LPG sector in Pakistan

LPG sector in Pakistan

FOZIA ISHAQUE (fozia.ishaque@hotmail.com)

Liquefied petroleum gas (LPG) is a non-renewable source of energy. It is extracted from crude oil. More than 4 million light and medium duty vehicles travel around the world on LPG. LPG vehicles emit about one-third fewer reactive organic gases than gasoline-fueled vehicles. Small amounts of LPG may escape into the atmosphere during refueling, but these vapors are 50% less reactive than gasoline vapors, so they have less of a tendency to generate smog-forming ozone. LPG's extremely low sulfur content means that the fuel does not contribute significantly to acid rain. LPG is internationally used in the automotive sector because its usage makes the driving range equivalent to that of gasoline, the engines last longer, refueling infrastructure is affordable, and it is affordable than other fuels in many countries. Beyond its technical and economical advantages, LPG is clean and helps combat urban air pollution.

The Pakistan LPG Association is working to lobby the Government to allow greater usage of LPG in the automotive sector in all provinces. The United Nations Development Program ñ Small Grants Program is running a pilot program in Rawalpindi where it is emphasizing Pakistan to "reduce carbon emissions by converting rickshaw engines from petrol/oil mix to liquefied petroleum gas through elimination of investment cost barriers. LPG is a popular domestic fuel in remote areas where natural gas distribution network is not available. Domestic LPG production always falls short of demand. The gap in demand and supply has to be met through imports. However, the volatile LPG price in the international market has made LPG import prohibitive.

LPG diversification

Traditionally, LPG was being marketed in 11.8kg domestic and 45.4kg commercial cylinders, whereas marketing of 2-5 kg cylinders was discouraged. However, in view of increase in the prices, unscrupulous LPG dealers and unauthorized decanters started decanting LPG in a crude, unsafe and hazardous manner, leading to major accidents and even fatalities of innocent people. Following deregulation, the mushroom growth of LPG marketing companies' points towards many flaws in issue of licenses to those who have no infrastructure investment. Hence, the menace of bulk trade of LPG is rampant. Currently, out of 25 million households in Pakistan, 4.3 million are connected with natural gas network; approximately 2 million are using LPG, whereas the rest are relying on conventional fuels like coal, firewood, kerosene, dung cake, etc. Presently, about 1,500 tones of LPG are being produced domestically per day contributing 0.5% to the total energy supply mix, which is insignificant as compared to other competing fuels. There is, thus, an urgent need to make concerted efforts to increase contribution of LPG in the total energy mix by diversifying its usage in other sectors of the economy. LPG availability needs to be enhanced to ensure its marketing in the far-flung remote northern, hilly and the rural areas of the country to ensure elimination of unauthorized activities, reasonability in prices, reduce deforestation and mitigate environmental impacts and to bridge the gap between demand and supply of LPG.

The caretaker government has recently reversed the decision of former Prime Minister Shaukat Aziz and completely de-regulated the pricing mechanism of LPG and directed the OGRA to de-link the price of LPG from the Saudi Aramco control price. Practically, now LPG producers would be free to fix wholesale prices and subsequent supply chain, including distributors and dealers would set their prices for retail sales. The government had deregulated the LPG industry in 2000, under which LPG producers had formed a cartel-like situation to fix production prices. As a result, they used to increase prices at their own will, primarily ahead of winters when domestic consumption increased. The LPG market at the time was restricted to domestic consumption and its use in vehicles was banned and the administration used to take criminal action on violation. In December 2006, the then prime minister Shaukat Aziz linked its prices with international prices - calculated on the basis of Saudi Aramco contract prices ñ on the demand of a couple of private sector investors, although more than 95% production of LPG comes from the domestic sector. Subsequently, on the demand of same private sector investors, the previous government also allowed use of LPG in auto-sector.

Ever-rising price graph

Since then, the LPG market has heavily tilted towards automobiles with about 60% market share. As a result, the domestic consumption now stands at about 40% of the entire market, although it remains a fuel of compulsion mostly in rural areas because of it being environmental-friendly and lack of other fuel sources. However, prices which were about Rs17,000 per ton in April 2006 increased to Rs25,000 per ton in December 2006, but surged to more than Rs75,000 per ton at present, showing an increase of almost 440% in matter of 22 months. In recent months, prices of LPG made news headlines. After December 27, when country was facing sever law and order disorder and number of trading concerns tried to increase their profit margins massively under the cover of shortage of supply. The government tried to bring the prices down but unluckily stakeholders have made cartel in this sector as well like in many other sectors. Government tried to bring down price to Rs 70 a kilo but it is being sold between Rs 80 and Rs 100 in the city despite assurances from marketing companies to bring LPG prices back to those fixed by the OGRA. It is said that LPG, which was considered to be cheaper than petrol around the world, was no cheaper in Pakistan. As a matter of fact, about 70% of LPG is being consumed by rickshaw drivers in Lahore whereas more than Rs 80 is comparatively expensive deal for them. It is also said that distributors are involved in creating the price hike and artificial shortage of LPG in many parts of Pakistan. Unfortunately there are instances where distributors tried to sell LPG at a price set by OGRA but their counterparts who involve in black marketing harass them.

The expected increase in demand is partly due to the expansion of the middle class, which sees subsidized LPG as improving their lives. But, the government's intention to increase the use of LPG as an auto fuel also plays an important role. In major cities, air pollution is a serious problem and switching to LPG from leaded gasoline or diesel is expected to improve air quality. Partly because of gap and partly because of inadequate infrastructure facilities for import, storage and handling, the government decided to open the LPG business to private entrepreneurs. However, their entry was constrained because of rise in international prices of LPG, apparently because of purchases by China and India and the government's inability to reduce subsidies.

Taking into account the economic growth projections (middle and high income households are not connected to natural gas network and the government's decision to allow use of LPG in auto sector) the demand of LPG is likely to increase manifolds in coming days ahead. It was decided by the government that all the LPG marketing companies would be obligated to market at least 20% of its quota in AJK and hilly areas. This quota included 7% for Northern Areas, 7% for AJK and 6% for hilly areas, including Fata, to arrest deforestation, improve degrading environmental conditions and upgrade the living standards of the people of backward areas. Similarly, to fulfill the requirements of Balochistan, it was decided that each company would be obligated to market at least 10% of its LPG uplifted from Parco in Balochistan.

New dimension

The use of LPG in auto sector, however, created a new dimension in the market. Despite over 440% increase in prices, LPG still remains almost at 60% of petrol which is the competitive fuel. This, however, is almost forcing out the domestic consumers. An official statement quoted the caretaker prime minister as saying that the interest of the consumer has to be given foremost priority and, therefore, it would be better if the price of such a commodity of daily use is driven by market forces of demand and supply rather than notification by the government. Government, however, has also directed the OGRA to keep a close watch on supply and prices of LPG to ensure un-interrupted supply of LPG in far-flung areas at reasonable prices. According to the Secretary of Petroleum and Natural Resources, LPG share in the country's energy consumption has increased from 0.4% last year to 0.5% this year and around 1.5 million households are using LPG fuel for cooking and heating purposes, while the main user of this type of fuel is the automobile sector.

Use of LPG as domestic fuel is being encouraged to slow the ongoing deforestation in the areas where supply of natural gas is technically not feasible. LPG is also being increasingly used in cars, pickups, rickshaws and even motorcycles in areas where CNG is not available due to the absence of natural gas distribution network. The supply of LPG was streamlined with its distribution at affordable prices, promoting healthy competition and ensuring safety standards across LPG supply chain. The custom duty at 5% imposed on the import of LPG has been waived to further enhance availability of LPG. The LPG marketing companies have planned to import approximately 50,000 M.T during 2007-08.

Keeping in view the popular demand of small cylinders, the Oil and Gas Regulatory Authority (OGRA) needs to take appropriate measures to encourage the LPG marketing companies to introduce small-sized LPG cylinders and make safe arrangements by setting up separate mini-filling centers at major consumption hubs. After decision of the Cabinet to allow use of LPG in the auto sector it is imperative that proper mechanism may be evolved for establishment of LPG re-fuelling stations.

Presently, more than 100 LPG marketing licenses have been issued by OGRA and if all these companies are allowed to appoint distributors to establish LPG re-fuelling stations it may create safety hazards. Many industry experts believe that only LPG marketing companies themselves should establish LPG re-fuelling stations after getting license from the OGRA. OGRA should also enhance safety standards, rules and procedures and make them in line with the international best practices for regulating this sector. Despite clear instructions of the government, the marketing companies are not marketing mandatory quota of LPG in the said areas and are diverting their product to selective urban consumption centers. In this regard, OGRA should ensure that the marketing companies take appropriate measures to implement the aforesaid decision to ensure smooth availability of LPG on equitable basis. Moreover; there is a need to lay down certain guidelines for public sector producers to make transparent allocations. There is also a need to protect the LPG consumers from unreasonably high prices of LPG. It is, therefore, imperative that OGRA exercises its powers under Rule 18 of the LPG (P&D) Rules, 2001 for regulation of LPG prices

Source: www.pakistaneconomist.com