Jan 22 - 28, 2007

The Pakistan government's decision to introduce parity prices for alternative fuels on the advice of the World Bank is bound to lead to substantial price increases and consequent negative socio-political ramifications.

In pursuance of parity prices policy, the linking of the prices of locally produced Liquefied Petroleum Gas (LPG) to the Saudi Aramco Contract Price (CP) will lead to increase LPG prices at producer level by 39 per cent and retail prices by 58 per cent in next two months and hit the poor consumers in the country very hard.

"The policy of parity prices for alternative fuels is detrimental to the population as well as hostile towards Pakistan," said Iqbal Z Ahmed, Chairman LPG Association of Pakistan.

The LPG was a deregulated industry and the market forces including gas producers, distributors and consumers were determining the price factor, which is the soul of the concept of free economy. On the other hand, the deregulation policy in the LPG sector announced in 2000 was also attracting a huge investment. Some 40 new LPG marketing companies had come forward injecting $350 million in this business resultantly become instrumental in invigorating the economy on one hand and generated huge employment opportunities on the other hand.

"So instead of deciding LPG prices, the government should focus on bringing this sector into a regulatory ambit to ensure elimination of sub-standard practices and offering level playing field to all stakeholders," he said.

Saying that some 1,600 metric tons LPG is being locally produced on daily basis, Mr. Ahmed believed that Pakistan had a potential to produce additional 1,000 metric tons LPG per day and consequently earn a huge income. He stressed that the government should also focus on enhancing indigenous production of LPG as consumer base in this sector was increasing at a fast pace of 15 per cent per annum.

He expressed concern that the Pakistan government had so far remained unable to notify safety rules in the LPG sector despite the fact that the federal cabinet had approved it on September 15, 2005. He said it was high time that the government should encourage the setting up of LPG fuel stations and eliminate highly unsafe decanting practices in the country. "If unsafe decanting practices are eliminated, then the LPG is more safe, efficient and clean burning poor man's fuel," he added.

Answering a question about problems in the LPG sector, Mr. Ahmed, who is also Chairman of the Jamshoro Joint Venture Limited (JJVL), Lub Gas (Pvt) Limited and Mehran LPG (Pvt) Limited, said the government should rationalize its latest policy by returning to the year 2000 deregulation policy. He said the LPG industry had opportunities and potential to attract US$500 million to US$1 billion market per annum.

Referring to the growing difference between regulators and regulated, he called to curb this trend through in-depth discussions and seminars among LPG industry regulators, producers and marketing companies.

Answering a question about Prime Minister Shaukat Aziz's recent decision with regard to the introduction of LPG pricing parameters in revision of its previously notified policies, Mr. Ahmed said the LPG Association of Pakistan had strongly objected to the decision and wrote a letter to the Chairman of the Oil and Gas Regulatory Authority (OGRA), besides sending its copies to the President and Prime Minister.

He said the LPG Association of Pakistan was aggressively approaching the government that the principle of linking local production to Saudi Aramco Contract Price would lead to serious negative impact on the LPG industry as a whole, besides creating socio-political ill will. He said it would also hamper local consumption, discourage investment by crowding out new marketing companies, encourage deforestation, encourage greater use of CNG thereby putting an additional strain on already tight natural gas supplies, and putting planned investments on hold.

Under the LPG Producer Pricing Policy 2006, he said, the producer as well as consumer level prices would increase sharply and burden the common man. Giving statistics, he said, the total ex-plant producer level LPG price Rs28,848 in December 2006 would increase to Rs34,471 in January and Rs40,083 in February 2007 - representing an increase of 39 per cent.

Similarly, he said, the policy would badly impact on consumer prices as the difference between the average prevalent price of Rs450 per 11.8kg LPG cylinder in December 2006 would rise to Rs711 in February 2007, representing an increase of 58 per cent.

Mr. Ahmed said the government was also considering a proposal to allow marketing companies to sell a mix of imported and local products in 20:80 ratio. He said this move would raise LPG prices even higher.

Stating that significant investment had been made in LPG marketing infrastructure since the deregulation of the sector in 2000, he said, the OGRA factor in the cost of primary transportation from production source to bottling plants at an average rate of US$50 per metric ton as well as minimum margin of US$150 per metric ton for marketing companies to cover costs of operations, depreciation, financing, tax liabilities, marketing and selling expenses, utility bills and company margin would ensure economic viability of marketing companies.

"It will be difficult for marketing companies to operate on margins below the above mentioned levels and any pressure from the government or any regulation thereof will be unsustainable and lead to malpractices," he suggested.