Doing business in India is difficult, but not impossible, Vikram S Mehta, Former Chairman, Shell India

Retail plans have not been successful because of the pricing policy of the government, which has not allowed private companies to market petrol or diesel profitably. All private companies have put a stop to their expansion plans.  Shell has around 70 outlets currently operational.  It remains  in the retail business is because it believes the government will sooner rather than later level the playing field.  This has happened now in petrol. The price of petrol has been deregulated.  There is still a constraint in diesel. The gap between the trade parity price of diesel and the current public sector price is about `12 a litre on an average. However, Shell is bullish about its future retail plans because of various reasons. One, its retail network is located in cities where the ratio of petrol sales to diesel sales was higher than in other places.  As petrol is deregulated, the profitability of retail outlets is therefore relatively robust. Second, it believes the government will slowly but surely align the domestic market price to international prices. Three, it has a very strong customer value proposition because of the quality and service of our products.  And four, it has a strong brand.

The location, service, quality and brand and customers response is the key issue, not the number of outlets.  For example, in 2009-10, Shell had only 13 outlets in Bangalore; yet it had 18% of the market share because all these were very well located and were very popular with the customers.

Lubes is the only business in the petroleum products area in India, which is totally deregulated. There is no constraint on any company. We are the largest lube marketing company in the world. Our strategy is to grow profitably. We have a very strong brand and portfolio of products. We can meet the needs of all segments of customers, be it retail or industrial. We have strong technical base. So all these factors, along with a strong sales and distribution network, is the basis on which our objective is to double our volumes within next three years.  There is a synergy between lubes business and retail. As we grow our retail network, the lubricant sales will also increase. We have already acquired land on the east coast in Andhra Pradesh and are looking at developing a lubes plant. 

We have a small presence in the bitumen market right now. The presence is focused on specialized bitumen, called polymer modified bitumen. We have plants in Bengal and Gujarat. Specialized bitumen accounts for a very small proportion of the total bitumen market in India. The largest share is accounted for by the commodity grade bitumen. We don’t have the access to the raw material i.e. commodity grade bitumen as we don’t have a refinery in India. That is why we are constrained in our growth plans. Our plans to grow in bitumen business will depend on how quickly and successfully we are able to access the commodity grade bitumen.

My personal hope is that we will establish a position in the E&P business in the coming years. It depends on my successor and the management of Shell. I am somewhat disappointed that we do not have a presence in E&P. There is no specific reason for that. India has oil and gas resources, but a global company like Shell has to choose between many options and opportunities. A choice has to be made on basis of geological and technological reasons as well as good prospects. So one has to allocate your scarce and finite resources in all these various opportunities. The reason why we have not invested in India so far is because we have had other bigger, better prospects elsewhere.

India is surplus in refining capacity right now. So, logically there is no need to put up any refining capacity in India. On the other hand, one could argue that maybe we need to take a stake in refinery in order to provide all our downstream marketing businesses competitive access to molecules.

Biggest challenge for anyone starting a business in India is to first overcome the entry hurdles without breaching business or personal principles.  The biggest source of satisfaction is we have built up a large business without compromising our principles.

The businesses Shell is involved with have had a positive impact on India’s energy situation. We were among the first to actually introduce LNG into this country. We are the first energy multinational to do primary research in India. We have helped the government formulate an integrated energy plan.  All of this makes me very satisfied.

I am bullish about the LNG prospects in India for various reasons. One, there is a shortfall of domestic gas. So there is need for importing gas. Second, gas is cheaper than oil.  Today, for example, you can import LNG at around $12 per MMBTU, while the equivalent price of imported diesel would be around $19 a MMBTU. Third, gas is cleaner than oil. A shift from oil to gas has environmental benefits.  Fourth, the supply side is robust. There have been huge discoveries offshore.  East Africa and the countries on the Indian subcontinent also have resources. 

Shell will increase the capacity of its LNG terminal at Hazira from 3.6 to 5 MMTPA by end of this year or the first quarter of next year.  The plan for further doubling the terminal’s capacity 10 MMTPA is also under review.

Shell is also contemplating a Floating Storage Regasification Unit (FSRU) in Kakinada. Once approvals are secured, the project could be completed within 16 to 18 months. When we put up the terminal at Hazira, there was resistance from the consumers to pay the market price. It took time and logic to persuade customers to shift to LNG. The same effort will have to be expanded on customers for the East Coast gas.

Doing business in India is difficult, but not impossible. You have an example of Shell. We have created it from scratch. Today 3000 people work for Shell and it has over `12,000 crore of business in India.

We should not constantly criticize the Indian regulatory environment, or red tapism. It is difficult, but if you have the patience, and if you work with the interest of the company and the public interest also, the decision makers are receptive.

I started my career with Shell in London. I was in head office as an executive with shareholder responsibility for Shell’s investments in the Middle East and South Asia.  I was on board of several Shell companies in the region. I spent about two years in this job. I then went to Egypt as the MD of the Shell Marketing Company and the Shell Chemical Company, and then back to London for a year and eventually started the operations in India. I was the first employee of Shell in India. I have been chairman of Shell in India for 17 years. Shell India is today the most diversified and amongst the largest of the energy multinationals in India. It is involved with four different kinds of activities. One, marketing. It is the only multinational with a license to sell main fuels (petrol /diesel). It also markets lubricants, ATF and bitumen.  Second, is gas. It has built one of the two LNG regasification terminals in India in Hazira, with a capacity of around 3 MMTPA, which will be increased to 5 MMTPA in a few months. Third, technology.  Shell has created a technology centre in Bangalore. This Centre currently has around 700 technocrats, who are providing technical support to Shell group around the world across the full range of petroleum activities, from E&P to refining, to petrochemicals and marketing. This group is also doing primary research in its own laboratory.

Finally financial services.  Shell has around 1700 chartered accountants and cost accountants located in Chennai and these people provide support to the finance function across the world. These four legs were created over the last 15 years.  It makes Shell the most diversified of the energy multinationals in India.

I have worked for Shell for 24 years. So I am looking forward to something different. My plans are to work in the non-corporate world. I will take a few non-executive board positions that will represent my continuing involvement with the corporate world. But over and above that, I will spend time working with a not-for-profit organization and I also hope to get more involved with the academic and think tank world.