INTERVIEW WITH CEO OF NOOR LPG

HOARDING, BLACK MARKETING OF LPG MAIN CAUSE OF RECENT LPG PRICE HIKE

KANWAL SALEEM
Feb 11 - 17, 2008

LAHORE: NOOR LPG was incorporated in 2003, with its corporate office in Lahore and filling and storage plant in District Sheikhupura. It markets LPG across Pakistan from Karachi to Kashmir via its network of over 70 distributors. The Company is also an active member of the Paris based World LP Gas Association. Mr. Belal Jabbar is the Chief Executive Officer of NOOR LPG Co. (pvt.) Ltd. He is a graduate from the Lahore University of Management Science (LUMS). He has worked closely with many LPG marketing companies and been actively involved in the business since 2001. He has also attended several international forums and seminars held on the LPG Industry world wide. Belal is also a spokesman for LPG 70, which is a grouping of LPG Marketing companies representing 70% of the market share in Pakistan.

In an exclusive interview with the Pakistan and Gulf Economist (PAGE), Mr. Belal Jabbar shared his views about the LPG market in Pakistan. Following are details of his interview:

PAGE-Tell us about the LPG Market in Pakistan and its prices in comparison to other fuels such as petrol, diesel, kerosene and CNG?

BELAL JABBAR - The LPG industry is a developing one in Pakistan. Current local production is 1700 tons per day and demand hovers around the same, except in winter when it reaches 2000 tons per day. There are 10 LPG Producers in the country and over 63 LPG Marketing Companies. As per the Government's policy, LPG industry is a deregulated with market forces determining pricing decisions. However to ensure a reasonable price for the end consumer OGRA has the authority to intervene, which it does every now and then. Unlike petrol, diesel, kerosene, natural gas and CNG, which are all heavily subsidized by the Government in order to provide relief to the consumer, no such formal subsidy exists in the LPG sector. The result is that LPG has to compete with subsidized kerosene in rural areas and with subsidized CNG in cities. The Government has also capped the price of locally produced crude oil at US$50 per barrel versus US$90 in the international market.

PAGE-What was the main reason for the recent price hike in the country?

BELAL JABBAR - The main reason for the recent price hike was hoarding of the product by distributors and its black marketing. Although the winter season does bring about shortage, it has never driven prices this high. As per OGRA's directives all LPG Marketing Companies except one, were selling LPG between Rs. 58-60 per kilo from their plant. Distributors in turn were selling it at Rs. 120 per kilo making exorbitant and record profits. We are extremely grateful to the DCO's across Pakistan for reducing these prices and bringing them in line with OGRA's directives.

PAGE-Why were local LPG production prices linked to Saudi Aramco CP last year and what were the results?

BELAL JABBAR - The linking of locally produced LPG prices with Saudi Aramco CP or the import parity pricing policy was proposed by a particular interest group on the premise that there is a latent demand of 4000 tons per day in the country and the Government's pricing of LPG below CP was making imports unviable and allowing local players to mint money. It was argued that the link with Saudi Aramco CP would (i) facilitate imports and thereby increase supply, (ii) through increased competition lower the price for the end user, (iii) attract additional investment in LPG production. The prices were linked in Jan 2007 and in Dec 2007 the Government reversed its decision after realizing that none of the objectives had been achieved and in fact during this period consumer prices had actually increased by 15%. More importantly zero investment occurred in LPG production and there was no noticeable increase in imports.

PAGE-Why was there no increase in imports if the policy was implemented to facilitate imports?

BELAL JABBAR- Imports rose by a mere 3% in the year 2007 versus 2006 and still accounted for less than 10% of total consumption. The reason that imports did not increase substantially was the cost of LPG itself. As a result of high oil prices in the international market, LPG prices had also increased and at that price were no longer affordable for the common man in Pakistan. In fact the entire concept of facilitating imports to increase consumption was flawed, since how can costlier imports drive demand for a product. It defies all economic logic. Demand can only be stimulated if prices are low to encourage consumption. It has been estimated that due to this linkage in 2007 the size of the Pakistani market particularly rural has actually shrunk.

PAGE-Why does India have a higher per capita consumption of LPG even though the bulk of its LPG is imported?

BELAL JABBAR - Unlike Pakistan where most urban areas have supply of piped gas, in India the bulk of the population relies on LPG. In order to encourage its use since it is a clean burning fuel, the Government in India heavily subsidizes LPG for all its household users. If the same subsidy was given in Pakistan the per capita consumption would be far greater.

PAGE-Has the new deregulation policy had any positive impacts?

BELAL JABBAR- Two months have passed since the deregulation policy was reintroduced and the results are that after a high of Rs. 120 per kilo, LPG prices are down to Rs. 65 per kilo and despite critics claiming that imports have once again been rendered unviable a parcel of 2500 tons has been imported in January.

PAGE-What is the best way to meet the shortage of LPG in the country?

BELAL JABBAR- Pakistan suffers shortage of LPG for nearly 3 months in the year and therefore it is not rational that LPG prices should be increased to international level for 12 months. The best way to cater to this shortage is for producers to import LPG in the winter months, mix it with their local product and pass on a weighted average price of the two to their customer companies who in turn will market it to the end user. This way, the rise in price will be nominal compared to if the entire product was charged at international prices. This model has been successfully implemented by a LPG producer; JJVL in January 2008 and after mixing the expensive imported LPG with local prices they have still ensured that price in the market does not exceed Rs. 65 per kilo.

PAGE-What is the future of the LPG Industry?

BELAL JABBAR - LPG in Pakistan accounts for less than 1% of the total energy fuel mix. There exists enormous potential for this industry especially since additional local production to the tune of nearly 700 tons can be brought on stream fairly soon. Additionally there is a LNG project being set up in Karachi which will also produce LPG to the tune of over 500 tons per day. What is needed is a level playing field for LPG in relation to other competing fuels to ensure that a sustainable market for the product is developed and an across the board pricing mechanism needs to be implemented.

PAGE-How do you see the Autogas market?

BELAL JABBAR- Pakistan is just ripe for the Autogas market, since nearly 50% of all LPG consumption is in the auto sector. Also with dwindling natural gas reserves the possibility of additional CNG stations is limited. LPG is a clean burning and environment friendly fuel and there are over 10 million vehicles operating on it worldwide.

PAGE-Who would you blame for the recent LPG Price Hike?

BELAL JABBAR- The recent price hike was mainly driven by distributors and by 2 or 3 LPG marketing companies who were defying OGRA's authority and trying to sabotage the Government's effort of ensuring an affordable price of LPG for the common man.

PAGE-What is the profit margin of LPG marketing companies?

BELAL JABBAR- On the average the profit margin of LPG marketing companies varies between US$30-US$50 per ton.

PAGE-What are the future projects that NOOR LPG will be undertaking?

BELAL JABBAR- NOOR LPG has expanded the scope of its operations by acquiring marketing interests of another company. NOOR is also establishing the country's first dual fuel (LPG & CNG) station in Lahore, which will also be the country's first Autogas station.