LPG'S GLOBAL GROWTH AND ITS DOMESTIC OUTLOOK

MUHAMMAD ALI MALIK
Feb 11 - 17, 2008

The global energy consumption is increasing incrementally and is estimated to be 50% more in 2030 than what it is today where two thirds of the demand would come from the developing countries. Petroleum and its products would remain as the main area of power generation, surpassed only by their use in the automotive sector. The ACGR for Energy consumption in Pakistan remains at 6.1% for the last five years. LPG continues to register the fastest growth in the energy sector with consumption at more than 600,000 TOE in 2005-2006 or roughly two and a half times of what it was about five years ago. Energy experts believe that Pakistan has yet to realise the potential of LPG where growing oil prices, among other factors; would switch the consumers from traditional to better and efficient fuels. Asia will see the average demand for LPG expanding by more than 6% per year, followed by North America and India . Asia will continue to drive the consumption and demand for LPG.

As demand increases, efforts are underway to increase supplies which are projected to increase markedly from the current 50 million tons to 75 million tons by 2010. The Middle East and North Africa regions have further strengthened their position as the production source for LPG. For example, Abu Dhabi has plans to double its LPG exports to 16 million tonnes per year by mid-2008 against current exports of eight million tonnes to become one of the top three exporters in the next five years.

As oil prices continue to rotate around the US $ 100 benchmark, they have affected other derivative hydrocarbons, such as LPG and LNG. LPG prices in the international market rose one and a half times in the space of just five months. The Saudi Aramco Contract Price or CP, which sets world wide LPG prices; rose from US $ 560 per MT in September 2007 to US $ 800 per MT in January 2008.

Pakistan, like most countries which follow the Saudi Aramco CP, was alarmed as rising prices would affect its domestic use as an alternate to natural gas. In order to preclude a public outcry, the government decided to intervene and early in December 2007 capped the LPG prices at the October 2007 Saudi Aramco CP level or at US $ 640 per MT. In Pakistan, like many countries, there is a pattern of increased demand in the winter months and the local production of 1650 MT per day falls short of the actual demand by about 800 MT per day this gap is met by imports. In December 2007 Saudi ARAMCO Contract Price was US $ 860 per MT. The LPG importers who would have otherwise bridged the demand supply gap, found themselves caught between the govt's capped price and the high international prices. The local market now had only to depend on local production and faced a shortage of about a third of its demand. This in turn lead to the highest LPG prices in the consumer market where retail prices jumped to over Rs. 100/kg.

The caretaker government was assured that increased local production would be sufficient to cater for the increased activity in the winter months and secondly, lower local producer prices would translate into lower consumer prices. This looked politically good and seemed the way out of the rising international petroleum prices conundrum. What the government missed out in the fine print was the local producers' lobby and their associates directly benefited from the price capping and secondly they had no fair competition from the LPG importing companies. The importer companies felt overlooked as they represent a substantial portion of the foreign investment in the LPG sector and are vital links in the whole chain. Their presence in the market ensures stability in prices and uninterrupted flow of the product.

As predicted by petroleum experts, it was a deja vu of the events of 2004. The careful manoeuvring by certain pressure groups had paved the way for imports to become uneconomical, thus discouraging any outside intervention. The prices in the local market went up to one and half times of what they were before the capping, given the fair margins of profit, the consumer prices even shot over and above the international prices. The benefit that the government tried to give to the consumers ended up lining the pockets of the middlemen and to the people responsible for initially turning over the whole apple cart.

The government lost a lot of political capital amid assurances that local production and local producers would import product and thereby handle the increased winter demand. The tall claims of lower consumer prices through lower production prices suddenly became hollow words. But sadly, for the consumer, the market works on supply and demand, and when supplies were short, the prices shot up. Muted protests by the regulator and the ministry could not prevent the government's digression from a policy which had worked well since 2001. The governments' intervention would only cause market distortions. If consumers do not pay a realistic price for hydrocarbons they will not value the commodity and therefore waste it. One needs to look at Iraq and Iran where a system of rationing has had to be set up for motor spirits and due to these huge price distortions local consumers waste diesel and petrol and much of it is smuggled across the border to the loss of the Iranian, Iraqi, Turkish and Pakistani exchequer.