CHALLENGES AND OPPORTUNITIES FACING THE LPG MARKET IN PAKISTAN
Jan 21 - 27, 2008
LAHORE: The last few months have witnessed numerous articles on the LPG industry even though it contributes less than 1% to the total energy fuel mix in the country.
This was mainly a result of the Government's controversial policy of linking the price of locally produced LPG with Saudi Aramco Contract Price; an international price benchmark. The advocates of this policy had claimed that the demand for LPG in Pakistan stood at nearly 4000 tons per day versus the local production of 1700 tons and the Government's capping of Producer Prices below the Saudi CP had allowed marketing companies windfall profits, enabling them to create artificial shortages and thwart imports while the consumers continued to pay a high price.
With the implementation of this policy it was argued that imports would flow in more freely thereby eliminating any shortage and would make the product affordable for the common man by lowering prices through increased competition. The Government also hoped to attract substantial investment in LPG production as a result of this policy and so the import parity pricing policy took effect in January 2007.
In a report presented to the Senate Standing Committee on Petroleum & Natural Resources in November 2007, it was submitted that LPG Producer Prices had increased by 55% and consumer prices by 15% compared to 2006. Another official report stated that during the same period imports had risen by merely 3%; thereby confirming that local production was sufficient to meet up to 95% of total consumption. The results were obvious; the real beneficiaries of the import parity pricing policy were the Producers of LPG who witnessed 100% rise in their profits, and the consumers ended up paying even higher prices (Figure 1; all prices adjusted for applicable Govt tax).
Realizing that the desired effects of the policy had not been achieved due to the incompatibility of CP with local market conditions, the Government announced a de linkage from the Saudi Aramco CP and on 3rd December 2007 reverted to its deregulation policy of the year 2000, which had been formulated to ensure that market forces of demand and supply should determine LPG prices. It is important to point out that whereas the deregulation policy had succeeded in attracting investments of over US$200 million, the import parity pricing policy resulted in zero investment.
Following this announcement by the Government, most LPG Producers did not increase their prices, and in fact one Producer cut its price by 10% and many marketing companies responded by reducing their prices by Rs. 50 per domestic cylinder. However with the onset of the winter season, distributors began to engage in illegal profiteering and hoarding of the product, causing sharp escalation in retail prices. Companies who had advocated a linkage with Saudi CP took advantage of this opportunity and increased their ex plant prices to alarming levels. Finally on insistence of the LPGAP (LPG Association of Pakistan), OGRA stepped in and announced the maximum price distributors could charge consumers; Rs. 63 per kg forcing the miscreant companies to reduce their prices as well. This announcement coupled with repetitive advertisements by marketing companies and the recent crackdown on distributors by the offices of various DCO's has finally resulted in a reduction of prices, Belal Jabbar, CEO of Noor LPG Co. (Pvt.) Ltd and spokesman of LPG 70; a grouping of LPG Marketing Companies representing 70% of the market share while talking to Pakistan and Gulf Economist (PAGE).
Talking about LPG vis-a-vis other fuels, Belal said, although the price of LPG is no longer linked with any international price benchmark it is still higher compared to the prices of other locally produced fuels. According to the Petroleum Policy 2007, the price of locally produced crude oil (which meets less than 40% of the country's requirement) has been capped at US$50 per barrel, even though the international price is hovering around the $100 mark. The current subsidy on crude oil and petroleum products is costing the Government Rs. 14 billion every month, he added.
According to him, price of natural gas has also been capped at extremely low levels (almost 50% cheaper than international prices). As a result of this subsidy natural gas has continued to be used irresponsibly without regard for its limited supply and today this has led to its curtailments. The supply of natural gas in Pakistan is limited to less than 30% of the country and the remaining parts of the country (mostly rural and low income areas) have to rely on alternative fuels including Kerosene and LPG; the former being once again heavily subsidized by the Government. The common man living in these areas is paying roughly 7 times more for LPG as compared to his counterpart using natural gas, he added.
The same subsidy applies to CNG with the result that today although Pakistan can boast as being in the top three users of CNG, it has come at the expense of reduced power generation capacity and losses of hundreds of millions of dollars to the industry that is deprived of natural gas. In fact the effect of this subsidy has been so widespread that on two occasions PARCO has had to export petrol as a result of petrol's market being displaced by CNG, Belal added.
When asked about the use of LPG as Auto gas, Belal said, although 50% of all LPG consumption in Pakistan is in vehicles, it remains to date an illegal activity since it primarily involves decanting; i.e. filling from one cylinder into another (usually substandard cylinder). Although permission for establishing Auto gas stations was issued in March 2007, to date not one station has been set up. The reason is the stringent requirement of minimum area of 10,000 square feet as stipulated by OGRA. Even if one were to find a vacant plot of that size in the city, the sheer investment in land would make the entire venture uneconomical, he added.
Though CNG operates at a much higher pressure of 3500 psi versus 250 psi of LPG, the area required for its establishment is only 4500 square feet and the Government continues to promote its use as a cleaner, cheaper and environmental friendly fuel and to this effect has removed all duties and taxes on import of CNG equipment, Belal said.
For the same volume of fuel, LPG requires a tank that is one-third the size of a CNG tank. Vehicles running on CNG experience up to 20% reduction in engine power, primarily due to gas carburetors. To maintain this engine power at optimum levels, pressure creating systems are installed that lead to increase in conversion costs. On the other hand driving with LPG is similar to driving on petrol and the conversion cost for a LPG kit is around Rs. 10,000 versus Rs. 30,000 for a CNG kit, he said.
Belal said the LPG is a clean burning, high octane, environmental friendly fuel and the number of vehicles running on LPG globally is in excess of ten million. Its greatest advantage is that unlike CNG its supply is not dependant on pipeline infrastructure and therefore it can be made available anywhere in the country, he said, adding that incentives need to be given for the establishment of Auto gas stations including reduction in area requirements, followed by removal of duties on LPG kits and vehicular cylinders and by making the licensing procedure less cumbersome. The current process involves NOC's of at least eight different departments, followed by a lengthy design vetting process and an official fee for the entire process of Rs. 500,000 compared to Rs. 150,000 as required for installation of CNG facilities, he added.
He further said that there exists an enormous potential for development of the LPG market in Pakistan. Additional production to the tune of almost 1000 tons can be brought on line fairly soon, but it is important to have the correct policies in place to ensure absorption of this increased production. One such avenue is Auto gas especially in light of depleting natural gas reserves, another is that of provision of LPG for city gas purposes in those towns and villages that do not meet the per consumer cost criteria as laid down by SSGC and SNGPL. The recent project undertaken by SSGC in Gwadar is one such example, he added.
But above all to maintain a long term viability of the product and expand its market it is imperative to bring about stability in its price. For this reason it is now up to OGRA and the local authorities to make sure that the Government's policy of ensuring supply of LPG at an affordable price to the consumer is implemented and stern action taken against all those engaged in illicit profiteering and black marketing.