LARGE STORAGE CAPACITY NEEDED TO ENSURE SUSTAINABLE LPG SUPPLY

Interview: Abbas Bilgrami
Managing Director Progas Pakistan Ltd

SADAF AURANGZAIB
Jan 22 - 28, 2007

PAGE: Please tell us a little about Progas and its standing in Pakistan's LPG sector.

AB: Progas is a joint venture between Malaysian, Middle Eastern and Pakistani interests. It has invested fifty million dollars in the LPG sector in Pakistan. We have a terminal with 6,500 metric tons of storage at Port Bin Qasim. We have storage in Haripur near Islamabad which feeds northern Punjab and the NWFP. We have storage and bottling plant between Lahore and Gujranwala. We also have warehousing operations in Balochistan and we have storage and a despatch station at Taftan. The company owns 18 tankers and 36 ISO containers - giving us almost 850 metric tons of transportation capability. Nationwide, we have 8,500 metric tons of storage and we are able to bottle approximately 12,000 metric tones of LPG throughout the country. In infrastructure terms, it makes us the largest LPG company in Pakistan. We have plans to expand this structure as the demand for LPG is increasing in the country and we believe that in order to extend best benefits to the consumers in Pakistan, we need to ensure large storage facilities throughout the country. Currently, the total monthly consumption in Pakistan is about 50,000 metric tons. This is dependent on supply situation. LPG is a supply constraint commodity. Whenever you have LPG supplies increasing you will immediately find the demand factor increasing.

 

PAGE: How much total LPG storage is available in Pakistan at the moment and how this affects local LPG pricing?

AB: The total storage of the country is less than two weeks of consumption requirement. With this shortage of storage, the LPG demand suddenly increases in cold weather in the north. With the increase in demand and a lack of sufficient storage and transportation facilities, the LPG price suddenly jumps as dealers will always charge higher prices for the commodity.

PAGE: With approximately 45 LPG marketing companies operating in Pakistan at the moment, why hasn't the storage infrastructure been build up?

AB: Most of these companies have bottling plants with small storage capacity. The government has made it simple to become a bottling company but these are no more than the glorified distributors. Marketing companies should have a nationwide network, with the ability to transport the product and have significant number of cylinders in the market. Today we witness that because of the fact that there is a lack of infrastructure and a dearth of investment in the infrastructure, the bigger use of cross-filling, which means that companies like our's find out their cylinders go to Iran, get filled and come back. Our cylinders go to other plants and get filled. This is an industry issue and the regulators need to look at it very seriously because this contravenes the laws and the policies that have been enunciated.

PAGE: What are the main reasons for the recent fluctuations in local LPG prices?

AB: I don't think you can blame certain companies to be responsible for price fluctuations. Price fluctuations normally occur because of high demand and low supply. At present, there are 7 gas plants and 4 refineries in Pakistan. If any of the plants shuts down, there occurs a shortage in the market. When the supply in the market is not enough, prices will jump very quickly; if there had been storage, people would have had product in the market and then that jump would have been much slower and much less. But the question is still the same for forty years a lot of companies have had the opportunity of building up storage and infrastructure...then why it has it not been done? There are several factors. The market was not deregulated so nobody wanted to invest. The government thought that by keeping the prices low, the benefit would be passed on to the consumers. From Sept 2004 to Sept 2006, the government regulated prices but consumers got actually very little benefit from the low prices. International prices were commonly acknowledged and local marketing companies and distributors who have local supplies always keep their prices just below the import prices so that nobody could import. This practice is known as gouging. As a result, imports dried up and then we started giving wild fluctuation in product pricing. In July this year when the CP jumped up, the dealers, marketing companies and other unscrupulous individuals tracked the international prices and raised the prices not once but several times. The regulators took a very serious note of it and they basically then stepped in September last in this regard. In September 2006, OGDC decided to increase the prices from 25,000 rupees to 28,000 rupees in one go. At the end of the day the consumer was not benefiting from the reduced prices. All that the government was doing was basically allowing somebody in the middle to make a super profit.

We have been pushing the government to go to its original LPG policy, which requires price parity with international product prices. This would mean that the middleman would then lose their margins. Once you have inputs coming in freely, the price fluctuations will reduce. Often there is only 10 to 20% reduction in the production locally, which throws the prices up significantly. We have asked the government to look at this.

In consultation with the LPG companies and the World Bank, the government decided that they would have a pricing formula based on the highest international benchmark price for local producers that would be in alignment with the contract price. Now this still leaves about a $ 150 per ton benefit to beneficiaries of local allocations. This is calculated at $75/pmt for freight costs, transportation cost from the Gulf, plus $25-30/pmt cost for handling and $50/pmt cost for the inland transportation. This differential is still going to be paid by those importers to bring the product in. Even with this differential the local companies, local producers or local marketing companies will always benefit; importers will then be able to bring in the product that is needed so it's a complex issue. The government brought in the deregulation policy in full on 9th Dec, 2006. The pricing mechanism has already been debated and discussed.

There are people in the industry who say that no local products should be priced locally; if we keep price differentials, we will create price distortions. What has happened is that after the government announced this policy, OGRA then decided to roll this out in one go and last month they basically fixed the prices for producers at this month contract price.

Some marketing companies had started the price game in Oct and Nov last year and this price was an all time low because internationally prices fell. Some people knew that the ECC will be going to announce the policy, they knew that the regulators will be putting the prices up, they reduced prices so much so that when the regulators announced the new pricing there resulted a 12% jump in the price. You want to know who they are, these are people within the LPG industry so that when the consumer would be hit by that, the distributors would start shouting, and the consumer would start shouting. They then say that the multinational and foreign companies want imports to come in but they didn't start the price game, as you know, they didn't manipulate the prices. This is an issue which is understandable.

Our belief is that the differential in pricing doesn't work at all. It has been tried for two years. There was a local pricing and there was an international pricing and the government allowed people to set local prices at any price they liked and all that happened was that all the prices were near international prices, so the government is bringing everything in line. That means that they will no longer be providing an indirect subsidy. They provided $150 million worth of these 'subsidies' between Sept 2004 to Dec 2006 and the bulk of it went to the marketing companies, distributors, unscrupulous individuals and companies who basically knew that they had gotten the prices fixed to benefit the consumer because prices of LPG and hydrocarbon have jumped. These individuals and these companies need to compete. The best way of seeing a healthy competition is that there must be a level playing field for all. The LPG market in Pakistan is about three-and-a-half million tons over the next ten years. The whole potential market is three-and-a-half million tons. Today's demand is about a million tons.

The total consumption today is dependent on the supply that comes in, which is 1,600 metric tons per day. But that's the capacity of the plants. Present demand is about 3000 metric tones. When people can't get LPG they will switch to other fuels. In a perfect market system where you have enough LPG available, there will be a demand of about million and a half tones. In winter, people prefer to use LPG because it can turn on and off quickly. They still continue to use woods incidentally. Those consumers who can't get enough LPG at any particular point of time, use more wood and less LPG during day meals.

Another sign of why there is shortage is because of black marketing of LPG. That is why lots of consumers have 3 or 4 different types of cylinders from different companies. If you can't buy gas from one company but if you have a cylinder from other company, at least you can get it filled which means that the consumers have to have four times of the thing which they might be needing only once at one time.

If there is enough product in the market place, they will just go and replace and come back with a new cylinder but that hasn't happened because of the shortage of storage in the market. Fourth, if there were enough products in the market, LPG would be available in the most difficult areas. Today the highest price of LPG is in Kashmir. It's because these people are right at the end of the supply chain and all of the marketing companies prefer to sell at the closest point of their plants. These are all issues which proved that there is a shortage of LPG in the market.

PAGE: Do you think the situation will get worse?

AB: I don't think that the situation will get worse. When the government agreed that the local and international pricing will be more or less the same and they are not stopping if a company doesn't want to charge its distributors or its marketing company. We need to have independent regulators to monitor the situation. When the situation is pretty close to the level playing field, the import of LPG will become viable, larger quantity of LPG will become available which means that the price stability will become much greater. That means if prices drop and the local price of commodity doesn't drop then the regulator has a reason to come and check on that. In January last year the price of cylinders in Karachi was 550 rupees in wholesale market and today the price is still the same, however, the buying price has increased from 17,000 rupees to 29,000 rupees. It makes you think that somebody is making huge money in between. When there will be a demand, which is unmet, and imports are allowed, people would put the product into the market then the second thing that would happen behind is that when producer will get a fair price for the product, they will ensure that they produce as much as they can. Pakistan's potential to produce LPG today is two-and-a-half thousand metric tones a day. This can only be produced fully if you have conditions that the local potential producers and exploration companies will get a fair value for their product. If they are going to be paid by the BTU values then there is no hope of their performing well. It is only possible if you have import price parity which will result in more product being available.

PAGE: Import is the only solution or do we need to expand production?

AB: More extraction plants will come about if you allow people commercial rates. Karachi has a huge shortage of water because people don't know the real value of water. There is no commercial rate charged for water. It is 40 rupees per 1000 gallon. The major consumption we can see is in agriculture and industry.

Farmers don't pay anything other than 'abyana' which is a nominal charge for water. As they won't pay commercial rate we are unable to develop our obsolete system of canals and infrastructure of water. Also farmers don't use more efficient form of irrigation like sprinkle irrigation where you can reduce the consumption from 250 litres on one acre land to 20 litres an acre. Similarly, if LPG is priced properly, consumers will learn to respect the product. Today, natural gas is not properly subsidized and people use to lit their gas cooker all day as they don't want to light another fire. This is all inefficiency on the part of the system. What makes this system work properly is if you deregulate and let the government out of the business of regulating the markets. Then there will be independent regulators who sit with everyone from the industry.

PAGE: What is your view on Autogas stations?

AB: Well, auto gas has been much hyped up. I'll give you a reality check on that. Today you have over 120,000 people using LPG in the auto gas sector. These people have been using LPG for the last 30 or 40 years. They are not going to switch from LPG to another fuel. The likelihood of more people using LPG is basically dependent on two things:

1. The cost of converting
2. The cost of the fuel itself

Today CNG is significantly cheaper than LPG. You have million vehicles running on CNG. CNG is only available to those people who are close to a gas pipeline but those people who are not able to access the gas and it's not their fault that they live in small towns or in rural areas so you have to give them a choice of fuel. If they choose to use LPG and the LPG consumption increases over there, that's good as well.

LPG will go to the rural areas. Our view is that government should not stop the consumption of LPG and it shouldn't create impediments in the consumption of LPG but it should allow market to supply as much LPG as needed. The auto gas market in Pakistan will take off slowly in the first couple of years but once you have auto gas forecourts and once you have conversion kits available then you will be able to create a very sizable market.

Our market today is 1.2 million tons for domestic and commercial applications. I believe that the market for auto gas is another million or two million during the next five years as long as the auto gas investment in the infrastructure occurs. The auto gas forecourts are something that have been discussed and probably in coming few weeks a decision will be taken and rules will be announced and the investment will be coming in. This will then grow far out to rural areas as well. Benefit for consumers will be that they will be having a choice of fuels in addition to liquid hydrocarbons like gasoline and diesel; they will also have LPG. Auto gas is used world wide by 12 million vehicles. That's twice as much as the number of vehicles on CNG worldwide. Auto gas is being used safely for the last eighty years; CNG has only been around for the last 13 to 14 years. An LPG kit costs only 6000 rupees, however a CNG kit costs around 30,000 rupees. LPG is portable and can be taken anywhere. CNG can only be derived through a pipeline. LPG fuel can run 80 to 90% compared to diesel and gas of the fuel filled for liquid hydrocarbon so that means you don't need to go everyday to get the cylinder filled up. The LPG metering is very simple and it is a much clean and safe fuel to use.

PAGE: How safe is LPG handling?

AB: There is no policy structure for the safe use of LPG. If the government would allow the LPG and gas sector to announce the rules and if the rules are not applied then you have every reason to step in and enforce those rules. As there are no rules, there are illegalities.

The best way to protect the customer is to bring about a legal framework and announce the rules.

PAGE: What are you thoughts on taxation on fuels?

AB: The issue of equal taxation on all the fuels is something which was discussed greatly in September, October and November with the World Bank and the Pakistan government. I don't think you can do that. Some fuels are naturally less polluting like CNG and LPG so if you tax them you will discourage the use of it. Today Karachi is one of the most polluted cities of the world. Our taxing CNG or LPG will discourage the use of it and the consumers will start using other liquid hydrocarbons which means you will have more pollution in the forms of SO2's or NOx pollution or noise pollution so the government in its wisdom has chosen not to tax LPG usage in auto gas and CNG in auto gas so in this way consumers will not suffer the consequences of using diesel and other fuels. Also it will encourage the mass transit program between all the major cities of Pakistan . They should encourage the use of LPG and diesel in heavy automotive vehicles than CNG as the down time in a CNG bus is much slower than the diesel bus. CNG buses can only work in those places where there is high tech system and less pollution.

PAGE: How the LPG sector become more efficient in the coming years?

AB: 65-70% of investment of LPG infrastructure is from 7-8 companies and if 5-6 of them agreed that the import price parity is a way to go then it's a way to go. Secondly, LPG is a commodity. If you price it differently just because it is a Pakistani commodity it doesn't make any different. People are still going to buy it and they will buy it even on an unfair price. I think we have an excellent LPG policy. The deregulation policy was not something that had been announced today but it was announced in the year 2000 and it had been consistently followed up year in and year out and the government said that it would stand by this deregulation. We will encourage the government to stay the course. Give a report card in six months or eight months and if LPG industry hasn't performed then by all means let there be changes brought about to improve the situation. Let the import price parity model continue if there is a shortage of product or if there is large price fluctuation so then we need to sit down and think where it's going wrong. My view is that we are one industry, we are one country and ultimately I am a consumer of LPG too as anyone else and if I can't provide product on time, right fill, right quality and right delivery when it is needed then I am a failed company. I don't think its fair for an LPG marketing company that has invested one rupee and another marketing company that has invested 50 rupees to be equated; you can't do that as it is unfair. But all the companies and investors should have the ability as long as there is a level playing field to be able to operate so there is a space for everyone. It's a large market. Small companies will always be able to be more efficient and will be able to keep the prices but at the same time you just can't have 150 companies working in the same market, it just doesn't make sense.

Lastly as you know that Pakistan is a hydrocarbon deficit country so there are three-four things we must be doing to use our resources to the fullest. First of all we must conserve the energy, we must also upgrade our systems and we must try to increase our self-reliance by using our resources properly and we must be able to attract more of foreign investment and new technologies to be able to double our production capacity.

OIL PRICE BUILDUP-2006

MS

EX-REFINERY /IPP

EXCISE DUTY

PETROLEUM LEVY

INLAND FREIGHT

OMC MARGIN

DEALER MARGIN

SALES TAX

SALE PRICE

Sunday, April 16, 2006

28.50

0.88

13.86

2.30

1.59

1.82

7.34

56.29

Monday, May 01, 2006

29.89

0.88

12.72

3.18

1.63

1.87

7.53

57.70

Tuesday, May 16, 2006

30.31

0.88

12.30

3.18

1.63

1.87

7.53

57.70

Thursday, June 01, 2006

29.49

0.88

13.12

3.18

1.63

1.87

7.53

57.70

Friday, June 16, 2006

30.19

0.88

12.61

2.99

1.63

1.87

7.53

57.70

Saturday, July 01, 2006

30.51

0.88

12.67

2.61

1.63

1.87

7.53

57.70

Sunday, July 16, 2006

31.90

0.88

12.15

1.74

1.63

1.87

7.53

57.70

Tuesday, August 01, 2006

31.88

0.88

12.50

1.41

1.63

1.87

7.53

57.70

Wednesday, August 16, 2006

31.14

0.88

13.24

1.41

1.63

1.87

7.53

57.70

Friday, September 01, 2006

29.99

0.88

15.08

0.72

1.63

1.87

7.53

57.70

Saturday, September 16, 2006

27.77

0.88

17.30

0.72

1.63

1.87

7.53

57.70

Sunday, October 01, 2006

26.13

0.88

18.94

0.72

1.63

1.87

7.53

57.70

Monday, October 16, 2006

26.19

0.88

18.88

0.72

1.63

1.87

7.53

57.70

Wednesday, November 01, 2006

26.21

0.88

18.86

0.72

1.63

1.87

7.53

57.70

Thursday, November 16, 2006

26.47

0.88

18.60

0.72

1.63

1.87

7.53

57.70

Friday, December 01, 2006

26.87

0.88

17.79

1.13

1.63

1.87

7.53

57.70

Saturday, December 16, 2006

28.03

0.88

15.86

1.90

1.63

1.87

7.53

57.70

Monday, January 01, 2007

27.80

0.88

15.75

2.24

1.63

1.87

7.53

57.70

Tuesday, January 16, 2007

25.97

0.88

14.85

1.74

1.52

1.74

7.00

53.70

Source: Oil and Gas Regulatory Authority