City gas distribution rights to help oil marketing firms diversify: Fitch

New Delhi: The recent award of city gas distribution rights to oil marketing companies such as Indian Oil Corp (IOC) and Bharat Petroleum Corp Ltd (BPCL) will help them diversify and maintain their market shares in the domestic cooking and auto fuel markets over the long term, according to Fitch Ratings.

IOC and Hindustan Petroleum Corp Ltd (HPCL) won city gas distribution rights in nine geographical areas each last month, and BPCL got rights to two areas. BPCL won the rights to 11 geographical areas in a previous auction in September 2018 as well.

Fitch said it expects the state-owned oil marketing companies' increased presence in city gas distribution to help them diversify from their oil refining and marketing business and reinforce their existing strong positions in the auto fuel market, with piped natural gas (PNG) usage gradually competing with auto fuels and replacing liquefied petroleum gas in the domestic cooking fuel market.

"The investment by the winners of each geographical area will depend on its physical size, as well as the number of natural gas stations for automobiles that must be built and length of PNG steel pipeline that must be laid under the terms of the distribution rights.

"In any case, we expect the investments in city gas distribution to remain relatively small over the medium term relative to the overall investment plans of the state-owned oil marketing companies," it said.

Other companies that won bids in the auction of rights for 50 geographical areas included state-owned gas processing and distribution company GAIL India Ltd, Maharashtra Natural Gas Ltd and Rajasthan State Gas Ltd, and private companies Adani Gas Ltd and Torrent Gas Pvt Ltd.

"In our view, the state-owned oil marketers will have more expertise than GAIL in operating the retail-oriented business model required under the city gas distribution rights, but GAIL would benefit more from the rising transmission volumes.

"The expansion in gas distribution networks is likely to increase gas consumption over the medium-to-long term, although industrial demand is likely to remain highly sensitive to prices," Fitch said.

Natural gas consumption increased by about 3 per cent in the April 2018-January 2019 period and 4.5 per cent in the financial year ended March 2018.