LPG not to be affected by oil price hike

Dec 03 - 09, 2007

As the industrial and commercial activities of the nation increase so do the demands of energy to perform those activities. Liquefied Petroleum Gas is a common alternative source of energy alike in industries and households. In far flung areas of Pakistan where pipelined gas can not be supplied LPG is the main source of running industrial and commercial processes and of generating energies for domestic consumptions. Collectively, oil refineries, gas producers, and extractors have right now ability to produce 1600 metric tons of LPG per day. This capacity of production is at its optimal. The average demand in country is around 1800~1850 metric tons per day. There remains a shortfall of 250 metric tons daily. Obviously, that is compensated by imports. In term of proportion, 7 to 8 percent is contributed by imports, while 93 percent is locally produced. The government is a major producer of LPG while private companies are either involved in marketing or distribution of locally produced and imported gas. Recently, PAGE interviewed Senior Vice Chairman, LPG Distributor Welfare Association, Muhammad Ali Haider. This association was founded in 2003. Ali said that there were lot of problems being faced by LPG marketing and distribution companies in past. There were five to ten people who monopolized the market. They held total distribution share in their hands. The association was founded with the agenda to safeguard the interest of distributors and marketers to break that monopoly. And, also to keep aware stakeholders of safety standards and make them involved in safety practices of LPG distribution. After graduating from LUMS in 1992, he started his career in a multi national company belonged to Ireland as a Marketing Manager. This Irish company was running duty free shop at Jinnah airport, Karachi. He was associated with the company for nine years and then joined in his family business of oil and gas. He is also the CEO of Power Gas (Pvt.) Limited, which initially started distribution of LPG but soon after one year obtained a licence to operate as LPG marketing company. This year government connected prices of local LPG with the international market; contract price formula of Saudi Amarco. Thus, price has become a subject to be determined beyond border. Following are the excerpts of the interview:

PAGE: Has linking of tariff of locally produced LPG with Saudi Contract Price formula provided economic payouts? Was it needed actually?

Reforms introduced by the government in oil and gas sector have both positive and negative implications. It has a trickle down effects on the economy. LPG sector has become a biggest investment attraction. Billions of rupees have been invested in the last four to five year in oil and gas sector. But, equally discouraging was the decision of government taken in this year to link the price of locally produced LPG with Saudi Contract Price formula. That implies a monthly review and resultant fluctuation in prices of liquefied petroleum gas. Subsequently, a movement at CP formula means instability of prices. Of course, the government decision was justified in a sense that local production is unable to meet the local demand. And, it was decided to encourage import of LPG through this policy shift. It was also to discourage black marketing in LPG sector. Basically, government stepped forward to fill the gap of demand and supply of LPG in the country. However, the draconian rise in crude oil price every now and then has not either benefited the purpose. Therefore, the price is increasing beyond consumer buying power. What happened in result was that people in remote areas resorted to deforestation and using gasoline generators for their domestic use. Before linking to CP, producers were selling the commodity at Rs. 25,000 per metric tons, now there is an increase of 55 percent to Rs. 40,000 per metric tons. It is an unprecedented addition to our deficit. Few people with vested interests and multi national companies lobbied in to restructure price mechanism. But, interestingly those who did it have now footed aback; because of, they could barely attain break even. Is it not an irony that international price mechanism is being followed for local product? If price of natural gas, for instance, is linked to international formula it would obviously raise its price from present level. Indigenous produce should at least be used for the betterment of the people and to give them economic advantage. But now it seems that government has listened to our demand. The policy may be reviewed and revised in near future. And, it should be; as LPG is being used because of it is giving price advantages to consumers. If its price increases, the charm of its usage finishes off.

PAGE: What negative impacts may LPG sector sustain in case of oil and gas price hike?

Prices of petrol may be increased by December 01 this year. The proposed price incremental will be tantamount to shifting of whole burden onto consumers. Since LPG is already under CP formula, the proposed price increase for oil and gas would not affect. Rather, this will increase LPG usage. In case of implementation of November CP, prices of LPG will increase by 7 to 8 percent. The rise would be borne by natural gas and petroleum products. In case of 100 percent shift of impact to public prices of petroleum product will increase to historically high. When we were purchasing LPG on high price, it is recorded, that we transferred only 15 percent burden on consumers, rest was borne by producers, marketers, and distributors. This is why; marketing companies have lost 4 to 8 million rupees in last seven months.

PAGE: How do you find government policies for Liquefied Petroleum Gas sector?

Government has not provided a level playing field to LPG sector. All hydro carbons should have equal level playing field. LPG should have the similar government subsidy as CNG sector has. So that consumers could gain price advantage.

PAGE: In terms of growth, is LPG sector enable enough to supply alternative source of energy to meet national energy needs?

One of our suppliers of LPG, Jamshoro has exclusive distinction of extracting LPG from natural gas. It is a private company, owned by chairman of LPG Marketing Association. Apart from Jamshoro, all are just refineries refining crude oil to produce the gas. The production shortfall usually occurs owing to dependence on crude oils. As the price of oil in the international market go high, so does the gap appear in demand and supply a wide. What that extraction plant does is to extract certain elements from natural gas to transform them into LPG. Jamshoro plant extracts these elements out of the flowing natural gas. Rest of the natural gas are left in the pipeline for usage. The suppliers of natural gas apply on it standardized process. But, LPG concentration is not separated that could give and added advantage after all. This way natural gas supply continues without its elements wasted. In the same manner there are other avenues that may be tapped to make economy viable and self sustainable in relation to energy utilization.

Pakistan has the potential to increase its production capacity of LPG to another 700 to 800 metric tons if these avenues would be explored properly. And, if these opportunities are opened to private sector substantial investment could be invited.

The attraction of LPG sector is expanding with a passing day. There were 20 LPG marketing companies in past, today this number has increased to 65. When I started my business there were only 30 to 35 LPG storage plants now there are 85 plants across the country. Lot of investments have come directly and indirectly in the sector. Indirectly, allied industry has come into operation such as steel industry, valve industry, etc. Even foreign companies are coming in. A Malaysian company has begun its marketing operation, importing LPG from across the border. But, I think, local production and exploration should be focused instead of import in order to acquire economic sustainability.

PAGE: Considering that government regulations are not being implemented in letters and spirits to mobilize growth of LPG sector how else distribution of LPG network could be improved?

It is not that there are no regulations and rules for the sector. By laws are there but not being implemented actually. There are mainly two reasons for non-implementation. One, If incentive oriented policies are provided; freight pull be given; and price differential be offered to LPG sector, this sector definitely would grow on a positive line. Second, government is reluctant to include LPG sector in automobile policy. The reason attributed to low production of LPG in Pakistan. It is said that available production is sufficient only to supply on a limited scale. Had government included LPG sector in automobile policy, vehicles would have been encouraged to convert to LPG instead of CNG. LPG is a prime fuel in many countries such as Turkey and South Korea, to name few.

LPG distribution network is not up to safety standards because of distributors having no facilities. Health hazardous way of cylinder decanting may be reduced by opening of stations similar to CNG. That could safe consumers and those citizens who are exposed to liquefied petroleum gas. Since, LPG sector didn't come under regulations before, it allowed all and a sundry to start the business and earn money. Even after OGRA has devised rules they are even now operating openly. These dispensers fulfil major demand of rickshaws and taxis in cities and suburban areas and of household altogether. Outright ban on them would not prove effective. There must be an alternative source of earning for them. Our association was founded to curtail the mal practices and manipulation in the industry. It deals with defaulters and those who are not following norms and sentiments of the industry. There is also a dispute settlement committee. To ensure that standard practices are being followed by distributors, it has set up town level committees. This association aims at resolving problems. And, hopefully we would find a solution.

PAGE: Unlike natural gas LPG is not supplied through pipelines. Can that become a competitive advantage of LPG over contemporary products?

Yes, indeed the scope of LPG utility is comparatively high to any other fuel. It is used domestically, in industries, and commercially where no other fuel has accessibility. On high ways there are usually no supplies of natural gas and therefore only gasoline stations set up, while LPG can be transported any where around the region.

PAGE: What do you say about environmental impacts of LPG?

LPG is more environment friendly fuel than any other fuel. Environmental Protection Agency examined emissions of LPG vehicle to check the lead-level. It was found that it had the lowest lead-level as compare to gasoline, diesel, and CNG. LPG is also a hi-octane gas providing good acceleration to vehicles travelling in high elevated areas. In Seoul government encourages LPG vehicles in order to protect environment.

Power Gas (Pvt.) Limited has established plant in Port Qasim, Karachi in 2004. It has storage capacity of 250 metric tons. It involves in marketing of LPG all over Pakistan including remote and far flung areas of Balochistan, northern areas, Central Punjab, to ship breaking industry in Karachi and Gaddani, and so on and so forth. It is distributing approximately 20 to 25 metric tons pr day. It obtains LPG from Jamshoro Joint Venture, OGDCL, and occasionally from PARCO. He told the scribe that it plans to expand the current storage capacity to 500 metric tons by 2008; to tap industrial and commercial customers which have not yet been so; and to establish another plant near Multan to tap the market which has not access to natural gas. He said that his company has the expertise to convert generator to LPG from conventional energies.