LPG sector; has open market regime worked

LPG Sector: has open market regime helped?

20% of house-holds in Pakistan has access to natural gas . Gas supply to consumers is dictated by the availability and expansion of the gas distribution network. Some 68-83% of households rely on wood and biomass. Bulk of the natural gas goes to the non-domestic sector; 33% to power, 28% to industries and 16 % to the fertilizer production. Only 16% of gas goes to the domestic sector. For small residential consumer, the gas tariff has been kept really low, at 1.5 USD per unit as compared to the average rate of 6 USD per unit. By contrast average tariff in the US is 12 USD per unit, while In most of Europe it is twice the US gas tariff. I am recounting this data for giving the reader a perspective, and am not building an argument for increasing domestic gas tariff.

of the cheap domestic fuel is available to the urban areas. Most people in rural areas either burn woody biomass and some consume LPG .In that way LPG can be considered as a rural poor man’s fuel , while some of it goes to the transport sector , mostly in Taxis which cannot afford the initial cost of CNG installation or operate in non CNG areas. Also roadside cafes and tea-stalls and tharas use LPG for a variety of reasons of supplies related issues.

has unique characteristics, some of which make it a preferred fuel, especially its relatively easy transportation as compared to the natural gas which has to be distributed through pipeline and also cannot be stored conveniently. Despite this LPG consumption in Pakistan is very low; 2.6 Kg per capita , as opposed to 7.3 kg in India,12 kg in Philippines . LPG consumption peaked in the year 2006-7 at a level of 649,000 tons, and came down in the last few years to 500,000 tons, perhaps due to the price increases and unstable pricing regime that we would discuss in the following. This amounts to some 25 Billion Cft as opposed to 204 billion cft (12%) of natural gas consumption in domestic sector, and 1275 Bcft (2%) of total yearly gas consumption of the country. LPG market should be able to be quadrupled to 2 million tons in a matter of a few years.

We live in the gas surplus region or adjacent to it. Iran and Qatar together house % of world natural gas resources. In LPG sector also, there is a surplus which is being exported. Middle East has a surplus of more than 3.0 million tons, half of which is in Iran. Iran is facing problems in its exports due to the frequent trade embargoes of all kind. Also there is exportable surplus in Turkmenistan, which goes as far as Indonesia. Pakistan has not been able to fully exploit the potential of LPG imports from the region. Only 8% of the demand is met through imports, which is really negligible.

There is a scope for expanding LPG imports and supplies by establishing a stable and dynamic LPG market based on imports, while there are obvious limitations on domestic production. LPG imports from Iran can provide for a very significant domestic demand, if adequate transportation infrastructure is brought about and facilitated. All of this can be provided by the private sector. Ideally, rail transportation is the most economical, but is subject to many issues. For all practical purposes, road transport may have to be employed. GOP lifted price controls in a hope that it would expand supplies and attract investments in imports, storage, transportation and distribution. Nothing appreciable seems to have happened. This is despite, that there is no restriction on imports. Any body can import. Infact the sector suffers from monopolistic conduct and structure. Competition Commission of Pakistan (CCP) has levied fines and penalties on two major LPG companies, which is reportedly sub-judice.

Competition does not seem to work in Pakistan. We have witnessed this in case of sugar and cement and other areas where there are a far more number of suppliers than they are in LPG. In LPG sector, there are only 10 producers. Neither has price gone down, nor have supplies and investments increased despite significant scope and opportunities of imports from Iran. Only some smuggling takes place, and undertaken possibly by small parties who do not have the wherewithal of dealing with the practical barriers that may be involved in official imports despite an ostensibly open import regime.

There appears to be a lot of confusion in LPG policies. Apparently , the sector is unregulated ,yet OGRA is prescribing LPG producer prices of local and imported production .Perhaps these are recommended prices and do not carry the weight and support of law. The air is full of controversy Minister of petroleum and others in government have spoken against LPG price increases and profiteering of the LPG sector. A parliamentary Committee is investigating some questionable deals while OGRA keeps wondering and is usually engrossed in infighting. I have earlier in this series discussed at length the role and practice of OGRA.I would restrict myself here to point to just one issue. Why does not OGRA involve public and stake-holders by inviting proposals and holding public review? OGRA has confined itself to be a big organizational calculator. We have come across only two public hearings in a year, one on SSGC and the other on SNGPL. It is a misnomer that if there is a formula, it does not require public oversight and discussion. Except for these two cases, OGRA has not developed the culture of public hearings, which could have provided useful input and feedback and would have provided the required institutional strength required for a regulatory body. By avoiding it , OGRA has suffered tremendously in terms of its functionality and prestige.

As mentioned earlier, LPG can play a significant role in filling the demand supply gap, especially in cooking fuel sector, domestic and commercial. Pressure on Gas supplies is increasing. Due to the lack of availability of a suitable alternative, rural population is resorting to felling of trees, reducing the much needed forestry cover. Recent floods have been aggravated due to massive deforestation in the northern areas. For the 80% uncovered population, LPG seems to be the only short-term option, especially when the domestic natural gas resources are running out.

LPG has economic characteristics in between oil, a traded commodity deserving international market price regime, and gas which is often priced at local production cost. Currently, Saudi contract prices are taken as a bench mark for prescribing upper limits for the producer prices. Following are some other pricing options that could be examined;

a)Imported LPG be priced at landed cost plus taxes and duty , taking Saudi contract Price as

a bench mark.

b) Fixing LPG well-head prices according to the natural gas price formula, with some possible enrichment; where LPG is extracted from Petroleum, it could be paid as a fraction say 75% of the ex-refinery price of Gasoline; an average whole-sale/producer price to be worked out depending on the sources of gas, such as natural gas fields, oil refineries or imported. Forward prices in the value chain to be fixed by allowing gross margins/mark-ups for marketing companies and distributor. If such margins are fixed in case of gasoline and diesel, why can’t it be done in case of LPG?

c) The retail price basket of selected stations in the U.S. or EIA retail average price could be taken as a bench mark. Other prices in the value chain are worked out as per fixed margin allowed to every stage. Current retail price of LPG in the US averages around 1.25 USD per kg.

The idea of providing subsidies to LPG to targeted sectors such as domestic consumers in FATA and NWFP deserves serious attention as well. These subsidies could be shared under a trilateral programme wherein GOP, GoKP and U.S aid could share the cost. The programme should be administered under some kind of a fuel ration card system to restrict the subsidies to the intended target group. Apart from welfare and political consequences, the subsidized cooking fuel rationing would help reducing deforestation.

GOP and the Ministry of Petroleum (MPNR) would be advised to come out with an explicit policy for the LPG sector. If unregulated sector has not given the desired dividend, regulation and controls may be tried. Regulated sector often provides the stability, confidence and reassurance our business sector needs. It is perhaps not strong and confident enough to benefit from an open sector that works without assurances of return. Regulatory status has not prevented Power sector to attract IPPs. Infact it is doubtful that IPPs investment would have come about without a regulated policy frame-work. Same may be true for LPG.