ISLAMABAD: A study conducted by the Competition Commission of Pakistan (CCP) on the LPG sector in Pakistan revealed that the LPG sector suffered from various discrepancies and competition distortions resulting in higher prices for end consumers, and undue profits for LPG importers in the private sector.
The CCP has prepared solid recommendations for the government to introduce policy reforms, remove regulatory barriers, and put in place a competitive LPG pricing framework to create a level playing field and promote competition in the sector.
The CCP is mandated under Section 28 of the Competition Act, 2010 to conduct studies for promoting competition in all spheres of commercial and economic activity. The draft study on the Liquefied Petroleum Gas (LPG) sector has been uploaded on CCP's website for soliciting public comments within 15 days.
In Pakistan the main energy sources include, oil, natural gas, Liquefied Natural Gas (LNG), Liquefied Petroleum Gas (LPG) including both domestic and imported LPG, coal and electricity. LPG is most commonly known as the 'poor man's fuel'. It is used mainly in domestic and commercial sectors, however its use in the industrial sector is also growing.
LPG is a naturally occurring hydrocarbon in gas and oil fields, or extracted in oil refineries. Compared to other petroleum products, LPG is a lighter gas. In Pakistan 60 percent of the LPG is extracted from natural gas fields and the remaining from refining crude oil at the refineries.
Furthermore in crude oil refining, 10 percent of crude is processed into LPG. LPG presently accounts for about 1.3 percent of the total energy supply in Pakistan. During 2017-18 the total LPG supplies stood at 1.19 million tonnes and the LPG consumption at 1.28 million tonnes. Furthermore, LPG consumption during Fiscal Year 2017-18 stood at around 3,508 tons per day. The LPG demand is met by both domestic and imported sources whereby 66 percent of the local demand is met by the domestic sources and the rest by imported sources.
Punjab is by far the largest consumer of LPG followed by Sindh and Khyber Pakhtunkhwa (KP). Within Punjab and Sindh, the largest LPG consumer is the commercial sector whereas in KP domestic sector has the highest share in LPG consumption. LPG demand by both domestic and commercial sectors experienced high rate of growth since year 2013. The results are in congruence with other data available on energy sources consumption in Pakistan, according to which the LPG sector though small in size compared to other sources of energy yet LPG sector has shown significant growth in the past one decade.
The LPG industry although has a small share in comparison with other sources of energy, however data analysis suggest that in comparison to other energy sources, LPG in the last few years has shown notable growth and the energy source has great potential. It is a 'green fuel' and is environment friendly. Pakistan has been facing energy challenges for the last two decades as a result of higher energy demand in the country compared to supply. Energy sustainability is crucial for economic development and growth and thus the need to ensure availability of these resources through market friendly policies such as to enhance production, efficiency and investment. Likewise ensuring competition is crucial for development, efficiency and investment. The LPG sector can become a major energy source provided it gets due attention through favourable regulatory environment and by clearing the bottlenecks created by the anti-competitive practices in the sector.
There are 12 LPG producers in Pakistan, including six exploration and production (E&P) companies, five refineries and one extraction plant. There are 184 LPG marketing companies and the total number of LPG distributors is 5,512, further the total number of LPG importers is 33. In order to handle the LPG imports at Port Qasim, Karachi there are two import terminals at which LPG is received and stored. These are Engro Vopak Terminal Limited (EVTL) and SSGC LPG.
The Oil and Gas Regulatory Authority (Ogra) is empowered to regulate the LPG sector under the Ogra Ordinance, 2002 and LPG (Production & Distribution) Rules, 2001. Further, Ogra has been regulating the LPG sector in accordance with the policies of the Federal Government. Under the LPG (Production and Distribution) Policy, 2016, LPG price is regulated, and Ogra under the said policy sets and notifies the LPG price on monthly basis.
Competition assessment of the sector shows various barriers to entry and expansion that restrict/reduce and distort competition in the LPG sector at various levels. Natural barriers include high capital and financial requirement in the upstream LPG production/extraction, illiquid market, and seasonal fluctuation in LPG demand.
Regulatory barriers arise due to certain clauses in the LPG Policy, 2016, these include contradictory clauses 3.4.3 and 3.5.1, no clear LPG disposal mechanism due to which uncertainty arises as how to dispose the LPG produced by the producers and procurement by the LPG marketing companies, no clear direction given w.r.to LPG supply (indigenous/imported) under clause 3.6.9, regulated pricing of indigenous LPG vs deregulated imported LPG price. Barrier in LPG imports due to applicability of Public Procurement Rules, 2004 and mushroom growth of LPG marketing companies under licensing regime followed by Ogra.
Strategic and other barriers include substandard LPG import through land route, under invoicing, use of Hundi and Hawala system in LPG import through land route, no LPG quality testing lab for land imports, issues of decanting and cross filling, use of substandard cylinders, illegal use of LPG in public service vehicles (PSVs) and anticompetitive and illegal business practices carried out by LPG dealers.
Based on the data analysis through questionnaires, industry reports, international best practices, and meetings with relevant stakeholders, the study proposes the following recommendations in order to enhance the competitive environment and competition in the LPG sector in Pakistan. These recommendations include removal of regulatory barrier created by contradictory clauses 3.4.3 and 3.5.1, amendment in section 3.6.9 in the LPG Policy, 2016, amendment in Public Procurement Rules, 2004 for ease in importing LPG by public sector companies. More competitive LPG pricing framework for both indigenous and imported LPG to create a level playing field, monitoring of land imports to prohibit black economy and the import of substandard LPG. Establishment of quality lab for testing of LPG through the land route, stringent qualification criteria for awarding LPG marketing license, prohibition and strict penalty for illegal activities of cross filling and decanting, monitoring of LPG dealers by Ogra or any third party nominated by Ogra.
The study also proposes an LPG subsidy programme for the poor domestic households as a measure to uplift them out of poverty and to improve their standard of living coherent with the Sustainable Development Goals (SDGs) of the Government.
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