
z Access control securing all entry points and facilitating
deliveries
z Security system offers easy search of events.
(c
Small to medium-sized retail companies habitually have limited

security budgets and can find it hard to invest in electronic
systems to cover all aspects of their business. However, through an
arrangement of physical measures and carefully selected electronic
security equipment, it is probable for smaller retailers to
cost-effectively amplify the protection of stock, staff, customers,
takings and premises.
134 The security systems can help small retailers reduce “blind” spots
Notes with cautious positioning of video cameras; restricting access to
S
Activity
___________________
Write an article on the Indian stock and cash with stand-alone access control; clamping down on
Oil petrol/Diesel Stations. 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.
___________________
___________________ Indian Oil–Petrol/Diesel Stations
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___________________ Indian Oil was the pioneer in introduction state-of-the-art petrol
___________________ stations with digital dispensers, modern canopies, standardized
___________________
signage and efficient lighting systems. The new retail-branding
template initiated by Indian Oil set in motion a revolution in the
___________________
petroleum retail business in the country. Indian Oil lead the way
___________________ in differentiated offerings to meet the diverse needs of its
customers, be it all the way through large format Swagat outlets
for the highway traffic, Kisan Seva Kendras for the rural
consumer, or yet the XtraCare outlets for the discerning urban
customer.
)U
Figure 13.1: Picture of Indian Oil Petrol Pump
XtraCare
(c
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
stations are one and the same with world-class petroleum 135
retailing. Notes
S
___________________
___________________
___________________
___________________
Figure 13.2: Logo of XtraCare
___________________
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Total vehicle care begins at an Indian Oil XtraCare petrol pump. ___________________
From branded auto fuels, to speedy windshield wipes to quick oil
___________________
checks and snappy air service, one will experience the superior
services that will leave customer vehicle feeling special. ___________________
Indian Oil’s XtraCare pump is a innovatory initiative in petroleum ___________________
retailing that combines the best bouquet of quality, quantity and ___________________
warm service, with an assurance to make your every visit a truly
rejuvenating experience. It is benchmarked to international
standards of quality & quantity, housekeeping, maintenance and
customer service certified by the worldwide renowned agency – M/s
Bureau Veritas (BV), amongst others.
The maintenance of the equipment at XtraCare outlets is
)U
undertaken by original equipment manufacturers beneath a
unique ‘equipment quality outsourcing’ system.
Even as the industry standard is to take samples on a quarterly
basis, Indian Oil has moved several steps to the lead by
introducing fortnightly random sampling with specific significance
given to RON (Research Octane Number) sampling, which is truly
the definitive test for quality and quantity. The observation audits
by BV are being done on a more comprehensive basis. The scale
and spread of XtraCare pumps is as well an industry record.
By means of automated facilities, trained attendants and forecourt
managers attuned to the needs of customer car, XtraCare pumps
offer the full range of branded fuels – XTRA PREMIUM Petrol and
XTRAMILE Diesel as well as world-class SERVO lubricants and a
(c
wide-ranging loyalty programme.

The non-fuel activities received a main fillip at the Indian Oil
XtraCare outlets and a wide range of loyalty programmes like
XTRAREWARDS, XTRAPOWER and co-branded cards give
customers additional benefits (available at present at select petrol
pumps). The cutting-edge technology introduced at XtraCare
136 pumps comprises automatic tank-level gauges, temperature

Notes sensors, density measurement sensors, back-office server with
S
___________________ dispensing unit controls, customer database, etc.
___________________ An additional vital differentiator in the XtraCare outlet is the
___________________ significance given to the frontline customer attendants. They are
trained at three levels of competencies – customer service, personal
___________________
hygiene/grooming and customer complaint redressal. XtraCare
___________________ dealers also undergo extensive training on ‘retail site business
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___________________ management’, an exclusive training module incorporating the best
global practices in retail sales management.
___________________
___________________ The Warmth of XtraCare

___________________ Complete vehicle care set in motion at an Indian Oil XtraCare
___________________ petrol pump. From branded auto fuels, to speedy windshield wipes
to quick oil checks and snappy air service, the customer will
experience the superior services that will leave his/her vehicle
feeling special.
The value added services offered beneath the umbrella care of
XtraCare during monsoon for Indian Oil’s valued customers consist
of brake fluid check, tyre check-air and visual, battery check-
)U
battery water, windshield wiper check-condition of the wiper
blades, water spray, etc.
Indian Oil’s XtraCare pump is a ground-breaking program in
petroleum retailing that unites the most excellent bouquet of
quality, quantity along with warm service, with an assurance to
make customer every visit a truly rejuvenating experience. It is
benchmarked to international standards of quality & quantity,
housekeeping, maintenance and customer service accredited to
globally renowned benchmarks certified by the globally renowned
agency.
XtraCare petrol pumps in the urban centres in addition
complement the Swagat Highway petrol pumps and the rural
petrol pumps known as the Kisan Seva Kendras. Customers at this
(c
outlet have not merely experienced the impact of Indian Oil’s retail
branding initiatives but have as well voted in large numbers to
make it the No.1 Fuel Pump Brand. Indian Oil is as well the only
petroleum company as the ‘The Most Trusted Brand’ in a recent
Brand Equity annual survey.
XtraCare Pumps of Indian Oil 137

Notes
S
This is the initiative taken by Indian Oil to enhances its services
and maintain good customer relationship. ___________________
Services and facilities of IOCL in retail outlet are given below: ___________________
___________________
1. Check and Fill Facility
___________________
2. Credit Card Facilities/Swiping machines
___________________
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3. Air Filling Facility
___________________
4. Drinking Water Facility
___________________
5. Availability of Lubricants in every Retail outlets
___________________
6. Toilet Facility
___________________
7. Availability of Complain Registers for complain and the ___________________
feedback of the customers
8. Forecourt Services viz. Wind screen cleaning, Oil check, Water
check, Coolant check, etc.
9. Sales Officer’s phone number for direct touch with company
10. IOCL also introduced all India toll-free number for customer
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feedback
11. SMS/IVRS facility for booking LPG refills
12. Cleanliness and well maintain of Retail Outlets and many
other services, which is provided by IOCL, which feels the
customers comfortable and happy.
Check Your Progress

Fill in the blanks:
1. …………………… was the pioneer in introduction state-
of-the-art petrol stations with digital dispensers,
modern canopies, standardized signage and efficient
lighting systems.
2. XtraCare petrol pumps in the urban centres in addition
(c
complement the Swagat Highway petrol pumps and the

rural petrol pumps known as the …………………….
138
Training Programme for Pump Attendants of
Notes
XtraCare Retail Outlets
S
Activity
Make___________________
a brief report on the
training programmes for pump IOCL carried out training programme for the pump attendants of
___________________
attendants of XtraCare Retail
Outlets.
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,
PE
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:
___________________
z Personal hygiene
___________________
z Forecourt and etiquettes
z Operation and maintenance
z Product push and its importance
z Forecourt service step
In personal hygiene, these participants were made responsive of its
)U
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
(c
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
given complete instructions regarding how to proceed when a 139

customer arrives. Notes
S
z Greet the customer. ___________________
z He should be asked for water. ___________________
___________________
z Before filling petrol/diesel, reconfirm how much they require
and show them the meter reading as zero. ___________________
z Inform them about the other products. ___________________
PE
z Provide additional facilities like air check and wiper service. ___________________
___________________
z 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.
Benefits of the Programme

The following are the benefits of the programme:
)U
z The etiquettes taught will show the way to customer
satisfaction.
z A customer tends to believe if a pump attendant advices him
regarding the kind of fuel they should prefer. Therefore, the
product sale will increase.
z Participants learnt how to maintain the pump.
z It also facilitates attendants from other pumps to interact with
each other.
Check Your Progress

Fill in the blanks:
1. ……………… and ……………… is the rationale of the
IOCL’s XtraCare training program.
(c
2. The etiquettes taught will show the way to …………….
Summary
Indian Oil was the pioneer in introduction state-of-the-art petrol
stations with digital dispensers, modern canopies, standardized
140 signage and efficient lighting systems. The new retail-branding

Notes template initiated by Indian Oil set in motion a revolution in the
S
___________________ petroleum retail business in the country.
___________________ Indian Oil’s XtraCare pump is a innovatory initiative in petroleum
___________________ retailing that combines the best bouquet of quality, quantity and
warm service, with an assurance to make your every visit a truly
___________________
rejuvenating experience. It is benchmarked to international
___________________ standards of quality & quantity, housekeeping, maintenance and
PE
___________________ customer service certified by the worldwide renowned agency.
___________________
___________________
Lesson End Activity
___________________ Compare the petrol pumps of IOCL and HPCL, prepare a research
report on convenience factor, and value added facilities provided at
___________________
the petrol pumps of HPCL and IOCL.
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.
)U
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.

(c
1. Describe the performance profile of petrol stations of HPCL.

2. Write a note on petrol stations security.
3. What are the services and facilities provided at IOCL retail
outlet?
4. Explain the Indian oil XtraCare pumps.
5. What are the extra benefits that the Indian Oil XtraCare 141
pumps provide as compare to normal fuel pumps? Notes
S
___________________
___________________
Books
___________________
Natural Gas Production’; Quorum books ___________________
PE
___________________
2010 ___________________
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf ___________________

Publishing ___________________
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center ___________________

Web Readings
)U
http://www.eia.gov
http://www.bp.com
www.iocl.com/
(c
142
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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(c
UNIT 14: Various Schemes in Retail Business
Unit 14
143
Notes
S
Activity
Various Schemes in
___________________
Prepare a report to present
the Indian Oil’s Initiatives.
___________________
Retail Business ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Indian Oil’s Initiatives
\ Concept of Kisan Seva Kendra (KSK) ___________________
\ Concept of Swagat Outlets ___________________

\ Convenience Stores ___________________
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
)U
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.
Indian Oil’s Initiatives

BSNL will have the opportunity to set up and offer communication
business centres at attractive rates to customers at Indian Oil
petrol stations. Indian Oil’s Indane distributorship network will be
(c
engaged by BSNL for selling products like Recharge Coupons,

Sancharnet cards, as well as BSNL’s bill collection.
With an eye for enhancing customer convenience, Indian Oil has
already introduced cashless transactions through co-branded credit
cards at its petrol stations. The Corporation has also tied-up with
reputed agencies like Akbarallys’ for Convenio stores, with
144 Dominos and Kamats for food courts, with ICICI Bank, Centurion
Notes Bank, etc., for ATMs etc. to provide an exhilarating retail
S
___________________ 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
PE
___________________ 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:
1. …………………… pioneered differentiated offerings to
meet the diverse needs of its customers
2. ………………… will have the opportunity to set up and
offer communication business centres at attractive
rates to customers at Indian Oil petrol stations.
)U
3. In USA, ………………… also uses consumer experience
to reinforce its price-based strategy.
Concept of Kisan Seva Kendra (KSK)

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. Today, KSK outlets have emerged as dominant
players in the rural markets, riding on the rapid growth of
upcoming second and third tier roads in the rural areas.
The KSK come with a fresh perspective enabling dealers to tap the
huge demand driven in by consumers there. In addition, non-fuel
retail facilities like convenience stores have been added to the KSK
(c
to sell pesticides, vegetables, banking products and stationery

items. Indian Oil has tied up with Indo-Gulf for fertilizers,
National Seeds Corporation for marketing seeds and agricultural
inputs as well as alliances with NABARD, Oriental Bank of
Commerce and Bank of Baroda for banking products. Some KSK
have installed internet kiosks, communication facilities, etc.
Business alliances have been signed to market products from
Dabur, Airtel, Tata Chemicals, Godavari Fertilizers, Gokulam 145

Fertilizers, Hindustan Unilever and Godrej Agrovet. Other alliance Notes
S
partners are Emami for personal care products, Money Gram for ___________________
money transfer, MILMA and OMFED for milk products, and
___________________
Supplyco for convenience stores.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
)U
The idea behind KSK outlets by IOC was to provide a one-stop
shop for the villagers, where along with his fuel he could buy
products of his daily needs too. Kisan Seva Kendra is a unique
award-winning retail outlet model pioneered by Indian Oil to cater
to the needs of the customers’ in the rural segment. Today Indian
Oil’s KSKs have merged as a dominant player in the rural
markets, riding on the rapid growth of upcoming second and third
tier roads in the rural areas. The KSK has come with a fresh
perspective enabling dealers to tap the huge demand driven in by
consumers there.
Tie-ups
The combination of the pump and the retail outlet is what drives
(c
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
146 Fertilizers. There are many similar tie-ups in the pipeline and the
Notes company is working on the modalities of the deal.
S
Activity
___________________
Write an article on the Kisan
Seva Kendras and the Swagat Ground Realities
___________________
outlets.
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
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___________________
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.
Concept of Swagat Outlets

The Swagat retail networks are large format sites designed
)U
exclusively to cater to travellers on the highways with spacious
parking lots, dhabas, eateries, retail stores and restroom, the
Swagat outlets provide customized services to owners of both light
motor vehicles as well as heavy motor vehicles. The corporation’s
aim is to make these fuel stations a place to relax and refresh for
travellers, tourists and drivers and it would be particularly a boon
for truck drivers who take long trips. Towards this end, IOC has
sought to provide the essential facilities, including individual
rooms for men and women, vegetarian and non-vegetarian
restaurants, departmental stores and dry cleaning facility.
Consulting physicians, medical shops, ambulance services,
communication centres with STD, ISD, internet and fax facilities
would also be available, apart from conveniences such as
conference hall and children’s park. Indian Oil Corporation (IOC)
(c
has embarked upon a massive re-branding exercise of its retail

outlets by replacing two of its existing retail formats in a bid to
stave off competition from private and other public sector oil
marketers. The company is phasing out two of its retail formats –
Q&Q and Jubilee and introducing XtraCare and Swagat. The
‘XtraCare’ format has been identified for the urban and semi-urban
areas. Swagat would be for highways.
147
Check Your Progress
Notes
S
Activity
Fill in the blanks:
___________________
1. …………………… is an award-winning retail outlet convenience stores.
___________________
model pioneered by Indian Oil to cater to the needs of
___________________
customers in the rural segment.
___________________
2. …………………… retail networks are large format sites
designed exclusively to cater to travellers on the ___________________
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highways with spacious parking lots, dhabas, eateries, ___________________
retail stores and restroom, the Swagat outlets provide
___________________
customized services to owners of both light motor
___________________
vehicles as well as heavy motor vehicles.
___________________
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,
)U
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
(c
‘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,
148 where the supply chain for most products remains highly
Notes fragmented and inefficient.
S
___________________
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
PE
___________________ 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
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product offer could hinge on fresh fruits and vegetable, e.g.,
a ‘Mother Dairy’ vegetable stall at every petrol pump.
Food
Store
Price Appearance
Basis of
Image Distribution
Differentiation
Convenience
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Service
Breadth of
offerings
Source: AT Kearney
Figure 14.1: Creating Differentiation in the C-store Business

Operating a c-store requires an entirely different set of capabilities 149

from petroleum retailing. Sourcing and supply chain management Notes
S
is critical skills for a c-store operator and may need to be ___________________
outsourced by Indian petroleum marketers as they build other
___________________
consumer facing kills. A reduced risk model could be an alliance
with an established retail chain, e.g., FoodWorld or Subhiksha, ___________________
which would provide the required skill synergies and ensure ___________________
immediate consumer credibility and trials. This model has worked
___________________
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well in more mature markets where consumers require greater
___________________
choice and assortment mix.
___________________
It is also important that the petroleum c-store operator develops a
strategy that differentiates its convenience store from other similar ___________________
stores as well as the traditional retailer. There are multiple ___________________
opportunities for differentiation in the convenience store market;
___________________
the key is to make a consumer-based choice.
For an international brand entering the market in India, targeting
the ‘Prestige Seeker’ consumer segment, the ‘smart shop’ – clean,
well-lit, wide aisles – may offer a differentiated value proposition.
A convenience store operator can select from eight levels, which
provide a basis for differentiation depending on the needs of the
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target consumer segments.
Check Your Progress

Fill in the blanks:
1. ………………… is planning to roll out 100 convenience
stores at IOC’s petrol pumps in major cities and towns
of North India during 2010–11.
2. A convenience store operator can select from ……………
levels which provide a basis for differentiation
depending on the needs of the target consumer
segments.
Summary
(c
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
150 family use. With respect to the wheel of retailing theory, a low spot
Notes on the wheel, once occupied by a low-margin retailer that has
S
___________________ traded up, is left open for an innovative retailer that can operate at
a margin lower than those earned by existing retailers.
___________________
___________________
Lesson End Activity
___________________
Make a list of convenience stores operating in India during 2011.
___________________
PE
___________________
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.

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1. What are the key initiatives taken by Indian Oil for
petro-retailing?
2. Write a note on:
(a) Kisan Seva Kendra
(b) Swagat
3. Discuss the role of convenience stores in non-fuel revenues.
4. Write a note on key initiatives taken by Indian Oil to introduce
convenience stores in India.
Further Readings
Books
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2010
Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf 151

Publishing Notes
S
Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center ___________________
Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning ___________________
and Development Strategies’; Gulf Elsevier; 2010 ___________________
___________________
Web Readings
___________________
PE
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
www.iocl.com/
___________________
___________________
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152
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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Unit 15
153
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study 1: Rising Demand of Petroleum Products
___________________
Petro products demand up 6.1% in Sept; output depressed.
___________________
___________________
___________________
The country’s September crude oil output remained almost

stagnant year-on-year and natural gas production fell 6.4 per
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cent.
The demand for petroleum products in September grew by 6.1 per
cent.
Around 80 per cent of the country’s hydrocarbon energy
requirements are met through imports, as growth in domestic oil
and gas output is not proportionate with the growing consumption
of petroleum products.
The country’s exploration companies produced 3.118 million
tonnes of oil in September (3.115 million tonnes in the same
month last year). The natural gas output stood at to 3.948 billion
cubic metre (4.219 billion cubic metre), according to data released
by the Ministry for Petroleum and Natural Gas.
Crude oil output was affected because of drop in production from
ONGC’s Mumbai High offshore fields. There was just a one per
cent rise in production from Cairn India-operated Rajasthan
fields.
(c
Oil output from ONGC’s Mumbai High offshore fields fell 3.4 per
cent in September to 1.349 million tonnes. Production from Cairn
India operated Rajasthan fields was at 525,000 tonnes (520,000
tonnes) in September.
Declining production from Reliance Industries-operated East
Coast gas fields was the main reason for the drop in natural gas
output. The current gas demand is projected to be 200 mscmd.
Contd...
154
The transmission and marketing major, GAIL (India) transports
Notes 118 mscmd of gas from various sources. Of this, domestically
S
produced gas is 92 mscmd including 29 mscmd from RIL’s East
___________________
Coast fields, remaining 32 mscmd is imported gas. However, with
___________________ the continued drop in domestic gas output, dependence on imports
is expected to increase, according to the industry.
___________________
Domestic refiners processed 4.4 per cent more crude oil in
___________________ September from a year ago at 12.702 million tonnes. Indian Oil
Corporation, the nation’s largest refiner, turned 20.7 per cent
___________________ more crude oil into fuel at 4.088 million tonnes.
PE
___________________ 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 crude oil in September, an
increase of 7.4 per cent. Reliance does not provide data for its SEZ
___________________ refinery in Jamnagar. Essar Oil processed 41.5 per cent less crude
___________________
in September, as its Vadinar refinery was shut down for 35 days
for expansion and revamp of some units.
The consumption of petroleum products during the month stood
at 11.289 million tonnes (10.638 million tonnes a year earlier).
Diesel sales in September stood at 4.605 million tonnes, petrol
1.197 million tonnes and LPG 1.288 million tonnes.
Question:
Critically evaluate the key reasons for rising demand of
petroleum products and their impact on automobile sales.
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Source: http://www.thehindubusinessline.com
(c
Case Study 2: Castrol India: Buy 155

Notes
S
Pick up in automotive demand, premium product mix and strong
brand presence bode well for the prospects of Castrol India. ___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
The company is reaching out to customers through promotional

campaigns.
An automotive segment in high gear, premium product mix, and a
formidable brand bode well for the prospects of Castrol India, a
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leading player in the lubricants market in the country. Also, the
company has been consistently posting solid financials, and has a
very high dividend-paying track record.
At its current price of ` 419, the stock trades at around 22 times
its trailing 12-month earnings. Yet, considering the FMCG-like
nature of the company’s business, there could be scope for further
upside (majors in the category currently trade at around 30 times
earnings). Also, while the company trades at a premium to
private sector lubricant peers Tide Water Oil and Gulf Oil
Corporation, this may be justified given its size and lead.
Though the stock has gained strongly over the past couple of
years following a re-rating, investors with a high-risk perspective
can consider taking advantage of the almost 21 per cent price
decline since mid-September. The company’s sequential
performance in the September quarter (historically weaker)
showed a dip, mainly due to input cost pressure. However, one
swallow does not a summer make, and, going forward, we expect
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the company to be able to capitalise on its strong positioning and

favourable industry dynamics.
Going Strong
Over the years, Castrol India, a BP subsidiary, has strengthened
its position, and enjoys more than 20 per cent market share in the
automotive lubricants market, from which it derives more than
85 per cent of sales and profits. It has been able to hold its own in
Contd...
156 a highly competitive market, which is catered to by the PSU oil

Notes marketing companies, major multinationals, including Shell and
S
Mobil, local players such as Tide Water Oil and Gulf Oil Corp,
___________________ and a large unorganised sector. A broad-basing of its distribution
network beyond the traditional fuel sale outlets to the ‘bazaar’
___________________
route and OEM dealerships and workshops has helped Castrol
___________________ expand its reach significantly.
Customer outreach initiatives such as Pit Stops, Bike Zones and
___________________
Sanjeevani have helped reinforce the brand. Strong brand
___________________ presence built over the years, and shifts in its product mix to
PE
cater to premium categories, has helped the company deliver
___________________ robust performance. Despite decrease in volumes sold, the
company’s profits have grown strongly. Sales grew at an annual
___________________
rate of around 13 per cent during the 2005-2009 period to ` 2318
___________________ crore, while profits grew around 27 per cent to ` 381 crore in the
same period (the company follows the calendar year).
___________________
___________________
Castrol has also been active on the product innovation front. It

has leveraged technology to offer a range of products, including
high-performance synthetic lubricants, giving it an edge over
competition. Strong pricing power has enabled the company, for
the most part, to pass significant cost increases in base oil, its
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main raw material.
Historically, Castrol has adopted a strategy of effecting price
hikes ahead of the cost curve, helping ring-fence its margins.
This along with a tight leash on costs has enabled the company
maintain strong profitability, with operating margins in excess of
25 per cent and net margin around 18 per cent. Strong cash flows,
zero debt, return on equity in excess of 75 per cent, and dividend
pay-out ratios consistently above 70 per cent (translating into a
yield of between 4 to 5 per cent) also make the company a solid
franchise.
Auto Charge
Castrol’s automotive lube product range caters to commercial
vehicles, passenger cars, and two- and three-wheelers. The
segment registered robust performance with sales and profits
growing 19 and 27 per cent y-o-y to ` 1,766 crore and ` 485 crore
respectively during the nine months ending September 2010.
(c
Castrol is shifting focus from the truck segment (accounting for

over half the segment’s turnover) to the high-potential passenger
car category. This segment is expected to see robust demand on
the back of growing demand for personal mobility, attested by the
strong performance of the auto sector last calendar.
With a host of recent launches, including that of affordable small
cars, the lubricant market is set to benefit from both new and
repeat demand. Castrol’s tie-ups with leading OEMs should hold
Contd...
it in good stead. The company’s increased thrust on rural areas 157

should also help. While in the past, volumes sold have been Notes
S
declining in line with the profitability focus strategy, we expect
this trend to reverse given the strong latent demand for the ___________________
company’s premium mix products.
___________________
` 419 ___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
The non-automotive segment (around 13–14 per cent of revenues
___________________
and profits), which supplies industrial lubricants, has also seen
good traction in the recent nine-month period, with sales and
profits up by 20 per cent and 19 per cent respectively over the
previous year to ` 273 crore and ` 79 crore. Pick-up in economic
and manufacturing growth, which aided this rise, is expected to
continue.
Risks
With crude oil price trending upwards, increase in cost of base oil
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(a key raw material), is a major risk. This could put pressure on
margins; yet, with the company’s pricing power, we expect
margins to remain healthy.
With improving technology, drain intervals (recommended
distance after which oil should be changed) for many vehicle types
are on the rise. This could moderate replacement demand for
lubricants.
Competition in the lubes market may intensify, with PSUs
getting aggressive on the distribution front. Castrol’s positioning
and brand, though, should help.
Question:
Discuss the role of brand image in increasing the Castrol India’s
profitability.
Source: http://www.thehindubusinessline.in
(c
158
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 16: Petroleum Pricing
159
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-IV
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160
Notes F
S
UNIT 16: PETROLEUM PRICING
___________________ UNIT 18: OPEC
___________________
z Pricing of Petroleum Products z OPEC’s Role in Price Structuring
___________________
z Physical Market z OPEC’s Oil Policy
z ___________________
Players in the Physical Market z OPEC’s Production Cut and Compliance
z Paper Market
___________________
PE
UNIT 19: PROMOTION
___________________
UNIT 17: CRUDE OIL PRICING z Introduction
z Introduction
___________________ z Structure of Oil Industry
z Tradable Crude and Non-tradable Crude
___________________ z Crude Oil Pricing
z OSP of NOCs z Oil Products’ Pricing
___________________
z Factors Affecting Petroleum Prices
___________________ UNIT 20: CASE STUDIES
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Unit 16
161
Notes
S
Activity
Petroleum Pricing
___________________
Write an article on the pricing
of petroleum products.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Pricing of Petroleum Products ___________________
\ Physical Market ___________________
\ Players in the Physical Market
___________________
\ Paper Market
___________________
___________________
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;
)U
and the government. Until 1997–98, the domestic petroleum sector
in India was operating under Administered Pricing Mechanism
(APM) for refined petroleum products.
Pricing of Petroleum Products

Crude oil price formation does take place in two markets, namely,
physical market and paper market. Both the markets have their
own dynamics and both interact with each other in a complicated
way. In economic sense, price is what a buyer pays for the utility of
the goods that he buys. In that sense, the price of crude oil is the
market price in the physical market. 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
(c
physical crude is traded and thereby its future price is formed. We

will briefly deliberate on these two markets, the players in the
market, the instruments used, the associations and the activities
in the market.
162
Physical Market
Notes
S
Activity
The area of physical market has been dealt with in the preceding
___________________
Prepare a written assignment
on the players in the physical section. Basically, it is the market, where physical oil is sold and
___________________
market. 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
PE
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
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three regions, there are however more regions, which present
alternate economic sources, are Venezuela and Australia.
Check Your Progress

Fill in the blanks:
1. …………… market is a backward extension of physical
market, where right on physical crude is traded and
thereby its future price is formed.
2. ……………… 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.
(c
Players in the Physical Market

Original producers of crude oil are of two types: (a) the National
Oil Company (NOC) of the country of crude oil origin, like Saudi
Aramco, Abu Dhabi National Oil Company (ADNOC), Kuwait
Petroleum Corporation (KPC), Petronas in Malaysia and many
others. Each oil-producing country has one such company, which 163
holds the ownership of the oil in their geographical territory. Notes
S
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). ___________________
PE
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
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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
(c
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.
164 2. Trading Companies: The second category of players in the

Notes physical crude oil market is the trading companies. They buy
S
___________________ 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. They buy and sell, depending
___________________ upon their relative position and price at the moment of selling
___________________ and buying. They swap their crude oil with others. Some time,
PE
they also hold physical stocks at some parts in the world. They
___________________
take advantage of price movement in all markets across the
___________________ globe. Usually they are having operation all over the world.
___________________ They keep tab on the requirement of the refineries. They
___________________
closely monitor the developments in the world crude oil market
affecting the price. They own or operate fleet of vessels, so that
___________________
they can quickly seize arbitrage opportunities arising between
two markets. Thus, they play an intermediary role between
buyer and seller across the world and make margin for
themselves taking advantage of price movement.
The last 15 years have seen emergence of a new type of trader:
the Wall Street refiners. They were given this name when the
US investment banks set up oil trading arms to deal in oil
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derivatives in much the same way as they deal in other
financial instruments. They are assuming the risk for a
number of companies involved in the oil market and laying
these risks off in the physical or futures market in the same
way as an insurance company does in other sectors. Several of
them also take substantial outright position in their own right.
3. Integrated MNCs: The third category of players are
integrated multinational oil companies (MNCs) having
integrated operations in the oil market, namely, E&P,
refining, marketing and trading. They are very powerful
operators in the crude oil market by virtue of their scale at
operation, volume of transaction and financial strength. They
are very few in numbers and the number of has been further
(c
narrowed down in the wake of mergers that took place in

recent past. They are British Petroleum, Exxon Mobil, Shell,
Total Elf Fina, Chevron Texaco. They play multiple roles in
the crude oil market, such as: (a) they are suppliers of crude
oil, as they bring equity crude oil to the market; (b) they buy
crude oil for their own refinery system; and (c) their trading
wing buy and sell crude oil and make margin.
4. Refiners: The fourth and final category of players in the crude 165
oil market is the refiners. They are the users of crude oil and Notes
S
Activity
are the ultimate buyers. They are the ones who pay the price, ___________________
Make a report on the paper
whatever may the level. At times they can also be the sellers of market and its role in the
___________________
crude oil, which they have bought. They do resell the crude oil petroleum pricing.
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.
___________________
PE
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
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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.
Check Your Progress

(c
Fill in the blanks:

1. ……………… companies buy crude oil from the market
and sell to others.
2. National Oil Company allocates the quota among their
buyers and declares their price, which is called
…………………….
Contd...
166
3. ………………… are very powerful operators in the crude
Notes
S
oil market by virtue of their scale at operation, volume
___________________
of transaction and financial strength.
___________________
___________________ Summary
___________________ The pricing of crude and petroleum products in the country has
___________________ been influenced by a multiplicity of politico-economic factors and
PE
(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.
Lesson End Activity

)U
Visit a petrol company website and collect information on the
pricing of the petroleum and its products in the last six months.
Present the information collected in the form of a report.
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).
(c
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.
Refiners: They are the users of crude oil and are the ultimate 167
buyers. They are the ones who pay the price, whatever may the Notes
S
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. ___________________
___________________
PE
___________________
1. Explain the pricing of petroleum products.
___________________
2. Explain the physical market and the players in the physical ___________________
market.
___________________
3. Describe the paper market. List the institutions involved in
___________________
the paper market.
4. Write short notes on:
(a) Trading Companies
(b) Integrated MNCs
(c) National Oil Company
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Further Readings
Books
2010
Publishing
(c
Web Readings
http://www.eia.gov
http://www.bp.com
www.iocl.com/
168
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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(c
UNIT 17: Crude Oil Pricing
Unit 17
169
Notes
S
Activity
Crude Oil Pricing

___________________
Write an article on
the tradable-crude and
___________________
non-tradable crude.
___________________
Objectives
___________________
topics: ___________________
PE
\ Tradable Crude and Non-tradable Crude ___________________
\ OSP of NOCs ___________________
\ Factors Affecting Petroleum Prices
___________________
___________________
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
)U
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.
(c
Tradable Crude and Non-tradable Crude

For a refiner in India, the time frames for buying crude oil are two:
(a) annual term contract, and (b) spot purchase. 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
170 Arab Heavy, Arab Light, Arab Medium and Kuwaiti Crudes, are
Notes sold by the respective NOC under annual contract and are bought
S
___________________ 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
PE
___________________
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’,
)U
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:
Invoice Price (payable in April) = B (of March) + P (as agreed in

January).
The basic price (‘B’ in the equation) is the floating element and is
linked to a Benchmark Crude Price, which is assessed by a price-
assessing agency, like Platts, on daily basis. What is considered for
the purpose of determining a payable price is an average of a
(c
Benchmark crude price for a specific period, called the pricing

period. Typically, it is average of the calendar month in which the
cargo is loaded. A variant of the pricing period could be five or six
days on an average after the date of loading.
A typical pricing clause in a contract would read like this: “mean of
Platts Dubai average for the calendar month of loading plus 1.18
dollar per barrel” (hypothetical value).
This formula has the following characteristics: 171

Notes
S
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
___________________
PE
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
)U
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,
(c
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.
172 Brent is generally accepted to be the world benchmark. Brent is

Notes used to price two-thirds of the world’s internationally traded crude
S
Activity
___________________
Prepare a report on the OSP oil supplies. In the Middle East, Dubai crude is used as a
of NOCs. benchmark to price sales of other regional crudes into Asia. Dubai
___________________
is one of the few Gulf crudes available on the spot sales, as opposed
___________________
to long-term supply contracts. In the United States, the benchmark
___________________ is West Texas Intermediate (WTI). Tapis is generally used as
___________________ benchmark for Far East Crude.
PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. For a refiner in India, the time frames for buying crude
___________________ oil are two: ……………… and ……………….
___________________
2. 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 …………………….
3. ………………… is the floating element and is linked to a
Benchmark Crude Price, which is assessed by a price
assessing agency on daily basis.
)U
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.
(c
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.
The underlying principles in the OSP system are the following: 173
Notes
S
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 ___________________
PE
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.
Platts and Argus

Platts is a leading energy news service agency. It was set up by
Mr Warren Platt in 1923. In course of time, the agency has
widened its operation to a wide gamut of services in the energy
)U
sector worldwide. Platts is known for its expertise in price
assessment energy sector. It has earned a unique place for itself by
meeting the need for impartial information, market price
transparency and real time news.
In the crude oil market, Platts plays a crucial role in the daily
assessment of crude oil prices, including those of benchmark
crudes. It does assess the price of crude oil for each market. It has
established methods, networks and institutional arrangements to
keep track of market developments and price movement. With all
these arrangements and after having extensive interactions with
market players, Platts, at the end of the day, assess and reports a
high, mean and low price, at which a particular crude oil was
traded in a particular market. The Platts assessed price is
(c
considered to be the price for that day for the particular type of
crude. The price of benchmark crude as assessed by Platts is used
to work-out the formula price of crude oil as per contracts.
Petroleum Argus is another agency of the same kind. The
methodology adopted by Argus for price assessment is different
from that used by Platts. Nevertheless, the price assessment by
174 both for the same crude follows somewhat similar level. However,
Notes in the crude oil market, Platts has more acceptability than Argus.
S
Activity
Make___________________
an assignment on the
factors affecting petroleum Check Your Progress
___________________
pricing.
Fill in the blanks:
___________________
___________________
1. ………………… is a declared price (or posted price) by
the seller, uniformly applicable to all the buyers in the
___________________
region.
PE
___________________
2. ………………… is a leading energy news service agency,
___________________ set up by Mr Warren Platt in 1923.
___________________
___________________ Factors Affecting Petroleum Prices

___________________ The factors bringing about equilibrium price in crude oil market
are many. One would presume that it is the cost of production.
Alternatively, it would be presumed that the demand and supply
or some such economic law would be able to explain the price
behaviour. Economists have attempted to explain the crude oil
prices in order to forecast them in both short and long terms.
However, no theory has thus far been able to use economic
)U
variables in a model that can accurately predict future oil prices.
Still there are consultants, who take into account the
fundamentals of the market and factor anticipated political
developments and project the future price both in short and long-
term under various probable scenarios. As a student of Economics
of crude oil, we need to be aware of the fundamental factors that
work in the market and influence the price.
The region-by-region demand patterns interact to establish the
price level. The interaction is constant and usually invisible to
anyone not directly involved in the oil industry. As a general rule,
thousands of transactions that take place simultaneously are
complete without fanfare. The price fluctuations are small and of
interest to the buyers and sellers within the Industry.
(c
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
demand balance has been re-established. Long-term factors, like 175

OPEC cut or a recession, have long-term impacts. Like crude oil Notes
S
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
___________________
PE
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’
)U
(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
(c
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
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
S
___________________ 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
PE
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,
)U
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.
(c
Check Your Progress

Fill in the blanks:
1. When markets are ‘strong’ (when demand is high
and/or supply is low), the bidder must be willing to pay
a ……………… to capture the supply.
Contd...
177
2. ……………… prices indicate that more supply is needed
Notes
S
and falling prices indicate that there is too much supply
for the prevailing demand level. ___________________
3. A depreciation of the dollar would be expected to lead to ___________________
a ……………… in the dollar price of oil. ___________________
___________________
Summary ___________________
PE
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
)U
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.
Lesson End Activity

Make a presentation on the crude oil pricing. Include pictures and
examples to make your presentation more attractive and
interesting.
Keywords
Basic Price: It is the floating element and is linked to a
(c
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.
178 Non-tradable Crude: The types of crude oil in Middle East,

Notes which can only be bought by annual contract and these crude oils
S
___________________ are destination specific are called non-tradable crude.
___________________ Pricing Period: It is a specific period for Benchmark crude price.
___________________
___________________ Questions for Discussion

___________________ 1. Explain the tradable crude and non-tradable crude.
PE
___________________ 2. Discuss about the OSP of NOCs.
___________________ 3. Discuss the factors affecting petroleum prices.
___________________ 4. Write short notes on:
___________________
(a) Benchmark Crude
___________________
(b) Basic Price
(c) Formula Price
Further Readings
Books
)U
2010
Publishing
Web Readings
(c
http://www.eia.gov
http://www.bp.com
www.iocl.com/
UNIT 18: OPEC
Unit 18
179
Notes
S
Activity
OPEC
___________________
Prepare an assignment on the
OPEC’s role in price
___________________
structuring.
___________________
Objectives
___________________
topics: ___________________
PE
\ OPEC’s Role in Price Structuring ___________________
\ OPEC’s Oil Policy ___________________
\ OPEC’s Production Cut and Compliance
___________________
___________________
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.
)U
OPEC’s Role in Price Structuring
It can be understood as follows:
OPEC vis-à-vis World Oil Market

Organization of Petroleum Exporting Countries (OPEC) was
founded in September 1960 and its member countries include
Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, the DAE and Venezuela. Original OPEC members
include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. During
1960 and 1975, the organization expanded to include Qatar,
Indonesia, Libya, the DAE and Algeria. Ecuador and Gabon were
members of OPEC, but Ecuador withdrew in 1992 and Gabon
(c
followed suit in 1995.

OPEC members share common interests and as a group have a
significant influence on world oil market, despite their lack of
monopoly over world oil production. EIA (Energy Information
Administration) estimates the current eleven members account for
roughly 40 per cent of world oil production and about 80 per cent of
180 the proven oil reserves. Following are some significant

Notes characteristics of OPEC member countries:
S
___________________
1. Member countries of OPEC are important world oil exporters.
___________________ Excluding Indonesia, members’ net exports averaged 85 per
___________________ cent of total oil production in 2001.
___________________ 2. OPEC countries’ oil industries are mostly nationalized,

allowing OPEC members’ political establishments to increase
___________________
PE
or decrease oil production. Through managing world oil
___________________ supply, OPEC can control world oil prices to help meet the
___________________ group’s economic and/or political goals. Member governments
___________________
tend to rely heavily on oil revenues.
___________________ 3. The lion’s share of the world’s spare oil production capacity lies
in OPEC countries. Non-OPEC countries hold approximately a
___________________
combined 500 thousand barrels per day (bb/d) of spare
production capacity, while OPEC spare production capacity
estimates for 2002 are as high as eight million bb/d.
4. As per January 2002 estimates, 80 per cent of proven world
crude oil reserves are located in OPEC member countries.
5. Production costs are far lower in OPEC countries. Prolonged
)U
periods of low oil prices make the world more reliant on
cheap-to-produce OPEC oil.
In contrast to OPEC countries, non-OPEC countries share the
following characteristics:
1. Most non-OPEC countries are net oil importers. The seven
largest non-OPEC producers’ 2001 net exports averaged
15 per cent of total oil production.
2. Because major non-OPEC countries have private oil sectors
(Mexico is one notable exception), the political establishment
generally has very little control over production levels.
Companies react to international price expectations, exploring
and drilling more and in higher cost areas when prices are
high and focusing on lower cost production when prices are
(c
low.
3. Private companies keep very little spare production capacity.
Hence, in case of a significant world oil production disruption,
OPEC would be the primary immediate source of additional oil
to displace the loss.
UNIT 18: OPEC
4. Non-OPEC lifting costs tend to be higher than OPEC lifting 181

costs, which makes non-OPEC production more vulnerable to Notes
S
Activity
price collapses. Prolonged periods of low prices can drive ___________________
Write an article on the OPEC’s
higher cost producers out of business and make major oil Oil Policy.
___________________
companies focus less on higher cost areas.
___________________
Fill in the blanks: ___________________
PE
1. OPEC is the ……………………. ___________________
2. ………………… estimates the current eleven members ___________________

account for roughly 40 per cent of world oil production ___________________
and about 80 per cent of the proven oil reserves.
___________________
___________________
OPEC’s Oil Policy
The single most important objective of OPEC is to maximize the
revenue of its member countries. This objective can be achieved
only if oil prices remain at a level that can sustain demand and
supply and remain stable over a secular period. OPEC cannot
determine the price level of oil by its dictates. OPEC is a cartel and
)U
not a monopoly producer. The dynamics of oil market is such that
oil prices are volatile and are subject to multiple forces. One of
those factors is oil production at a particular time, which
determines supply of oil in short-term. Second factor is oil reserves,
which determine supply of oil in the long run. OPEC, by virtue of
its having, large exportable surplus and proven reserves does
attempt to control price through output variation.
The revenue maximization objective of OPEC is dictated by a
number of compulsions, a few are mentioned below:
1. Meeting Budgetary Requirements of its Member States:
Oil revenue forms around 90 per cent of the total budgets in
most OPEC countries. OPEC countries need a stable income
primarily for two purposes: (a) to develop their economies and
(c
afford a fair standard of living for their people; (b) to expand

their oil production capacity to cover the expected future
increase in oil demand.
2. Transfer of Technology: OPEC countries need new
exploration and production technologies and expertise, which
require massive investment. This is a challenge for OPEC
countries, which has to be faced in line with their political
182 philosophy of not accepting production-sharing agreement

Notes with Oil Majors.
S
___________________
3. In the revenue earning game played by both the oil producing
___________________ countries and oil consuming countries, OPEC does not want to
___________________ be a losing party. OPEC has been observing that oil consuming
industrial countries are levying high taxes of various types to
___________________
gain revenue on the one hand and also to reduce consumption
___________________ of oil. OPEC secretariat has studies that taxes levied by the
PE
___________________ government of industrialized countries constitute 65 per cent
of the price of petroleum products. For example, taxes in UK
___________________
on gasoline are 70 per cent of its price.
___________________
4. Another compelling purpose for which OPEC countries barter
___________________
their output and price control is to earn measures of political
___________________ stability and military security.
Effect of OPEC Policy

Summarily, OPEC operates its policy through the following four
instruments: viz., (a) output variation, (b) destination control,
(c) declaration of official selling price, and (d) policy announcement.
These instruments directly impact the availability of physical
)U
crude in certain segments of market with different time lags. For
example, if OPEC cuts reduce availability of physical cargo in the
region of South Asia and Asia Pacific in the same month, it affects
USA after a lag of 45 days.
Reduction in physical loading of crude by OPEC member countries
impacts on the crude inventory available with refineries. Through
the invisible hand of market, reduction in supply brings about
disequilibrium in the price, which triggers ripples in the price
level. By fine-tuning the output, OPEC attempts to keep the price
of OPEC basket crude in a certain band, which currently is 22 to
28 US dollar per barrel.
The output and price linkage is not a linear linkage. Like any other
market phenomena, it has its own complexities. Firstly, there are
(c
powerful non-OPEC producers, who may have domestic

compulsions not allowing them to toe the line of OPEC dicta.
Secondly, there are substitute fuels, like gas, coal, nuclear, which
compete with oil for their commercial use. Thirdly, the
transportation and handling of physical crude also impacts the
price formation of crude, as ships, pipeline, and storage may pose
UNIT 18: OPEC
bottlenecks, hindering availability of crude at the point of 183

consumption. Fourthly, the paper market and financial market Notes
S
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. ___________________
___________________
India’s OPEC Policy
___________________
PE
India has large stakes in OPEC countries. The geographical
___________________
proximity of Middle East is really an opportunity for India by way
of security of supply and economic freight. Second, some of the ___________________
Indian refineries are configured to process the types of crude ___________________

produced in Middle East. ___________________
The combination of rising oil consumption and relatively flat ___________________
production has left India increasingly dependent on imports to
meet its petroleum demand. In 2010, India was the world’s fifth
largest net importer of oil, importing more than 2.2 million bbl/d,
or about 70 percent of consumption. A majority of India’s crude oil
imports come from the Middle East, with Saudi Arabia and Iran
supplying the largest shares. Iranian oil’s share of Indian imports
)U
has decreased in recent years, largely due to issues with processing
payments.
(c
Source: Global Trade Atlas, 2010
Figure 18.1: India’s Oil Import
Objective of India’s OPEC policy can be classified under two

headings: viz., (a) to have a security of supply at all times and
184 especially at the time of exigencies like war or natural calamities;

Notes and (b) to get crude at the best price.
S
___________________
Till recently, Indian refineries were operating in protected
___________________ environment and under administrative pricing regime. The
___________________ features of crude import, which were then operating under the
previous regime, were:
___________________
1. Canalized procurement by Indian Oil Corporation, under the
___________________
PE
operating guidance of Oil Corporation Committee.
___________________
2. Crude types were limited, which formed a common basket for
___________________
all the PSU refineries.
___________________
3. Sources of import were also limited, dominated by protocol and
___________________ convention of Indian Government with National Oil
___________________ Companies of Middle East.
4. Operational practices were constrained by existing
infrastructure, which were highly inadequate, and therefore,
built in costs were incurred for crude import.
5. The total operating costs were shared amongst all the PSU
companies in proportion to their throughput. Therefore, there
were invisible costs.
)U
6. Import procedures were strongly tied by Government
guidelines. All activities were subject to retrospective scrutiny
of audit, vigilance and parliament.
Policy Direction for India

In the short and medium term time frames, that is, within two to
five years, Indian refiners and policy-makers need to take few
policy initiatives, keeping in view the objectives of security and
economy with respect to crude oil import.
Indian government and business associations (like FICCI &
ASSOCHAM) need to step up commercial diplomacy in the OPEC
member countries. Commercial, economic and diplomatic
relationship with OPEC member countries and oil producing
(c
companies would go a long way in taking care of India’s crude oil

import.
It is important to realize that a vibrant and growing economy, with
competitive export and adequate foreign exchange reserve are a
few prerequisites for the success of any policy drive in the external
sector. Middle East countries need collaboration in technology and
UNIT 18: OPEC
expertise in drilling, exploration and information technology. 185

Indian companies having comparative advantage in these fields Notes
S
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. ___________________
PE
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. ___________________
___________________
Areas of Action for Indian Refineries
Indian refineries have to learn and practice and art and science of
buying high value crude at competitive price.
Certain areas requiring attention are:
1. Diversification of crude basket, which means continuous
search for non-conventional crude; trial processing of crude
)U
from new fields and up-gradation of refinery configuration to
process new varieties of crude and to extract maximum yield.
2. Diversify the supply sources. New Crude sources are to be
tapped. For example, countries like Venezuela, Angola, Egypt,
and Libya have not been properly examined. There are of
course constraints like shipping, which are to be addressed.
3. Have port related facilities to handle VLCC. It requires a
focused attention to overcome of the infrastructural
bottlenecks to bring in large parcel size from a remote source.
4. Vigorously enter into risk management areas. It is commonly
known that crude prices are highly volatile and considering
the volume, stakes are very high. Therefore, we need to resort
(c
to techniques of passing on the price risks to others, which

have specialized in risk taking business. A well-designed policy
framework is to be built by the Indian oil companies for
this. Institutional set ups and support systems in this filed
are already available. This is an area where Indian oil
companies are lagging behind their counterparts operating in
international oil market.
186
Check Your Progress
Notes
S
Activity
Make a presentation on the
OPEC’s production cut and
___________________ 1. OPEC operates its policy through the following four
compliance.
instruments: viz., ……………, ……………, ……………
___________________
and ……………….
___________________
2. Till recently, Indian refineries were operating in
___________________
protected environment and under ……………….
PE
___________________
___________________ OPEC’s Production Cut and Compliance

___________________
In the prevailing condition of depressed demand world over,
___________________ OPEC’s curb in production has maintained a kind of balance,
___________________ which can be seen in the Table 18.1. The table gives a snap shot of
world demand and supply split in terms of OPEC and non-OPEC,
came into notice that the major producing countries in OPEC block
are adhering to their ceiling production. Saudi Arabia is the only
country with the capability to further increase its capacity
significantly in short period, say 30 days.
Table 18.1: World Demand Supply Balance

)U
(million barrels per day)
2008 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 3Q11 4Q11 2011
OECD DEMAND
North America 24.2 23.3 23.4 23.7 24.1 23.8 23.8 23.8 23.3 23.6 23.4 23.5
Europe 15.4 14.7 14.4 14.3 15.0 14.9 14.7 14.2 14.1 14.7 14.1 14.3
Pacific 8.1 7.7 8.2 7.3 7.6 8.1 7.8 8.3 7.1 7.7 8.3 7.9
Total OECD 47.6 45.6 46.0 45.4 46.7 46.8 46.2 46.3 44.5 45.9 45.8 45.6
NON-OECD
DEMAND
FSU 4.2 4.1 4.2 4.2 4.4 4.4 4.3 4.3 4.5 4.7 4.7 4.6
Europe 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.8 0.8
China 7.7 7.9 8.5 8.9 8.8 9.5 9.0 9.4 9.4 9.2 9.6 9.4
Other Asia 9.8 10.3 10.5 10.8 10.4 10.8 10.6 10.9 10.9 10.6 11.1 10.9
Latin America 6.0 6.0 6.1 6.4 6.5 6.5 6.4 6.4 6.6 6.8 6.7 6.6
Middle East 7.2 7.4 7.3 7.7 8.2 7.6 7.7 7.5 7.9 8.3 7.8 7.9
Africa 3.3 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.3 3.4 3.4
(c
Total Non-OECD 39.0 39.9 40.9 42.2 42.4 43.0 42.1 42.7 43.4 43.6 44.1 43.4
Total Demand1 86.7 85.5 86.9 87.6 89.1 89.8 88.4 89.1 87.9 89.5 89.8 89.1
OECD SUPPLY
North America4 13.3 13.6 13.9 13.9 14.0 14.4 14.1 14.3 14.2 14.4 15.2 14.5
Europe 4.8 4.5 4.5 4.1 3.8 4.1 4.1 4.0 3.7 3.5 3.7 3.8
Pacific 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.5
Total OECD 18.7 18.8 19.1 18.7 18.4 19.1 18.8 18.8 18.5 18.5 19.5 18.8
Contd...
UNIT 18: OPEC
NON-OECD 187
SUPPLY
Notes
S
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 ___________________
PE
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 Biofuels4 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
)U
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.
(c
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.
188 5 As of the March 2006 OMR, Venezuelan Orinoco heavy crude production is included
within Venezuelan crude estimates. Orimulsion fuel remains within the OPEC NGL and
Notes
S
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
PE
historical periods and with an average of “Miscellaneous to balance” for the most recent
___________________ 8 quarters added for forecast periods.
___________________ The vast majority of development projects in OPEC countries,

___________________ accounting for incremental capacity is being operated and funded
by MNCs. Governments of OPEC member countries are
___________________
increasingly finding it hard to comply with the quota restriction
___________________ beyond a point, to the extent the surplus capacity is being funded
by MNCs.
Check Your Progress

Fill in the blanks:
1. In the prevailing condition of depressed demand world
over, OPEC’s curb in …………………… has maintained
)U
a kind of balance.
2. World demand and supply split in terms of OPEC and
non-OPEC, came into notice that the major producing
countries in OPEC block are adhering to their
…………………….
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
(c
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
refiner, who is the ultimate buyer of crude oil, pays for all these 189
costs and realizes its margin by selling refined products, which are Notes
S
processed out of crude oil. ___________________
___________________
Lesson End Activity
___________________
Discuss the recent issue for payment of outstanding oil debt ___________________
between India and Iran.
___________________
PE
___________________
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.
)U
1. Explain the role of OPEC in price structuring.
2. Discuss about the OPEC’s oil policy.
3. Describe OPEC’s production cut and compliance.
4. What do you understand by cartel?
5. Write a note on OECD.
Further Readings
Books
(c

2010
Publishing
190 Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center

Notes
S
___________________
___________________
Web Readings
___________________
___________________
___________________ http://www.eia.gov
PE
___________________ http://www.bp.com
___________________ www.iocl.com/
___________________
___________________
___________________
)U
(c
UNIT 19: Promotion
Unit 19
191
Notes
S
Activity
Promotion
___________________
structure of oil industry.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Structure of Oil Industry ___________________
\ Crude Oil Pricing ___________________
\ Oil Products’ Pricing
___________________
___________________
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
)U
products if processed in the same refinery.
Taking a broad view of petroleum marketing it involves:
z Transporting the product to a point where custody transfer is
feasible
z Providing storage facilities wherever necessary
z Balancing product and demand
z Obtaining the best possible price.
Structure of Oil Industry

Before World War I, the world oil market was dominated by four
major international oil companies: Shell, Standard Oil, Nobel and
(c
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). In the 1920s, the oil market was essentially controlled
by these three companies. During the 1930s, new major oil
companies developed as offshoots of the old Standard Oil
192 Company. They were Gulf, Texaco, Standard of California, Sohio

Notes and Mobil. With these new entrants, the degree of competition in
S
___________________ the world oil market has increased, but only to a certain extent. In
the 1940s and 1950s, the seven sisters had balanced the supply
___________________
and demand mainly by market-sharing and joint producing
___________________
agreements. To some extent, these agreements distorted world
___________________ market competition. This resulted in an oligopoly market structure
___________________ characterized by substantial differences between production cost
PE
and market price.
___________________
The deviation of oil prices from production costs allowed for
___________________
vertical integration and controlling the market all the way from
___________________
exploration to marketing. The share of the major oil companies in
___________________ world oil. Production refining and marketing was about
___________________ 60 per cent. This concentration ratio, which indicates the degree of
competition in world oil market, has declined dramatically,
especially in the production sector. This is due to the increased
participation of oil-producing countries in production and to the
evolution of the national oil companies. Table 19.1 shows the
shares of the largest seven international oil companies in different
sectors of the oil industry in 1987. It is clear that the market power
of the majors has reduced. Yet, they are still controlling 25 per cent
)U
of world oil refining and about 3.5 per cent of marketing activity.
Table 19.1: Shares of the Largest Seven International

Oil Companies in Oil Industry Activities
(Thousand Barrels per Day in 1987)
Company Oil % of Oil % of Refining % of Products % of
reserves world produced world input world sold world
Amoco 2,580 0,10 RO2 1.44 K95 1.57 1.021 1.79
Chevron 3.341 0,14 1,331 2.41 I,R7S 3.30 2.235 3.91
Exxon 6,634 0.27 1,835 3.30 2,9S1 5,24 -+,043 7.0R
Mobil 2,953 0.12 70t) l.2S 1,563 2.74 2.362 -+. 13
Texaco 3,089 0.13 1,056 1.90 1,892 3.32 2.734 -+.79
BP 5,005 0.20 1,425 2.56 I,S22 3,20 2.622 -+..59
Shell 7,939 0.32 1,550 2.79 3,244 5.70 -+,900 .5
Total oil 31,545 1.28 S,7l5 15.68 14,275 25.07 19.917 3.U,7
companies
(c
Total 2.441,386 100.0 55,512.1 100.0 56,925 100,0 57.124,7 100.0

world
Source: Croll, D. Oil companies, Petroleum Economics, June 1999, p. 184.
The beginning of oil producers’ participation in oil industry was in

1960 when the Organization of the Petroleum Exporting Countries
(OPEC) was established. OPEC was formed by five major
oil-exporting countries: Iran, Iraq, Kuwait, Saudi Arabia and
UNIT 19: Promotion
Venezuela. Qatar joined in 1961 and was followed by Indonesia 193

and Libya in 1962. By 1979, the number of OPEC’s members Notes
S
Activity
totalled its present 13, including United Arab Emirates, Algeria, ___________________
Nigeria, Ecuador and Gabon. Furthermore, during the 1960s, crude oil pricing.
___________________
several national oil companies of the producing nations were
established, although in most cases without significant market ___________________
power. ___________________
___________________
PE
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The deviation of oil prices from production costs
___________________
allowed for ………………… and controlling the market
all the way from exploration to marketing. ___________________
2. …………………… ratio, which indicates the degree of ___________________
competition in world oil market, has declined

dramatically, especially in the production sector.
Crude Oil Pricing

Before World War II, the world oil market (mainly US, the world’s
)U
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.
This system tended to prevent competition and lower prices. After
the war and the emergence of new suppliers from the Middle East,
the price structure changed to a dual basing point system. The
second basing point was the Arabian Gulf. 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. This was
(c
about equivalent to the US Gulf price plus the transport cost from
some point near Malta in the Mediterranean. With the increase in
the demand for the Middle Eastern crude oil especially in Western
Europe, oil companies moved the “parity point” westward to
London, then to New York, in order to maintain low competitive
prices among the various producer countries exporting to Europe.
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
S
___________________ 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
PE
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
)U
prices for the different crudes reflecting the different locational,
physical and chemical characteristic of each crude.
Yom Kippurwar
Fears of shortage in US Post-war reconstruction Iranian 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
(c
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
Source: BP Statistical Review of World Energy 2011
Figure 19.1: Crude Oil Prices 1861–2010

UNIT 19: Promotion
Supply disruption from the Arabian Gulf because of Iran 195

Revolution in 1979–1980 caused spot oil prices to jump to over Notes
S
$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
___________________
PE
target price of $18/bbl.
___________________
Oil Products’ Pricing ___________________
___________________
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.
For perhaps two decades after World War II, the major refining
companies “posted” prices for the major fuel products at which they
were willing to sell to any wholesaler or distributor. With stable
crude prices, the major product prices also remained stable for long
)U
periods of time except for the summer/winter fluctuations in
heating oil and motor gasoline prices.
For oil products, there have been at least three markets, spot sales,
term contracts and wholesale transactions. In oil surplus
situations, which characterize world oil market except for supply
crises of 1972–74 and 1978–81, spot sales tend to command the
lowest mark-up over crude oil costs and wholesale transactions the
highest. Term contract sales, however, justify some discounting for
outlet security, and therefore fall between wholesale and spot
sales. Nonetheless, the existence of a spot market generated the
need for some kind of reporting service. Platt’s price assessment
service developed to fill this need.
Individual product value-added in refining varies among different
(c
products. They also vary among market areas and over time. These
variations require refiners to be typically competitive even during
periods of supply surplus. More recently, competitive pressures on
product prices generated different kinds of discounts from official
crude selling prices.
196
Check Your Progress
Notes
S
___________________ 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 ……………….
PE
___________________
___________________ 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.
)U
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
(c
through the full-barrel refiner’s margin, which can be considered

as value-added in the processing of crude oil.
Lesson End Activity

Visit a petrol pump to meet the dealer and collect information on
the promotion strategies undertaken by his brand.
UNIT 19: Promotion
Keywords 197
Notes
S
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.
___________________
Parity Point: Points of parity are those elements that are
___________________
PE
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. ___________________
Single Basing-point Price System: Under this system, the price ___________________
is quoted only for the point of delivery. ___________________
Term Contract Sales: It justifies some discounting for outlet ___________________

security, and therefore falls between wholesale and spot sales.

1. Discuss the market structure of oil industry.
2. Explain the process of crude oil pricing.
)U
3. Describe the oil products’ pricing.
Further Readings
Books
2010
Publishing
(c

198
Web Readings
Notes
S
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
___________________
www.iocl.com/
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
Unit 20
199
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study 1: Club HP
___________________
High-Quality Personalized “Vehicle and Consumer Care”
___________________
A part of HPCL’s strategic retail marketing initiative that seeks
to break out of traditional fuel retailing, our new Retail Brand ___________________
“Club HP” assures high-quality personalized “Vehicle and
Consumer Care” through a select set of outlets. ___________________
Developed after an exhaustive research of over a year, which

included collecting feedback from over 13,000 respondents in
several key markets across the country, the “Club HP” concept
aims to provide the assurance of “Quick Fills”, “Expert,
Personalised Service”, “Total Vehicle Management” and
“Consumer Conveniences”.
While designing the bouquet of services for Club HP outlets, we
)U
have relied upon the feedback received directly from consumers.
We realize that consumers are highly conscious of the fuel that
goes into their vehicles – each “Club HP” outlet carries the
assurance of HPCL’s ‘Good Fuel Promise’ and delivers the right
quality and quantity of the products on offer. Fuel is delivered to
these outlets in tank trucks fitted with tamper proof locks and a
high degree of control is kept by the HPCL staff to ensure that
quality standards are strictly enforced.
The “Club HP” concept also recognizes the fact that the consumer
today places very high importance on vehicle care and at the same
time expects other value added services from a fuel retail outlet
that help him take care of diverse activities under one roof and in
the shortest possible time. The Club HP outlets provide a distinct
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.
(c
To deliver the many conveniences and services, we have

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. We are 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.
Contd...
200
The roll out of “Club HP” began in a phased manner, initially
Notes targeting 85 outlets in the cities of Mumbai, Delhi, Bangalore and
S
___________________
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
___________________ outlet will offer a bouquet of standardized services to consumers,
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___________________
depending upon market requirements and logistical abilities.
z 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.
z 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.
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z 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.
z ‘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.
z Vehicle Finance and Insurance Related Counsel: HPCL
has tied up with leading vehicle insurance and finance
service providers for these activities, which include
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assistance towards issuance and renewal of policies as well

as extension of loans for purchase of new or second hand
vehicles.
z 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...
201
z Bills Payments: HPCL has tied up with Skypak Financial
Services, which is providing “Drop boxes” at all “Club HP” Notes
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outlets in a phased manner. Consumers can utilize these
drop boxes to pay bills relating to a variety of service ___________________
providers. All one has to do is drop the bill and payment ___________________
instrument (Cheque/Demand Draft) for the designated
service provider and Skypak will route the same to the ___________________
correct destination…at no extra cost.
___________________
z Communication Facilities: Each Club HP outlet is
equipped with a payphone for the convenience of consumers. ___________________
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In addition, select outlets will also provide high speed
internet browsing and e-mail facility. ___________________
z HPCL: ICICI Co-branded Credit Cards- Customers visiting ___________________

the “Club HP” outlets will be able to use the HPCL – ICICI
Credit Cards to reap the higher reward points offered by this ___________________
unique product. ___________________
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 Coca Cola India to
provide beverages and bottled water as well as snacks at all “Club
HP” outlets.
Question:
Read the case and summarise the facts.
Source: http://www.hindustanpetroleum.com
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202
Case Study 2: LPG, Diesel Burn Oil Marketing Companies’
Notes Pockets
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___________________
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
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___________________ 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
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` 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
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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...
203
At the current crude oil price levels, the public sector OMCs are
estimated to lose ` 72,812 crore on sale of petroleum products Notes
S
below the market price in the current fiscal.
___________________
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
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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204
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 21: Sales and Marketing
205
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-V
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206
Notes F
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UNIT 21: SALES AND MARKETING
___________________ UNIT 23: PETROLEUM INDUSTRY FUTURE
___________________
z Sales and Marketing of Petroleum Products z Future of Global Petroleum Industry
___________________
z Crude Oil Marketing z Upstream Industry: Future of the North Sea
z ___________________
Natural Gas Marketing z Downstream Industry – Refining and Marketing
___________________ z Future Oil Prices
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UNIT 22: FRANCHISING AND BRAND
MANAGEMENT
___________________ UNIT 24: EMERGING ISSUES IN INDIAN OIL
z Introduction INDUSTRY
___________________
z Franchising Management z Introduction
___________________
z Brand Management z Import Parity Price
z
___________________
Basic Differences between Brand and Product z Managing Unannounced Surplus
___________________ z Petro Retailing in General Outlets – FMCG Stores
and Super Markets

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Unit 21
207
Notes
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Activity
Sales and Marketing

___________________
Write an article on sales and
marketing of petroleum
___________________
products.
___________________
Objectives
___________________
topics: ___________________
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\ Sales and Marketing of Petroleum Products ___________________
\ Crude Oil Marketing ___________________
\ Natural Gas Marketing
___________________
___________________
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.
Sales and Marketing of Petroleum Products

Marketing is the most complex sector of the world oil industry.
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Generally, there are many ways in which oil marketing may be
viewed. These include wholesale markets, in which large sales are
made to sellers of small volumes, versus retail markets, which sell
to final consumers. Sometimes, sales are on a spot or single-sale
basis, and sometimes on short or long-term contracts. There are
also differences between crude oil and oil product markets.
Historically, until the early 1970s, crude oil was marketed through
integrated company systems. Sometimes, producing/refining
companies would exchange oil, usually on a barrel-for-barrel basis.
Some crude oil, around 5 per cent, was sold by producers through
spot markets to refiners.
This situation is now changed. Most of the world’s equity crude has
disappeared from the market, largely as a result of nationalization
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of the assets of most major oil producers. Although the traditional

concessionary companies have retained preferred access to crude’
oil through service contracts, the amount of oil traded on a spot
basis has increased to above 50 per cent. This trend has been
accentuated by the development of formal oil exchange markets
such as New York, London and Hong Kong.
208 On the oil products side, the marketing was relatively simple in
Notes the past. There were essentially three main products: Motor
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Activity
With___________________
the help of internet, Gasoline, Heating Oil and Heavy Oil. Motor gasoline markets
collect more information on were, and remain, the most fragmented among the world’s oil
___________________
crude oil marketing.
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,
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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.
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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.
Check Your Progress

Fill in the blanks:
1. …………………… is the most complex sector of the
world oil industry.
2. On the oil products side, the marketing was relatively
simple in the past. There were essentially three main
products: ………………, ……………… and ……………….
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Crude Oil Marketing

Refineries are normally located near population centres, often in
processing clusters that include petrochemical plants. The overall
pattern is for crude to be shipped to these clusters from around the
world in smaller tankers.
Since crude is so easily transported by marine tanker, in remote 209

areas of the world the development of a new field generally Notes
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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
___________________
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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.
Organisation of Petroleum Exporting Countries (OPEC)

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OPEC was formed in 1960 to give the producing countries a unified
voice in dealing with the western oil company’s crude pricing. Its
major impact, however, has been since 1973, when it began
functioning as a cartel to control crude prices. In 1999, the OPEC
member states are Saudi Arabia, Iraq, Iran, Venezuela, Nigeria,
Kuwait, Libya, United Arab Emirates, Indonesia, Algeria, Gabon,
and Qatar.
From its beginning, the international crude market was highly
volatile. Since major crude oil discoveries were random events that
defied planning or scheduling, the supply of crude was usually too
long or too short, generating wide swings in price. This
environment was discouraging to investment of the huge sums the
emerging industry needed. Some stabilization was clearly in
everyone’s interest.
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The first effort to bring order to the market was made by the Texas
Railroad Commission in the 1930s, and it was quite successful. At
that time, the United States – principally Texas-was the world’s
biggest crude producer and exporter. The TRC was therefore able
to cutback or increase Texas – production as needed to bring world
supply and demand into rough balance. Working closely with the
210 major oil companies who controlled the foreign-produced crude, the
Notes TRC was able to maintain relative price stability well into the
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Activity
___________________
Present an assignment on the 1960s.
natural gas marketing.
___________________ 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
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___________________ 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
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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.
Check Your Progress

Fill in the blanks:
1. Refineries are normally located near population
centres, often in processing clusters that include
…………………….
2. Producers also have the option to ………………… in the
pipeline to transport their crude.
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Natural Gas Marketing

Because natural gas must be contained under pressure or it will
dissipate, commercializing (marketing) of remote gas inevitably
involves heavy investment in downstream facilities. One approach
is Liquefied Natural Gas (LNG), where the gas is converted in
place to a more easily transported liquid. Another approach is to 211

bring demand to the gas field by building, for example, a fertilizer Notes
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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, ___________________
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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
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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.
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Refined and Petrochemical Product Marketing

Plant operators not only have to organize and procure their slate of
feedstocks, they also have to keep the products they produce
moving smoothly out to retail markets. Although temporary
storage of excess liquid products, is more feasible than storage of
natural gas, the available storage capacity is minuscule compared
212 to the enormous volume of petroleum products moving through the

Notes system. This smoothly running enterprise again depends on
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___________________ well-developed markets for traders to easily dispose of their
surpluses and pick up their shortfalls. As with crude oil, there is no
___________________
particular attempt made by refiners to move the gasoline they
___________________
produce through their own service stations only. Instead, a Gulf
___________________ Coast refiner would typically deliver its surplus gasoline to other
___________________ marketers in the immediate area in trade for similar volumes
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received from other refiners on the east coast, west coast, and
___________________
elsewhere. This saves the cost of physically moving the products
___________________ around the country, so everyone benefits.
___________________
Products are transported from plants by truck, barge, ocean-going
___________________ ship, and pipeline. A pipeline can handle a variety of different
___________________ products introduced as sequential batches. Some mixing occurs at
the batch interfaces and this material is reprocessed.
LPG is produced not only as a refinery by-product, but also direct
from gas wells. As a by-product, its production volumes are not
determined by its own demand, but rather by the demand for
gasoline and natural gas. As a result, the LPG market is
notoriously cyclic, swinging rapidly from surplus to deficit and
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back again. It is therefore necessary to have more LPG storage
capacity than for other products. On the U.S. Gulf Coast and
elsewhere around the world, this has been accomplished by
washing out caverns in sub-surface salt formations.
Check Your Progress

Fill in the blanks:
1. ……………… is an approach where the gas is converted
in place to a more easily transported liquid.
2. ……………… refiner 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.
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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
oil industry. Because of the high fixed cost of exploration and 213
development, the oil industry tends to be a decreasing cost Notes
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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 ___________________
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more like product marketing of the past. This has been encouraged ___________________
by the emergence of official exchanges in major oil trading centres.
___________________
___________________
Lesson End Activity
___________________
Make a presentation on the sales and marketing of petroleum
___________________
products.
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,
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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.

1. Write a note on sales and marketing of petroleum products.
2. Discuss the marketing strategies and procedures of crude oil.
3. How is the marketing for natural gas conducted?
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Further Readings
Books
214 Parra; ‘Oil Politics a Modern History of Petroleum’; I.B Taunsf;

Notes 2010
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___________________
___________________ Publishing
___________________ Razavi ‘Fundamentals of Petroleum Trading’; Fast-West center
___________________ Alvarado and Manrique ‘Enhanced Oil Recovery, Field Planning
___________________ and Development Strategies’; Gulf Elsevier; 2010
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___________________
Web Readings
___________________
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
www.iocl.com/
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UNIT 22: Franchising and Brand Management
Unit 22
215
Notes
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Activity
Franchising and Brand

___________________
Prepare a report on
franchising management and
___________________
franchising models in
Management petroleum industry.
___________________
___________________
Objectives ___________________
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___________________
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
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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
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perspective on franchising.
Franchising Models in the Petroleum Industry

Franchising not new to the Oil industry – has been used for over a
hundred years in this country. Oil industry has the largest
franchisee network spread across the country. Started with
216 franchising packed Kerosene tins in 1890s with the following

Notes Mission:
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___________________
z A vast network spanning the length and breadth of the
___________________ country was set up quickly
___________________ z With the advent of Petrol vehicles a franchisee network for
___________________ marketing Petrol and subsequently Diesel was set up
___________________ z In the 1950s domestic LPG was introduced and a separate
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network was established
___________________
___________________ z Since then we have a very vast network of franchisees for

special products and lubricants as well
___________________
Table 22.1 illustrates the growth of Franchisee-based Petro-Retail
___________________
Market in India set up by major oil companies in India:
___________________
Table 22.1: Growth of Franchisee-based Petro-retail Market
No. of Dealers/Distributors (as on 1.4.2010)

Name of Oil Company Retail SKO/LDO LPG
OCL 18643 3943 5095
BPCL 8692 1014 2187
HPCL 9127 1638 2404
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Total 36462 6615 9686
Source: Public Sector Undertakings
Franchisees are of different types with varying franchising models

for different products as shown below:
z Individuals
z Partnerships
z Industrial houses
z Co-operatives
z Govt. Bodies
z COCOs
Modus operandi of Franchisee-based Petro Retail business can be
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evolved on these lines:

z The decision on how to franchise was strongly driven by the
product category, investments required and the need for
control of operations.
z Accordingly, Petrol/Diesel network was predominantly company 217

controlled while other products had a more loosely structured Notes
S
dealer controlled network. ___________________
z Lubricants and special products are also franchised to a ___________________
non-exclusive network.
___________________
z However, over a period of time, some of the models have been
___________________
diluted with changing priorities.
___________________
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Historically, franchisees treated as partners by oil companies in
___________________
manners, as given below:
___________________
z Dealer selection was an extremely critical activity with a very
clear idea of what sort of person was the right candidate ___________________
___________________
z The compensation or dealer profitability was very attractive
___________________
z Comprehensive training
z Strict control of all activities at the outlet
z Limited product category
z Competitive pricing
z Close interaction and relationships with network
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Dramatic changes in market dynamics in Petro Retailing in India
are taking place in this direction:
z Evolving consumer needs
z Market becoming highly competitive
z Large formats with state-of-the-art facilities
z Non-fuel offerings like convenience stores, ATMs, fast food
outlets, medical shops, grocery, dhabas, etc.
z Branded fuels
z Quick oil change centres
z Loyalty programs
z Use of technology
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z From just selling fuel to managing all these activities is a

completely new game for the organization and the network
Franchisee mindset, capabilities and requirements:
z Newer business areas require Dealer to acquire new skills
218 z Effort to reward ratio is initially much less than that for fuel
Notes trade
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___________________
z Focus on category management
___________________
z Most franchisees do not want to expose large fraction of
___________________ personal wealth at risk
___________________ z Enhanced customer interaction – multiple touch points
___________________
z An understanding of customer acquisition costs as an
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___________________ investment for the long term rather than cost
___________________ z Maintenance of standards and consistency of operations
___________________ z 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:
z Creating a positive brand image and clear brand positioning
z Creating high brand awareness & recall
z Developing a sustained business model
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z Developing a strong national marketing policy
z Choosing the right location
z Selection of Franchisees – akin to selecting partners in
business
z Understanding from day one that the real customer is the
buyer of the product or service that is sold, it is not the
Franchisee
z Developing systems, structures, suppliers for achieving
consistency
z Developing a flexible & low cost structure
There is a clear need to significantly strengthen partnership with
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mutual obligations between the franchisor and franchisees in

terms of following:
z Written contract
z Partnership requiring delivery by both parties
z Leverage of existing business system/brand equity
z Finite period of operation-potential for renewal
z Sharing of financial gain 219

Notes
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z Specific operational procedures to be adhered to Activity
___________________
Make a written assignment on
z True partnership with mutual obligations and focus on several the concept and features of
aspects in addition to financial returns ___________________
brand management.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
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1. …………………… should create and refine the franchise ___________________
brand before bringing franchisees on board.
___________________
2. True partnership with mutual obligations and focus on
___________________
several aspects in addition to financial returns should
be kept between ………………… and …………………. ___________________
___________________
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.
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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.
(c
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.
220
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________ Figure 22.1: Importance of Brand Personality and Brand Image
David Aaker has identified five different personality factors found

among the brand personality. These are:
z Sincerity (Kodak)
z Excitement (Bacardi)
z Competence (Wipro, Pentium)
)U
z Ruggedness (Levi, Marlboro)
David Aaker suggests three approaches to develop brand
personality: self-expression, relationship and functional benefit.
Self-expression can be defined as the motive behind the
consumption of a particular brand. For example, the products like
Close-up, Titan, and Mercedes-Benz fall in this category.
A Mercedes car is purchased as much for its status conferring
nature (self-expression) as to its utility.
Relationship fits those brands, which depict a reliable, dependable
(competent) personality. For example, Lalitaji of Surf, due to her
personality, sound reliable and trustworthy when she says,
“it makes sense to buy Surf”.
(c
Functional Benefit approach links brand with some functional

aspect. For example, Ariel Supersoaker uses one of the product
attributes to highlight its functionality. Mahacola signals the
‘value for money’ to its consumers through its jumbo sized cola
bottle, which is priced competitively.
Brand Image is the totality of impressions about the brand. David
Aaker says, “Brand image as an association and image both
represent perceptions which may or may not reflect objective 221

reality…. as image of competence may be based upon the Notes
S
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 ___________________
PE
effect.
___________________
Following table highlights the difference. ___________________
Table 22.2: Difference between Brand Personality and Brand Image ___________________
Brand Name Brand Personality Brand Image ___________________
Lifebuoy Price Value for money
___________________
Carbolic Hardworking
Kinetic Honda Gearless Comfort
Ignition start Comfort
Little Hearts Puffed biscuits Novelty
Distinct packing Attractive
Heart shaped Romantic
)U
Brand Equity, as the price at which one brand is preferred over
other, can be referred to as the final outcome of a brand identity
(personality and image). This is the payback of investment into a
brand. Brand equity is what makes the demand curve shift
upwards (Figure 22.2).
(c
Figure 22.2: Brand Equity

222 Therefore, to drive revenue growth, petroleum retailers have to

Notes either attract new consumers or increase their share of the existing
S
Activity
___________________
Make a chart for your display consumer’s wallet. Key to this lies in creating a strong brand adds
board showing the differences perceived value, which can command a price and or volume
___________________
between brand and product.
premium by differentiating from commodity products.
___________________
___________________
Basic Differences between Brand and Product
___________________
PE
The following points explain the key differences between the brand
___________________ and a product:
___________________
z A product is something that is made in a factory
___________________
z A brand is something that is bought by a customer
___________________
z A product can be copied by a competitor
___________________
z A brand is unique
z A product can be quickly outdated
z A successful brand is timeless
Check Your Progress

Fill in the blanks:
)U
1. …………………… is the sum of intangible assets of the
brand. It is what distinguishes one brand from another.
2. ………………… can be defined as the motive behind the
consumption of a particular brand.
3. ………………… is the totality of impressions about the
brand.
Summary
The franchise package normally includes a brand management,
advertising or marketing fee, but franchisees still have a
responsibility to help build the brand.
(c
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.
Lesson End Activity 223

Notes
S
Make a list of key brands introduced by petroleum companies in
___________________
India.
___________________
Keywords ___________________
___________________
Brand Image: Brand image is the totality of impressions about
the brand. ___________________
PE
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.

1. Discuss the concept of franchising management.
)U
2. What is the role of brand in petro retailing?
3. Write a note on brand image.
Further Readings
Books
2010
Publishing
(c

224
Web Readings
Notes
S
___________________
http://www.eia.gov
___________________
http://www.bp.com
___________________
___________________
www.iocl.com/
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 23: Petroleum Industry Future
Unit 23
225
Notes
S
Petroleum Industry Future
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Future of Global Petroleum Industry ___________________
\ Upstream Industry: Future of the North Sea ___________________
\ Downstream Industry – Refining and Marketing
___________________
\ Future Oil Prices
___________________
___________________
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
)U
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.
Future of Global Petroleum Industry

“Oil is dead. Gas is king. Long live the king.” This mandate must
be sent to the offices of all oil exploration companies. The reality is
not far from this. All of the jockeying for position with regard to
the mega mergers has in no small part been driven by desire of oil
industries to find gas or strengthen their gas portfolio: the reason
being that mega economies like China, India and North America
have a massive thirst for gas – both now and more importantly, in
(c
the future. Newer power generation projects will undoubtedly be

gas-fuelled with the two emerging economies of China and India
plus the global thrust for the cleaner burning image of gas is
predicted to increase production to the detriment of both oil and
coal. Also transport will gradually move towards gas and duel fuel
vehicles to what extent is still not known.
226
Upstream Industry: Future of the North Sea
Notes
S
Activity
The future of the North Sea is a two-sided coin. On one side, new
___________________
upstream industry of the North investment has slumped due to the continued hangover from the
Sea.___________________ 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
PE
___________________ 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
)U
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
(c
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
declining and competition is fierce for E&P deals. Foreign 227

basins have become much more attractive with regard to their Notes
S
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 ___________________
PE
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
)U
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:
(c
(a) Libya
(b) Iran
(c) UK
(d) Australia
(e) Algeria
228 (f) Iraq

Notes
S
Activity (g) Indonesia
Make___________________
a presentation on the
downstream industry and the (h) Angola
___________________
refining and marketing under
it. (i) Brazil
___________________
(j) Egypt
___________________
6. Africa: Several West African producers (Angola, Cameroon,
___________________
PE
Chad, Congo, Gabon and Ivory Coast) are expected to reap the
___________________
benefits of substantial exploration activity, especially
___________________ considering the recent rebound in oil prices. Angola is expected
___________________ to become a million barrels per day producer within five years.
Given the excellent exploration results, Angola has the
___________________
potential to produce volumes up to 1.8 million barrels per day
___________________ in the next 10 to 20 years.
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
)U
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.
Check Your Progress

Fill in the blanks:
1. The large oil companies are queuing up for a share of
this long-term …………………….
2. …………………… game is where one side wins and the
other loses.
Downstream Industry – Refining and Marketing

(c
The global capacity for refining crude oil is estimated as 89 million

barrels per day in 2009.
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
Californian water system probably from site contamination or 229

inland lakes with motor vessels experiencing fuel leakage. The Notes
S
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 ___________________
PE
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
)U
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 –
(c
conventional fuel plus fuel cells (electric).

The contenders for the alternative fuel crown are:
z Liquid Petroleum Gas (Propane) LPG
z Liquid Natural Gas (methane) LNG
z Ethanol
230 z Methanol
Notes
S
z Hydrogen
___________________
z Biodiesel
___________________
z 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.
PE
___________________
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:
)U
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:
z The higher initial cost of the vehicle,
z The total drive range limitation, and
z Fuel supplies – lack of a network of retailers.
(c
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.
231
Check Your Progress
Notes
S
Activity
Fill in the blanks:
___________________
Prepare a summarized report
1. …………………… can operate on either an alternative on the future oil prices.
___________________
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 – …………………… ___________________
PE
and ……………………. ___________________
3. …………………… fuelled can burn two fuels ___________________

simultaneously, stored separately and injected into the ___________________
combustion chamber simultaneously.
___________________
___________________
Future Oil Prices
The impacts of world oil prices on energy demand are a
considerable source of uncertainty in the IEO2011 projections.
Prices have been exceptionally volatile over the past several years,
reaching a high of $145 in July 2008 (daily spot price in nominal
dollars) and a low of $30 in December 2008, as the global recession
)U
substantially dampened demand and thus prices. Improving
economic circumstances, especially in the developing economies,
strengthened liquids demand, and prices rose in 2009 and 2010.
More recently, growing demand and unrest in many oil-supplying
nations of the Middle East and North Africa have supported price
increases into 2011. Prices rose from an average $62 per barrel in
2009 to $79 per barrel in 2010, and they are expected to average
about $100 per barrel in 2011. In the IEO2011 Reference case,
world oil prices continue increasing, to $108 per barrel in 2020 and
$125 per barrel in 2035.
In addition to the Reference case prices, IEO2011 includes
analyses of high and low world oil price paths. The three
alternative price paths, which are consistent with those presented
in EIA’s Annual Energy Outlook 2011, are used to develop five
(c
price scenarios that can be used to illustrate the range of

uncertainty associated with prices in world liquids markets (Figure
23.1 and Table 23.1). The high and low oil price paths and
resulting scenarios illustrate price uncertainty, but they do not
span the complete range of possible price paths.
232
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 23.1: World Oil Prices in Three Cases, 1990–2035
(2009 Dollars Per Barrel)
Table 23.1: World Oil Prices in Four Cases, 2009–2035

(2009 Dollars Per Barrel)
)U
Major Areas of Concern

The challenge of developing successful oil and gas activities have
been made considerably more complex by recent political and
economic changes in the developing countries and in the
international oil and gas industry. The global oil sector has felt the
(c
effects of a number of profound issues, which will be affecting the

future growth.
Future Supply vs Demand of Conventional Oil

There is uncertainty in estimates of future supply vs. demand of
conventional oil and the scope for replacing cheap oil with other
alternative energy sources. The oil shocks of 1970s made the entire
world quite conscious of depleting resources. Most oil explored and 233
produced by the world so far and will be produced over the next 20 Notes
S
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).
___________________
PE
Global Reserves of Oil ___________________
As of January 1, 2011, proved world oil reserves, as reported by the ___________________
Oil & Gas Journal, were estimated at 1,471 billion barrels—115 ___________________
billion barrels (about 9 per cent) higher than the estimate for 2010. ___________________
According to the Oil & Gas Journal, 51 per cent of the world’s
___________________
proved oil reserves are located in the Middle East (Figure 23.2).
Just under 79 per cent of the world’s proved reserves are
concentrated in eight countries, of which only Canada (with oil
sands included) and Russia are not OPEC members.
)U
Source: Oil & Gas Journal
Figure 23.2: World Proved Oil Reserves by Geographic Region as of

January 1, 2011 (Billion Barrels)
(c
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
234 shortages could be delayed for a few years and this will depend
Notes upon the behaviour of Middle East producers. However, according
S
___________________ 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
PE
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.
___________________
Issue of Non-conventional Oil
___________________
Oil supply from outside Middle East OPEC countries is expected to
decline. Oil supply from Middle East producers in projected to peak
at around 2013. Since the total conventional oil supply will not be
able to fully match demand, additional supplies of liquid fuels are
expected to become available from non-conventional sources. The
share of OECD is expected to increase to about 54% in the overall
)U
supply.
Non-conventional oil is expected to contribute to just over 8% to
total oil supplies by 2030. This represents production of 9.9 million
barrels per day – a sharp increase over the 1.1 million barrels per
day availability of 2000. The increase results mainly from
technological improvements that reduce the cost of extracting and
upgrading non-conventional resources. Gas-to-Liquid (GTL) plants
will make growing contribution to non-conventional oil supplies.
GTL production is projected to rise from 43 K barrels per day to
300 K barrels per day by 2030. The greater part of future non-
conventional oil will come from Canadian Oil sands and
Venezuelan extra heavy bituminous crude. It is estimated that
these two regions contains 580 billion barrels of recoverable
reserves – more than the entire reserves of conventional crude oil
(c
in the Middle East.

235
Check Your Progress
Notes
S
Fill in the blanks:
___________________
1. There is uncertainty in estimates of future supply vs. ___________________
demand of conventional oil and the scope for replacing
___________________
cheap oil with other alternative …………………….
___________________
2. Most oil explored and produced by the world so far and
will be produced over the next 20 years is termed ___________________
PE
…………………… oil, which flows at high rates from ___________________
giant oilfields.
___________________
___________________
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.
)U
Lesson End Activity
Make an informative presentation with examples and anticipations
on the future of the petroleum industry.
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.
(c

1. What are the key emerging trends in global upstream oil
industry?
2. Discuss the future of downstream industry.
3. Identify the major areas of concern of petroleum industry.
236 4. Highlight the future of global petroleum industry.

Notes
S
5. Write a brief note on the future oil prices.
___________________
___________________
Further Readings
___________________
___________________
Books
PE
___________________
___________________
2010
___________________
___________________
Publishing
___________________
Web Readings
)U
http://www.eia.gov
http://www.bp.com
www.iocl.com/
(c
UNIT 24: Emerging Issues in Indian Oil Industry
Unit 24
237
Notes
S
Activity
Emerging Issues in Indian Oil

___________________
Write an article on import
parity price.
___________________
Industry ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Import Parity Price
\ Managing Unannounced Surplus ___________________
\ Petro Retailing in General Outlets – FMCG Stores and Super Markets ___________________
___________________
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
)U
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.
Import Parity Price

Fixing a price of oil is a trader’s paradise. As the first owner of oil
(the crude) when it is extracted from the ground and is made
available as a ‘goods’ in economic sense, it gives a value to it. Those
are either the national-oil companies of oil producing countries or
the oil majors having equity in the oil fields. Before a barrel of oil
sees the light on the ground, a price tag is fixed on to it. That is
certainly not the ‘cost of production price’. It is a ‘market’ price at
(c
which the oil finds a buyer at that point of time. It is never ‘the
fundamentals of market’ which dictates the level of price, there are
whole lot of ‘technical’, ‘sentimental’ and ‘strategic’ factors attached
to it. However, today for a player in the international oil market,
there is a price assessment system available, which has evolved
and matured over the last 30 years and is still being evolved.
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
S
Activity
___________________
Make a report on managing commonly known problem associated with oil pricing is its
unannounced surplus. ‘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.
PE
___________________ 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
)U
pricing mechanisms, which diverge from full pass through and
provide a degree of price smoothing.
Check Your Progress

Fill in the blanks:
1. As the first owner of oil (the crude) when it is extracted
from the ground and is made available as a ……………
in economic sense, it gives a value to it.
2. It is a ……………… price at which the oil finds a buyer
at that point of time.
Managing Unannounced Surplus

(c
For the last 30 years, Indian oil industry was living with a net
deficit from the supply side. Potential demand was considered to be
‘given’ and was always attempted to meet. In 1999–2000, India’s
refining capacity increased from 69 million tonnes to 112 million
tonnes and is proposed to be enhanced further. On the
consumption side, the year 2001–02 was a depressed year.
Therefore, a glut like situation in the domestic market is being 239

managed by Indian oil companies. Surplus product is being Notes
S
exported. The operating level of refineries in Singapore and Middle ___________________
East is being adjusted with the surplus thrown up by Indian
___________________
refineries. Indian refineries have built-in disadvantages with
respect to cost of crude procurement. Therefore, it is hard for them ___________________
to get a comparable margin while fighting for price of their product ___________________
in international market. Despite infrastructural bottlenecks,
___________________
PE
Indian oil companies have started testing the export waters and
___________________
yet managing a respectable dollar per barrel ratio for their
refineries. In days to come, Indian oil companies and the ___________________
government will have to use their cards on technology and tariff to ___________________
play the game in international market with a hide-and-seek
___________________
product surplus situation in the domestic market.
___________________
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.
)U
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
(c
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
240 system of the global economy, but also in the economic structure
Notes for the production of goods and services.
S
___________________
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
PE
___________________ 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.
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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
(c
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.
Self-reliance in oil sector also would mean developing technical 241

capability within the country, and availability of capital and Notes
S
Activity
foreign exchange required for investment. ___________________
Prepare an assignment on
petro retailing in general
outlets.
___________________
Fill in the blanks:
___________________
1. …………………… is a veritable tool for sustainable
developments world over. ___________________
PE
___________________
2. ……………… and ……………… by Indian companies
together would go a long way in securing India’s ___________________
interest in foreign soil. ___________________
3. …………………… in the oil sector does not necessarily ___________________
mean only having right on crude oil.
___________________
Petro Retailing in General Outlets – FMCG Stores

and Super Markets
Under this concept, your main product is the anchor while some
other products one retailed as add on. Typical example is a
Multiplex Mall where the main product is entertainment at
)U
multiplex, but a shopping mall or food plaza adds to the customer’s
convenience. Most of the car dealers sell customized car accessories
as linked retailing.
The origin of this form of retailing can be traced to the cinema
halls or colleges of earlier days where a canteen was set as for sale
of foodstuff to customers who actually came for a movie or studies
respectively.
Petroleum retailing companies have been successfully trying it for
a long time. The major categories under this “allied retailing” are
convenience stores (urban or rural), food services, and ancillary
services. There is always a positive rub off from one products
category to another. For example, a petrol pump may have an ATM
as an ancillary service. A customer who actually comes to the site
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for a transaction at the ATM may buy fuel to avoid another trip to
petrol pump. A truck driver may prefer to stop at a specified pump
just because it has a dhaba for his choice!
242
Food Service Outlets
Notes
S
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
___________________
PE
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
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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
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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
service at petroleum stations itself is new, an alliance or joint 243

venture is likely to be the most suitable operating model. Notes
S
___________________
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 ___________________
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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.
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Figure 24.1: ATM Users Buying Profile
Another survey has clearly shown retention of sales at ROs with

allied facilities in an otherwise declining market. A survey of
dealers conducted in Delhi had 87% dealers saying, “A shop adds to
the overall ambience of our RO making the customer believe that
our RO is better than others. That’s how it increases our sales.” In
(c
response to a question that how much of fuel sales will be lost if

the non-fuel retail shop were to be closed, they clearly indicated an
expected loss of 15%–25% in MS sales and about 5%–10% in HSD
sales.
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
S
___________________ 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
___________________
___________________ outlet will offer the following bouquet of standardized services to
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___________________ 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.
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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.
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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.
Bills Payments: HPCL has tied up with Skypak Financial 245

Services, which is providing “Drop boxes” at all “Club HP” outlets. Notes
S
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
___________________
PE
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
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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.
Check Your Progress

Fill in the blanks:
1. The major categories under allied retailing are
…………………, ………………… and ………………….
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2. …………………… 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.
246
Summary
Notes
S
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,
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___________________ 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.
Lesson End Activity

Identify the growth trends in alternates for oil in India.
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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
(c
and accessories, all under one roof.

1. What are the emerging trends in Indian oil sector?
2. Discuss the concept of petro retailing in general outlets.
3. Explain the concept of import parity price. 247

Notes
S
4. Describe the process of managing unannounced surplus.
___________________
___________________
Books
___________________
___________________
PE
___________________
___________________
2010
___________________
Publishing ___________________
___________________
Web Readings
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http://www.eia.gov
http://www.bp.com
www.iocl.com/
(c
248
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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Unit 25
249
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study 1: British Petroleum
___________________
XML – enabled Order Exchange between BP Energy Company &
Barber Engineering & Controls Ltd. The first one describes about ___________________
the B2B transaction taking place between companies.
___________________
About BP at a Glance
___________________
z British Petroleum is recognized as a leader in the use of
e-procurement.
z Infrastructure built and experience gained to enable
innovations.
z The main objective is to get hold of top 35–40 suppliers
enabled for e-procurement in 2003.
z Its vision is to seamless, fully integrated automated process.
)U
Why Buyers are Pursuing E-Commerce?
z To leverage the internet as a business tool.
z To reduce cycle time.
z To have a complete automated business processes.
z To have a global reach and visibility across the value chain.
z To improve compliance.
z To gain statistical benchmarking for standard products.
E-commerce Hurdles for Oil and Gas Suppliers and Service
Providers are:
z Multiple sales channels with unique e-procurement systems.
z General lack of IT and internet expertise.
z Cost of systems and implementation.
z Transaction fees.
(c
z Risk being reduces to a ‘commodity’ (downward pressure on

pricing).
z Complex product and services – not readily categorized in
catalogue.
z All efficiency gains are for the buyer.
This case study shows web-based forms used both the buyer and
the supplier for e-transactions. Either partner has the option to
Contd...
250 integrate this information exchange directly to their internal

Notes back-office systems. This would not affect their trading partner,
S
because the XML transaction hub that connects them maintains
___________________ the format that they use.
___________________ Questions:
___________________
1. Write the case facts.
2. What do you infer from the case?
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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Case Study 2: Indian Oil Corporation Limited 251

Notes
S
India’s Largest Oil Company Reduces Total Cost of
Ownership by 30 Percent ___________________
Indian Oil Corporation Ltd. (IOCL), an energy major operating as ___________________
the largest company in India in terms of turnover, saw an
opportunity to capture a place for itself in the polymer market. To ___________________
achieve this, IOCL worked with Microsoft in association with its
partner Mahindra Satyam to deploy a fully functional Customer ___________________
Acquisition, Retention and Enrichment (CARE) platform. The ___________________
PE
CARE solution consists of an integrated stack of Microsoft
business applications including Microsoft SharePoint Server ___________________
2007, Microsoft Commerce Server 2009, Microsoft Dynamics CRM
4.0, Microsoft Dynamics AX 4.0, Microsoft BizTalk Server 2009, ___________________
and Microsoft SQL Server 2008. Executives across the company
___________________
now view the same tactical and operational information, which
enables them to gain business insight to drive improved decision- ___________________
making. Additionally, the solution reduces cycle time by
approximately 3 days and the total cost of ownership by ___________________
30 percent. IOCL believes that the new solution will result in
better customer service and ultimately higher revenues.
Situation
Indian Oil Corporation Ltd. (IOCL) is India’s flagship national oil
company with business interests straddling the entire
hydrocarbon value chain – from refining, pipeline transportation
and marketing of petroleum products to exploration and
)U
production of crude oil and gas, marketing of natural gas and
petrochemicals. It is the leading Indian corporate in the Fortune
‘Global 500’ listing, ranked at the 125th position in the year 2010.
With over 34,000-strong workforce, Indian Oil has been helping to
meet India’s energy demands for over half a century.
To achieve the next level of growth, Indian Oil is currently forging
ahead on a well laid-out road map through vertical integration—
upstream into oil exploration & production (E&P) and
downstream into petrochemicals – and diversification into natural
gas marketing and alternative energy, besides globalization of its
downstream operations. As part of its downstream diversification
and de-risking initiatives, Indian Oil is foraying into the highly
competitive polymer business with a U.S. $ 3 billion investment –
to address the Indian and overseas markets.
Polymer is a commodity business with the market characterized
by large scale, fluctuating prices of products that are indexed to
global prices on a weekly basis. The key factors for building
market traction and success are big scale of business, careful
(c
segmentation and targeting of customers, aggressive marketing

coupled with savvy price management – all backed by excellence
in customer service.
India is projected to become the third largest consumer of
polymers in the world by 2011 and the polymer consumption in
the country is predicted to witness double-digit growth for the
next 5 years. The polymer categories such as polyethylene and
Contd...
252 polypropylene will account for almost 75 percent of the polymer

Notes consumption in the country. IOCL polymer plant in Panipat
S
produces these grades of polymers.
___________________
The petrochemical vertical in the country has few players and the
___________________ polymer market presents a great growth potential. This business
is estimated to grow to a volume of INR 12,000 crore in future and
___________________ requires a paradigm shift in the way customers are approached.
The business model for this new business will be unique and
___________________
business partners will play a very important role in this new
___________________ business model. It will follow a customer centric approach and
PE
will require business partners and customers to be approached in
___________________ a new way completely different from what IOCL has done so far
for the conventional petroleum business.
___________________
Keeping in mind these challenges, the goal is to be perceived as a
___________________ company that is fair in trade practices and is easy and convenient
to do business with. This will be a crucial differentiator; to build
___________________ the edge in a mature market dominated by large, entrenched
players.
___________________
The vision was to leverage the enterprise-wide SAP ERP system
for the polymer business at the back end and build an Extended
ERP solution for customers, channel partners and the customer’s
field force.
Solution
The first step for IOCL was to create a centralized administrative
structure to address its core IT infrastructure issues. IOCL
decided to address these problems by standardizing on the
)U
Microsoft Server Product Portfolio. To construct a solution, it
chose to deploy the Active Directory technology and Microsoft
Exchange System for its centralized mail and messaging.
The company worked closely with consultants from Microsoft
Consulting Services to determine how best to implement a new
infrastructure based on Microsoft Server System integrated
server software, and to create an architecture that served its
needs.
IOCL achieved a unified, integrated enterprise network by
installing Active Directory services and Exchange systems. The
new architecture is not only more stable but also easier for IT
staff to administer. It provides better security and access to
needed resources, and makes users more efficient and productive.
With this solution, IOCL is improving the reliability and security
of its global desktop environment. In this process IOCL also
moved to a single unified mailing system and migrated there 8000
users from IBM Lotus Notes to Exchange 2010.
(c
Moving ahead, for IOCL to capture the potential of the polymer

market, it was absolutely necessary to implement a fully
functional Customer Acquisition, Retention and Enrichment
(CARE) platform. Microsoft Corporation in association with its
partner Mahindra Satyam collaborated with IOCL’s
petrochemical division to deploy this CARE solution.
The CARE solution consists of an integrated stack of Microsoft
business applications including Microsoft SharePoint Server
Contd...
2007, Microsoft Commerce Server 2009, Microsoft Dynamics CRM 253

4.0, Microsoft Dynamics Axapta 4.0, Microsoft BizTalk Server Notes
S
2009, and Microsoft SQL Server 2008.
As polymer marketing was a new venture, IOCL wanted to ___________________
leverage the existing SAP ERP infrastructure, by extending it ___________________
beyond the enterprise, to acquire-retain-enrich customers for this
business. The envisaged CARE platform was thus implemented to ___________________
provide these capabilities and also to integrate with the current
SAP ERP system. ___________________
The following functionalities are part of the CARE project: ___________________
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z Customer Acquisition
___________________
z Order to Cash Cycle
___________________
z Channel Management
z Field Force Management ___________________
z Complaint Management ___________________

z Knowledge Management ___________________
z Business Intelligence
z Planning and Demand Forecasting
z Exports
z Credit Management
z Product Extension
z Product/Touch Point Search
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z Payments
z SAP Configurations
z CARE-SAP Integration
IOCL turned around the existing business processes mapped in
SAP ERP to face the customer. Customers and partners can now
create, change and display business transactions as self-service.
The CARE solution brings together all the stakeholders in the
business.
IOCL’s sales force has a single dashboard view of all their
distributor’s interactions and information including orders, credit,
and inventory. It now has the tools to better service their
customers and ensure higher satisfaction levels.
Distributors for petrochemical products now have a streamlined
and standardized process interface to do business with IOCL.
This also brings in a high degree of compliance and transparency
in the operations. And with tight integration with SAP ERP,
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reconciliation and payments are faster and accurate.

Customers now are able to view product information, order
products, track shipments, manage payments, view order history,
and interact with IOCL’s customer care and sales force.
Operations management challenges like managing inventories
with distributors, warehouse shipments and order management
are completely eased as a result of implementing the CARE
solution.
Contd...
254
Officers and Regional Managers, hence it is easy to monitor and
Notes manage the sales process efficiently. The portal also allows
S
customers and partners to view their credit and debit balances
___________________
online, making financial management simple and transparent.
___________________ 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/
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4000009980
___________________
___________________
___________________
___________________
___________________
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Glossary
Glossary
255
Notes
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___________________
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. ___________________
Ancillary Services: Services that include ATMs, laundry facilities and ___________________
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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 and tyre services, car upholstery cleaning, minor repair ___________________
services, etc.
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.
Bazaar: These Stores go a long way in meeting customers’ convenience

needs on the road.
BIS: Bureau of Indian Standards, the National Standards Body of India.

)U
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.
Brent: It is generally accepted to be the world benchmark.
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.
Coast Refiner: It would typically deliver its surplus gasoline to other

marketers in the immediate area in trade for similar volumes received
(c
from other refiners on the east coast, west coast, and elsewhere.
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.
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.
256 Customer Relationship Management (CRM): It is a widely

Notes implemented strategy for managing a company’s interactions with
S
customers, clients and sales prospects.
___________________
Customer Service: It is the commitment to providing value added
___________________
services to external and internal customers, including attitude
___________________ knowledge, technical support and quality of service in a timely manner.
___________________ Development Drilling: It is the phase in which oil, which has been
___________________ explored, can be commercially extracted.
PE
___________________ 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.
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.
)U
Filter Paper: Filter paper is a semi-permeable paper barrier placed
perpendicular to a liquid or air flow.
Focus 500: It is an on-going program, several retail outlets have been

modernised during the year.
Food Service Outlets: This is an emerging sector in the non-petroleum

range of products from sandwiches to full branded fast food operations.
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.
Fuel Adulteration: The act of debasing a pure or genuine fuel for

pecuniary profit, by adding to it and inferior or spurious article.
Hindustan Petroleum Corporation Ltd (HPCL): It is an Indian state-

owned oil and natural gas company based at Mumbai, Maharashtra.
(c
HPCL NIIT Jyoti Program: Several dealermen were covered on

computer education all the way through this program of HPCL.
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.
Indian Oil Corporation Ltd. (IOC): It is an Indian state-owned oil and

gas corporation with its headquarters in New Delhi, India.
Glossary
Integrated MNCs: They are very powerful operators in the crude oil 257
market by virtue of their scale at operation, volume of transaction and Notes
S
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.
___________________
PE
Liquified Natural Gas: Liquified natural gas is an approach where the
___________________
gas is converted in place to a more easily transported liquid.
___________________
Logistics: Logistics means the management of business operations, such
as the acquisition, storage, transportation and delivery of goods along the ___________________
supply chain. ___________________
Lubricant Top-ups: Attendants at Bharat Petroleum petrol stations ___________________
gladly carry out lubricant top-ups as per customer requirements.
Lubricants: A lubricant is a substance introduced to reduce friction

between moving surfaces. It may also have the function of transporting
foreign particles.
Manufacturing: The procedure of designing and building the

appropriate technical configuration is vital.
)U
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).
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.
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
(c
specific are called non-tradable crude.
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.
Oil Supply & Trading: These activities deal with the procurement of
raw material and bulk sales of products in commodity markets.
258 Organisation of Petroleum Exporting Countries (OPEC): It was

Notes formed in 1960 to give the producing countries a unified voice in dealing
S
with the western oil company’s crude pricing.
___________________
Paper Markets: These are basically markets where right to crude oil is
___________________
traded. It is a mixture of crude oil market and financial market.
___________________
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
PE
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.
Pipeline Transportation: Pipeline transport sends goods through a

pipe, most commonly liquid and gases are sent, and also solid capsules
are sent using compressed air.
)U
Pricing Period: It is a specific period for Benchmark crude price.
Product: The end result of the manufacturing process, to be offered to

the marketplace to satisfy a need or want.
Project Akarshan: A new visual identity program rolled out by HPCL.
P-series Fuel: P-series fuel is a vegetable oil, animal plant waste sourced
fuel, used as an alternative to gasoline.
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

(c
requirements.
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.
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
Retail Outlets: A store that sells smaller quantities of products or 259

services to the general public. Notes
S
Retailing: Retailing is defined as a business that sells products and/or ___________________
services to consumers for their personal or family use.
___________________
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. ___________________
Single Basing-point Price System: Under this system the price is ___________________
PE
quoted only for the point of delivery.
___________________
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. ___________________
Statute: A formal written enactment of a legislative authority that ___________________
governs a state or city.
Supply Chain: The network of retailers, distributors, transporters,

storage facilities and suppliers that participate in the sale, delivery and
production of a particular product.
Surveillance: Surveillance is another data collection method with

different strengths and weaknesses from surveys.
)U
Term Contract Sales: It justifies some discounting for outlet security,
and therefore falls between wholesale and spot sales.
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.
Video Surveillance: Video surveillance systems monitor activity in

(c
public areas, businesses or commercial buildings for real-time or later

review.
260
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c

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Petro Retailing Business

Dr S R Das Dr Sanjay Mittal Prof V K Nangia

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MDSO-831D

Course Name: Petro Retailing Business

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 Introduction to Petro Industry....................................................................................... 3

Unit 6 New Exploration Licensing Policy ............................................................................... 59

Unit 11 Supply Chain and Transportation ............................................................................. 113

Unit 16 Petroleum Pricing ....................................................................................................... 161

Unit 22 Franchising and Brand Management........................................................................ 215

Unit 23 Petroleum Industry Future........................................................................................ 225

Unit 24 Emerging Issues in Indian Oil Industry ................................................................... 237

Unit 25 Case Studies................................................................................................................ 249

UNIT 5: CASE STUDIES

Oil Company. But the exploration and production activities

4 and collaboration from a number of foreign experts. Technical

Petroleum Industry Structure

hand, the downstream oil companies include Indian Oil

a subsidiary of BPCL – Chennai Petroleum Corporation Ltd., 5

subsidiary of ONGC. ___________________

was approved by the Government in 1997 and operationalised ___________________

Category IV: Basins are those in which analogy with similar

___________________ Exploration and Production Activities in Petro Industry

quickly, ONGC adopted the concept of “phased development”.

discoveries. They had started exploration in Arunachal Pradesh 7

of indigenous resources became the key demand of strategy. Both ___________________

The upstream oil and gas sector is characterised by high

8 In the context of domestic upstream sector, some other typical

z Consolidate the initiatives taken and seek greater private

z Increase the number of players in exploration and production 9

exploration and production sectors. The Government of India has ___________________

happening in the downstream public sector companies. The Indian ___________________

10 drilling, well logging, stimulation cementing and many other

___________________ New Exploration Licencing Policy (NELP)

Significant Success under NELP

awarded in previous eight rounds is given in Table 1.1.

Table 1.1: Eight Rounds of Awarded NELP Blocks 11

years by setting up of new refineries in the country as well as by

12 products substantially. The total refining capacity in the country

___________________ Table 1.2: Total Capacity and Location of Refineries in India

* Million Metric Tonnes per Annum ___________________

Some of the key areas to enhance efficiency as well as value ___________________

addition would be: ___________________

z Optimisation of crude processing, ___________________

z Process control devises,

infrastructure, which can meet the needs of consumers across the

14 system for petroleum products in India has passed through three

Liberalisation in the Marketing Sector

billion in oil exploration and production, refining, pipelines or

appointed. It was expected that post dismantling of APM, the 15

surge in fuel prices to customers. Thus, theoretically though the ___________________

Check Your Progress

companies can be grouped into Exploration and production,

Lesson End Activity

Grace; ‘Oil: An Overview of the Petroleum Industry’; Gulf

to perk up revenues and their bottom lines; by adopting a customer

20 themselves, particularly during times when oil prices are high.

z Wholesale customers, composed by petrochemical facilities,

Customers’ Categorization and Recognition 21

Table 2.1: Characteristics and Spending Patterns of ___________________