Feb 11 - 17, 2008

Q1: What is the actual demand size of LPG in the country at the moment and how much Progas is producing to meet this demand?

According to figures available, the present consumption of LPG is 625,000 MT per annum and it is growing by about 12% annually. However this figure does not take into consideration the existing latent demand for LPG. This is believed to be approximately 100,000 Mt. The local production of LPG is expected to level off at around 750,000 MT per year within the next four years. However demand will continue to grow and the shortfall will have to be met through imports. This shortfall is according to estimates extrapolated from the Pakistan Energy Outlook 2006 to be 1,000,000 MT within the next decade and would have to be met by imports. Progas started marketing in 2004-5 when our sales in the first partial year of operations were around 5,000 Mt. In 2005-6 sales were near 20,000 Mt and in 2006-7 were 32,000 Mt. 90% of all product sold by Progas has to be imported either over land or by sea. Progas has no local allocations in Pakistan and like 24 other LPG marketing companies licensed by the OGRA seeks to meet the supply deficit through imports.

Progas is now the sixth largest LPG marketing company with a share of approximately 6% of the market share. We sell between 100 200 Mt of LPG daily. It has been able to achieve this through an aggressive programme of developing markets in different parts of the country and not necessarily stealing market share from other operators.

Q2: What is the import situation of LPG, how do you see the import growth due to the rising demand factor?

LPG forms a relatively small segment, just about 1% of our total energy mix. The demand for LPG is growing worldwide as it is in Pakistan. LPG demand is growing by about 15% annually but imports have over the period 1999 - 2006 grown at an ACGR of over 35%. Pakistan produces only 1650 MT/ day of LPG of which over 50% is produced from imported oil the balance is produced by gas plants. The demand for LPG in winters rises to over 2,500 Mt/ day. Direct imports of LPG in 2007-8 were estimated to be in the region of 64,000 Mt. However this year imports of LPG will only be possible There is no shortage of capacity at the Port nor is there any shortage of supply. It all depends on the Government maintaining its own announced policy.

International LPG waterborne trade is now around 130 Million Mt per annum. Just new trade in the region will be over 25 million Mt per annum within the next five years. 40% of all LPG traded passes originates from the Persian Gulf. Therefore Pakistan is well placed to benefit from its strategic location.

Pakistan LPG consumption is about 650,000 Mt per annum in 2007 but expected to be 2.5 Million Mt by 2015. This market will grow due to the increased usage of LPG in the Autogas sector and as an industrial and commercial fuel as shortages of gas and electricity persist.

Q3: As the winters are intensifying all around the country, the LPG demand is also rising due to its manifold usage in the rural areas, however the price fluctuation is also a one great barrier to acquire this facility. What is your view on that?

LPG comes from two sources, either from a refinery or from a gas plant. At present about 50% of all gas is produced by refineries. 90% of these refineries operate on imported crude. This crude is purchased at international prices and unless producers can charge commercial prices for the LPG they produce there is no incentive for them to maximize production. The balance 10% of LPG is imported directly. This indicates that at least 60% of LPG marketed and sold in Pakistan is from import sources directly or indirectly. This would mean that selling LPG for less then the international benchmark price makes no sense. Hence economists have come up with the principle of import price parity. The recognition of this principle in markets as diverse as South Africa, Singapore and Australia has helped them develop their LPG market.

Despite the Government and Regulator being educated on this matter the caretaker Government tampered with existing policy and capped LPG prices on the assumption that this would help bring LPG prices down, however this made imports uneconomical. We informed the Government and regulators that there would be serious shortages prices however we were not even given the chance of meeting and explaining this matter in detail to the President, Prime Minister or the Minister. Again the so called delinking of LPG prices required the producers to determine their own prices. Therefore as soon as this decision was made public sector producers increased their prices to the international ARAMCO CP which was their right. They were immediately pressurized through the back door to cap these prices. This capping meant that no imports flowed into the country. In December prices of LPG jumped to an all time high of Rs. 100 per Kg in markets viz; Lahore and the central Punjab. While at the same time supplies of LPG to Azad Kashmir, the Northern Areas, Balochistan and the FATA dried up completely. While the lobby that had the prices capped made huge margins the consumer suffered. The market was short of product and this resulted in rent seekers indulging in price gouging.

Added to the above this particular winter we have seen power outages and gas shortages due to increase in energy consumption for heating and other purposes. The demand for LPG has therefore been even higher. It is our view that there is enough liquidity in the international markets to meet local shortages through increased imports. Without these imports, there will be serious shortages in the market which result in price fluctuations. We require the Government to not interfere and create artificial barriers in the market place. It needs to follow its own LPG Policy it has announced in 2001 and 2006 in letter and spirit. Pricing of LPG can be moderated using different mechanisms. If the Government wishes to moderate price fluctuations in Winters there are a number of suggestions we have made to the Government and the Regulator. It is very much upto them to work with all stakeholders to bring about the necessary change to ensure the consumer is saved the hardship they have had to suffer this winter.

Q4: Why is there a huge price differential that arises in severe winters all around the country for LPG cylinders?

The pricing of petroleum products is not necessarily a complex issue, which requires handling only by experts. OPEC regulates the price of crude and sets the worldwide price. For LPG, the Saudi Aramco CP is our regional bench mark. The idea is to have a mechanism which governs the whole price structure. In the absence of an index, the whole price structure crumbled, as we have seen in the recent past. Price indexing is already being done for petroleum, why can't it work for LPG.

A transparent pricing mechanism ensures price stability, uninterrupted availability of the product and provides added flexibility and advantage for fluctuating demands. This is a regular phenomenon world wide and is not new in Pakistan. The few months that LPG was priced based on Saudi ARAMCO CP were months when prices remained at the lowest, there was plenty of LPG available with the lowest margins for marketing companies and dealers in the history of the LPG industry. This was only possible because pricing was transparent and there was no shortage of product as imports flowed freely.

In winters demand for LPG goes up from around the 1800 Mt per day to over 2500 Mt per day. This shortfall needs to be met through imports. Unless the local pricing of LPG is not connected to international prices and selling prices are not controlled imports will not take place. This will result in product shortages and high prices. This recipe for disaster was cooked by the caretaker government and served up to the Pakistani consumers this winter. This kind of shortsighted adhoc policy decision left the consumer reeling with shortages in winter, high prices and gouging and black marketing. DCO's and civil administration have now become the controllers of prices. So much for a deregulated market and a successful regulatory regime.

Q5: What is the current situation of the expansion plans of the Progas company and how much benefit Progas is having in these winters by building huge LPG storage plants?

Progas has the largest LPG storage facility in the country with over 7,000 Mt of storage countrywide with an annual throughput of 250,000 Mt. Additionally Progas is the only LPG marketing company to have a dedicated LPG import terminal at Port Qasim. This terminal has an annual capacity to handle upto 2 Million MT per annum. The current jetty can handle vessels upto 15,000 DWT but has been designed with minimal additional investment to be able to handle large VLGC and other carriers of upto 80,000 DWT. With an incremental increase in storage this facility has the ability to handle all the needs of the country for the coming two decades. Progas is currently studying the best strategy for the increase of storage as the market demand develops. It has plans to increase storage to 60,000 Mt and work with other operators to use any bottling capacity available in the most sensible fashion. At present Progas at its Bin Qasim plant has the capacity to bottle over 5,000 Mt of LPG in one shift on a monthly basis.

Progas is also planning to build 22 satellite stations throughout the country which will be fed by an integrated world class LPG logistics business which it is proposing to invest in with its partners from Kuwait and Pakistan.

Progas has to date invested over US$ 60 million in the Pakistan market and if Government policy and the necessary Regulatory framework remains consistent and stable plans to invest a further US$ 100 million in the LPG industry over the next decade. Additionally as a group Progas have made a commitment to the energy sector of close onto US$ 1 billion. Our business model is from gas to wire. Therefore the Progas terminal and infrastructure is merely the first step in a thought through and well supported business plan.

Bearing in mind the huge capacity of this infrastructure it is our belief that this facility should be diversified to be able to import other hydrocarbons, like CNG. For this the Ministry of Petroleum and Natural Resources is to be complemented for having given us permission to import CNG and the Port Qasim Authority to give us the requisite no objection certificates to proceed with the development of this facility.

Q6: Any other thing that you would like to bring to the knowledge of the government?

Progas is an energy company and LPG is a vital component of the energy chain. We feel LPG has a lot of potential in the overall hydrocarbon fuel mix. Presently LPG constitutes about 1% of the energy pie. It should grow to at least 5% within the next decade. This potential however can only be realized by consistent, transparent and fair policies regulatory environment. While at the same time there must be a campaign to create greater awareness amongst consumers firstly to switch away from traditional biomass to cleaner modern fuels and secondly to bring about greater understanding of Energy Conservation. We must plan now for the future.

Though the Government has enunciated its energy policies viz; the Petroleum Policy 2007, LPG Policy 2006, LNG Policy 2006 and a number of Power Policies including the one announced in 2002. There has been no integrated review of the entire Energy industry. It is our belief that there should be an Energy Ministry that should work with the Ministry of Petroleum, the Ministry of Power and the Alternative Energy Development Board to be able to have a coherent and clear vision of where the country should go.

The government needs to oversee the judicious implementation of its existing policy framework to ensure consistency and transparency and the full implementation in letter and spirit. The government must incorporate all possible sources of energy and our needs for the future. We must plan today for our energy needs of tomorrow.

We believe the government should not only provide economically sound and business friendly policies, but also ensure a level playing field for fair business practices. There must not only be a level playing field between fuels but also a level playing field between the various segments of the industry such as producers, marketers, importers, distributors and transporters. There must be consistency in its policies and uniformity in their application. During the last five years there has been the largest foreign investment ever in the LPG sector of over US$ 230 million. Progas has invested a quarter of all this investment. If this flow of investment has to continue, foreign investors must be given some level of comfort that policies will not be altered to meet lobby and interest groups demands.

The shortage in gas and electricity can be easily bridged through the use of LPG as an alternative fuel. The use of LPG can release natural gas and electricity where there are shortages. People using electricity for heating and cooking could easily use LPG. We believe this alone could provide an extra 800 MW of power. The gas utilities could look at differential gas tariffs for those industries choosing to have uninterruptible supplies of natural gas and those who are able to live with interruptible supplies. In both case LPG could be the stand by fuel thereby ensuring continuity of supply. These kind of stand by peak load supply arrangements are quite common in the USA, Chile and in Europe. These stand by LPG supply arrangements would be easily able to free up at least 300 MMSCFD of gas capacity. The plants used for providing Synthetic Natural Gas are available and been used in the past by the SSGC in Quetta and in Gwadar.

This winter in Pakistan and specially in the Punjab and NWFP areas there have been serious gas outages. It is our view that these gas shortages will continue till trans national natural gas pipelines come from Iran or Turkmenistan or we discover more hydrocarbons. Standby LPG supplies will provide the most convenient arrangement to bridge this shortfall. Interestingly enough those proponents of spot purchased LNG and Floating Storage and Regasification Plants for Pakistan should note that this year spot LNG purchases in Asia have been in the range of US$ 16 18 MMBTU and one contract to Japan touched US$ 20 MMBTU. This would make the use of Fuel Oil, HSD and LPG all viable as stand by fuels. However in the case of LPG there is no environmental impact and if the prime fuel usage is natural gas LPG is the perfect alternative. Who can supply this LPG? Progas is well placed to provide this and more as it is the only company with the necessary experience, capacity and capability.

Q7: Any message

The Pakistani consumer has been used for far too long as the motivation for making ad hoc Government decisions. These decisions have hurt the government exchequer but not benefited the common man. Let us wake up to the fact that if we wish to help the consumer two matters must be considered.

i- Any indirect subsidy through price capping will be captured by middle men. In December alone the Ministry of Finance and the FBR have given out an indirect subsidy of Rs. 575 million by capping state sector producer prices at US$ 640. Yet this subsidy was captured by dealers, marketing companies and very little of this got into the hands of the consumer. This experiment was conducted during September 2004 and December 2006 and the Government gave away another subsidy of Rs. 11 billion. Who benefited once again? unscrupulous rent seekers and middle men.

ii- If the Government and the Regulator are keen to help the consumer they should give the deserving consumer a direct subsidy by providing coupons through the proposed Saving Card scheme and ensuring the consumer then receives this subsidy. Secondly assist in transportation costs to areas like Azad Kashmir and the Northern Areas where the cost of transportation is very high. These subsidies could be provided directly to transporters such as NATA or the NLC.

Progas wishes to extend its hand of friendship and cooperation to all the stakeholders in the LPG industry to build a fair, honest and equitable relationship which benefits everyone but most importantly brings the Pakistani consumer security of supply of LPG at a transparent and fair price without the hype and lies.