LPG INDUSTRY NEEDS ATTENTION

AN INTERVIEW WITH ALI HAIDER

SADAF AURANGZAIB
Feb 11 - 17, 2008

In an interview with PAGE, the Chief Executive, Mohammad Ali Haider of the Power and Gas (Pvt) Ltd Company informs about the recent situation of the LPG in the country. Power and Gas Company is a marketing company solely involved in the marketing and distribution of LPG in the country.

On account of the current prevailing situation of LPG in the country with respect to the greater demand factor, Mr. Haider stated that winters always create a huge vacuum and an imbalance between demand and supply. On reviewing the LPG industry for the last five years, one can easily see the rising demand during the winter's season reason being the lesser supply of the natural gas and manifold usage of LPG in the remote areas where natural gas infrastructure isn't available. The gap of around 250-300 metric tones of LPG arises out in winters which mostly is catered with imports to settle down and to ensure the availability of the product in the market. What happened in these winters is that due to the high international prices the CP rate has gone so much high that it was not feasible to import the gas on those rates. CP is the Contract Price which is determined monthly in the same pattern as the oil prices and it gets changed almost every month as it is linked with the oil prices. In 2007, the CP rate goes up to $874/per tone which is the record high in these winters, last winters the CP rate was around $700/per tone so there was an access $174 CP rate per tone that was added in these winters. Also you couldn't found the product in the region either even on this price and a premium of $150-$200 got also attached as the international spot rate buying was not available and smaller companies couldn't afford to buy a yearly contract. In order to buy the product, we have to buy it from a middle man or a third party which is going to charge a premium, hence we have to pay premium on imports so a 11.8 kg cylinder with a landed terminal cost of Rs.900 after the filling and primary transportation and other overheads costs more than Rs.1000 which was unaffordable by the consumers. Due to these reasons the imports were not been made for winters in 2007 and the passage and the shortage of LPG becomes huge in these winters but now the situation is going towards normalcy as one of the producers have imported two parcels of the gas and I think the other producers should also follow the Jamshoro Joint Venture (JJVL) pattern and should import to bridge in the gap.

When asked that Imports totaled 39,000 tones in 2006 and 41,000 tones in 2007, how do you justify that the bigger companies having huge reservoirs are playing their part to meet the harshness of the winters with the availability of the gas around the year. He said that there was a policy given by the Ministry of Petroleum and Natural Resources and OGRA where they have linked the price of local LPG with international CP rate, these rates were linked to make imports more consistent and the companies who were behind the implementation of this policy were also having the same objective as they can't bring imports on high prices and they make import price policy. Around 80% people were against this policy with a simple concern that why the Pakistani people pay a local commodity price on international rates. They should get the local commodity on local rates. Other hydro carbons i.e. Petrol, diesel, kerosene, furnace oil and gas which are CAP and have no concern with the international prices and to most of them the government has given subsidy, even the crude oil is also CAP and it is not similar to the international price rate so at one place the government is giving subsidy to all other fuels while there is no subsidy on the imports of LPG. If the government would have given the subsidy on LPG in these winters and would have paid the price differential from its own pocket or even if it has given us the freight pool, the situation would not be that worse in these winters. The bigger companies also backed off on importing LPG on high CP rates hence the import price parity remained un-feasible for not just the local producers but also for marketers and distributors, it was a gimmick by few players in the market which comes out to be a total failure. Now the government has again de-linked the price and our appeal to the government is that it should provide us with few incentives like giving subsidy on imports and those producers and marketing companies which have bigger allocations should also be allowed to import so that the gap in which the vacuum gets much too higher and where the middle man takes advantage of such situations should be curtailed.

On the current demand and supply situation, he iterated that if in Pakistan, all producers will give their optimal production; we will have locally 1600 metric tones per day LPG available which is without import substitution. But these 1600 metric tones is not happening as few refineries have their short fall in meeting this requirement due to certain other reasons so the average LPG per day is much lesser than the actual size of production. The every day demand for LPG is around 1750-1800 metric tones so there is a shortfall of 150-200 metric tones is enduring on per day basis which expands in winters to 400 metric tones. However JJVL which is the single largest private producer has imported two ships, out of which on has already reached and another is due in this week.

The benefit that would come from these imports could be measure in the sense that the commodity would be available in the market, we are importing on high CP rates but at last the product is reaching the customers, and now the situation is much better in northern region.

While elaborating on the steps that the government could take to ensure a better supply, he said that there are two suggestions. One is that in winters, the government should give exemptions whether in the form of GST or in freight pool to the producing and importing companies. By giving exemptions in the freight pool in the similar fashion that of OMC's (Oil and Marketing Companies) we would be able to cut on our transportation expense. Another thing is that the bigger producers and marketing companies who have the quota to produce around 50 metric tones a day should settle the price affect by averaging it on the annual basis as they have the cushion to rule out this affect on an annual basis. The bigger companies can absorb such shocks without it being transferred to the consumers. The Ministry should provide them with incentives so that they do imports and average out a better price solution for the consumers.

On the price rate disparity which is because of the upper hand of the marketing companies to sell the commodity on their price preference has made a hodgepodge situation where the same commodity is available on various rate and how this situation could be resolved, he said that there are few things involved in it. First is that the whole LPG sector is deregulated, now the government do not fix the price and the marketing companies, distributors and all other stake holders set the prices according to their own demand and supply situation. Secondly there can't be curtailing possible as the price disparity is because of several reasons. Like if our distributor is in Gilgit and we have to supply him the LPG from Sindh then the LPG costs double after reaching the final destination because of the transportation charges and this cost has to bear by the consumers, that's why we are asking the government for freight pool so that the LPG companies could sell the product on low prices. On my query about Punjab, he iterated that the prices in Punjab got higher because of the rising demand and less supply situation. The transportation factor can not be ignored as if out of fifteen companies five are transporting gas from Sindh while another two are getting gas from Punjab, so they have an edge to supply gas on lower prices. We have asked OGRA to build up a reasonable price mechanism so that all the stake holders according to their own investment on ground must get a proportional return on income. OGRA has taken out a price mechanism for the marketing companies; the same is needed for the distributors too.

I would also like to appreciate the efforts of LPG Marketing Association and LPG Distribution Association who have gone to Media, governmental agencies, DCOs and Nazims to take them into confidence and fix the price up to the level where black marketers could not exploit the situation and the price should be fixed at Rs.65 per kg. In Karachi and in Sindh we remained very successful and in Punjab we have also strictly examining the price. Now the product is widely available and this has only become possible because of the associations effort. Associations are also working towards the awareness program for safety measures and parameters for the LPG usage to educate the common man of the society.

Lastly he said that the LPG future is very promising provided we will also be given incentives and there is a substantial growth possible in this fuel demand too. Till now, only last year the growth remained on a standstill due to the import price parity, else LPG has a tremendous capacity to work for the poor man of the society. Today there are less than 1% consumers are there for the LPG product in Pakistani market, hence if the government would pay attention to this fuel then this environment friendly fuel would be widely available for the general public.

He also said that we really need to pay attention to LPG local production as today we need to rely on imports which mean an expensive commodity for consumers. If the public and private sector would work in tandem for building and reinforcing the extraction plants then we would be able to produce more locally and then only we can root out the red-tapism from this industry.