INTERVIEW WITH MALIK USMAN HASAN, CHIEF OPERATING OFFICER SSGC LPG (PVT.) LTD.
Mar 5 - 11, 2012
Malik Usman Hasan did his MBA from Roosevelt University Chicago, and started his career as an investment banker with prudential Bache Securities in Chicago and later moved to Citibank Pakistan. Last position he held with Citigroup was CEO Citinational Investment Bank in Colombo. In 2005, he jointly started a boutique investment bank, Ahmed Alman Aslam & Associates specializing in providing advisory services to Pakistani blue chip companies. Presently, he is working as Chief Operating Officer at SSGC LPG (Pvt.) Ltd.
PAGE: PRIME MINISTER SYED YOUSUF RAZA GILANI RECENTLY INAUGURATED ONE LPG PLANT IN KARACHI. HOW WOULD YOU COMMENT ON IT?
HASAN: The Prime Minister inaugurated SSGC LPG Terminal at Port Qasim on Saturday, 18th February 2012. This facility includes a jetty capable of handling 15,000 Dead Weight Tonnage vessels, product throughput of 250 metric tons per hour, a storage capacity of 6,500 metric tons and a fully automated bottling plant capable of handling 3,500 metric tons of LPG per month in one shift. This is the largest LPG infrastructure in the entire country.
Energy infrastructure is sorely lacking in Pakistan. The investment in a terminal, which will facilitate the importation of vital energy resource, is something that we have taken with a long term view.
PAGE: YOUR VIEWS ON LPG CONSUMPTION IN PAKISTAN.
HASAN: According to the latest figures, annual consumption of LPG in the country has contracted by almost 30 per cent in the past five years and now stands at 455,000 metric tons. However, demand is expected to increase substantially with the introduction of LPG Autogas and Synthetic natural gas project. SSGC is currently working on setting up two LPG Air Mix plants with a capacity of 50 MMCFD each. Besides, we aim to promote LPG use in remote areas and help people make the transition from biomass and kerosene to LPG, which is a much more environmentally friendly source of energy. The use of LPG as a standby fuel for industry, commercial and domestic consumers has been recognized globally. When Pakistan faces serious shortfalls of natural gas, LPG is the ideal bridge fuel.
LPG consumption has grown as more supplies have become available. Studies undertaken by the Petroleum Institute of Pakistan indicate that LPG demand will grow to over 1.5 mmt oil equivalent within the next decade. The supply of LPG from local resources will not grow beyond 600,000 mmt per annum. Therefore, nearly one mmt of LPG will be needed to just fulfill the shortfall, not to mention a 100 MMCFD SNG train, which will need 730,000 MT of LPG annually. So, we feel that LPG consumption will need to rise to meet the shortfalls in energy supply.
PAGE: THE INDUSTRY PLAYERS CRITICIZED THE GOVERNMENT FOR IMPOSING MORE THAN RS11 PER KG AS PETROLEUM LEVY ON LPG. YOUR VIEWS.
HASAN: Industry players need to recognize that the LPG Policy of 2001 was approved by them after a great deal of discussion with the government. This policy required that all LPG supplies would be priced at import price parity. This is the pricing mechanism for all liquid hydrocarbons in Pakistan. This policy was successfully implemented for five years. You will note this was the period in which LPG supplies grew significantly. This pricing policy was changed in 2006 to suit certain parties against the advice of major players to the highest of Saudi Aramco Contract Price. This benefitted those LPG marketing companies who had local allocations and thereby choked off imports into the LPG market. This resulted in a 30 per cent drop in supply between 2006 and 2011. The ministry has merely taxed local production in order to create a level playing field.
It is true that the introduction of this levy has increased the price of LPG but even before the levy was introduced the full benefits were not reaching the end consumer. There was a huge gap in the local price of LPG and the import price and this situation was exploited by industry players and caused cartelization. The rationale for this levy was to make sure that the benefits reach the poor people of Pakistan through the Benazir Income Support Program and erode the super normal profits that were being raked up by just the players in the supply chain. What has happened after the levy is that the price of LPG is close to the import parity level and it is economically viable for LPG importers to import LPG and meet the local demand.
PAGE: THE LPG MARKETING COMPANIES HAVE REPORTED A SHARP REDUCTION IN THEIR SALES FOR FEBRUARY COMPARED WITH LAST MONTH. YOUR COMMENTS.
HASAN: Pricing of LPG is linked to the Saudi Aramco Contract Price, which is currently at an all-time high of $1028/MT. This is mainly due to the artificial demand created by Japan in the aftermath of the Fukushima crisis. Another reason is that the LPG industry in Pakistan is mainly dependent upon a single product i.e. cylinder sales. It is essential to have a diversified product base so that the price shocks can easily be absorbed. We expect such diversification to come with the introduction of Autogas and SNG. However, one needs to also realize that in February there is always a drastic drop in demand for LPG. This has been observed year in year out. The pricing change may have had a nominal impact but this is a temporary phenomenon.
PAGE: IS IT RIGHT THAT STATE-OWNED LPG PRODUCERS ACCOUNT FOR 70 PER CENT OF THE COUNTRY'S PRODUCTION?
HASAN: First of all, it is not true that state owned LPG producers account for 70 percent of the country's LPG production. Secondly, the issue that is even more perplexing is that the private producers and distributors are making cartels. What is required is that the regulator checks cartelization and price manipulation instead of price controls and take effective steps to eliminate the smuggling of LPG. Thirdly, you must understand that nearly 50 per cent of all LPG comes from refineries. These refiners have to import most of their crude to produce motor gasoline spirits, diesel, and LPG as a byproduct. All products were being priced at full import price parity except LPG. By correcting the pricing of LPG through the levy, the ministry has merely fixed a pricing anomaly which should lead to greater stability of supply and pricing.