LPG Sector: has open market regime helped?
There is a lot of protestation against the increase in LPG prices which have been termed unjustified by the consumers and other stake- holders. LPG is being retailed in some places at a rate of Rs 135 per liter, against its normal price of Rs 80.00 per liter. 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 in LPG sector while OGRA keeps threatening the marketing companies with action and dire consequences. Let us examine in these passages the issue and the nature of the problem in some detail and the possible options and approaches that may be available to resolve these. Some perspective is essential.
Only 20% of house-holds in
Most of the cheap domestic fuel (natural gas) is available to the urban areas. Most people in rural areas either burn woody biomass and some consume LPG .Half (50%) of LPG consumption goes to the transport sector , mostly in Taxis which cannot afford the initial cost of CNG installation or operate in non CNG areas.30 % of LPG goes to residential and commercial sector. Also roadside cafes and tea-stalls and tharas use LPG for a variety of reasons of supplies related issues. The remaining 20% is consumed by other commercial and industrial users.
LPG 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.
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
Competition does not seem to work in
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
One is intrigued by the kind of controversy that prevails around LPG sector. It is alleged that the powerful local producers are inhibiting competition by keeping the prices low and discouraging competition. On the other hand there are charges of excessive monopoly profiteering and that the actual profits are made at retail level, as most producers have profit linkages down the line. One would require undertaking a detailed cost of production and marketing study, to get to the bottom. It appears rather strange that some quarters demand higher producer prices, so that they can import LPG and make profits. This would naturally make the prices still higher, while people are protesting against high LPG prices already. Imports are normally allowed to keep the local prices in check and not otherwise. In fact a case could be made the other way round for decreasing the producer prices. As we have discussed earlier, LPG has trade and pricing characteristics midway between oil and gas. LPG is also extracted from gas, while gas prices in
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. There is a public demand of doing away with the GST on LPG; one would be inclined to support it for residential use of poor customers, especially in KP and FATA.
Also the proposal of mandatory imports by the local producer to the tune of 25% of their annual production is worthy of consideration. LPG supplies are often found restricted, especially in winters when the demand in the northern region is high. It has been alleged that imports of LPG is discouraged by the dominant local producers and some key players. Mandatory quotas of imports are expected to improve supplies
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.
Comparative Fuel Prices in the European Union(Euro per Liter)
Gasoline unleaded Gasoline Super Diesel LPG
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Source: EU Energy Portal ; prices in para
ntheses are before tax.
LPG prices in the
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| | Most Recent | Year Ago | |||||||||||||
| Retail | 09/13/10 | 09/20/10 | 09/27/10 | 10/04/10 | 10/11/10 | 10/18/10 | 10/25/10 | 10/26/09 | |||||||
| Average | NA | NA | NA | 2.359 | 2.393 | 2.412 | 2.422 | 2.157 | |||||||
| East Coast (PADD 1) | NA | NA | NA | 2.824 | 2.846 | 2.866 | 2.876 | 2.595 | |||||||
| | NA | NA | NA | 2.824 | 2.842 | 2.852 | 2.878 | 2.612 | |||||||
| | NA | NA | NA | 2.919 | 2.945 | 2.962 | 2.956 | 2.686 | |||||||
| | NA | NA | NA | 2.588 | 2.611 | 2.668 | 2.676 | 2.312 | |||||||
| | NA | NA | NA | 1.817 | 1.857 | 1.876 | 1.886 | 1.633 | |||||||
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| | Most Recent | Year Ago | |||||||||||||
| | 09/13/10 | 09/20/10 | 09/27/10 | 10/04/10 | 10/11/10 | 10/18/10 | 10/25/10 | 10/26/09 | |||||||
| Average | NA | NA | NA | 1.310 | 1.327 | 1.288 | 1.274 | 1.185 | |||||||
| East Coast (PADD 1) | NA | NA | NA | 1.361 | 1.393 | 1.370 | 1.356 | 1.210 | |||||||
| | NA | NA | NA | 1.374 | 1.392 | 1.370 | 1.356 | 1.221 | |||||||
| | NA | NA | NA | 1.342 | 1.395 | 1.368 | 1.355 | 1.192 | |||||||
| | NA | NA | NA | 1.290 | 1.300 | 1.256 | 1.241 | 1.1 | |||||||
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