LPG sector: has open market regime helped?

There is usually a lot of protestation against the increase in LPG prices, which are termed unjustified by the consumers and other stake- holders. There appears to be a lot of confusion in LPG policies. Apparently, the sector is unregulated, yet OGRA is prescribing LPG prices in one way or the other.
Ironically, potential importers complain of low prices regime perpetrated by local producers' monopoly interest and the latter emerge as champions of consumers. Yet, the demand is more than supply. There is a lot of unmet potential demand. LPG consumption, on per capita basis, in Pakistan is much lower than other countries of the region.
Freeing up the sector was meant to lower prices and boost supplies, none of which actually happened. The classical market panacea has not been materialised. 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.
LPG ACCESS AND CONSUMPTION Only 20% of the households in Pakistan have access to natural gas. 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 the 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 PRICES Let us review the prices, domestic regional and international. Domestic LPG prices normally hover around Rs 100 per kg these days. LPG prices are the same for auto and as well as for households, contrary to the usual case, where the LPG for auto use is normally dearer than for residential uses due to varying taxation levels.
In India, these days LPG prices for the auto sector are IRs. 37.85 per kg (Pak Rs 75.70), and for home use the LPG price is much lower at IRs. 24.54 (Pak Rs 50) per kg. Gasoline prices in India these days are Pak Rs 116 per litre. Thus LPG in the auto sector is 50% more expensive than the rates for home use; and allowing for energy content differences, about 25% cheaper than Gasoline.
In Spain, a relatively low petroleum price country, LPG price for the auto sector is around Pak Rs 140 per kg (0.62 euro per litre). In the US the LPG prices for residential use average at Pak Rs 120.0 per kg (2.88 USD per gallon). Although the retail LPG prices in US for residential use may vary from under USD 2.0 per gallon (Pak Rs 85 per kg) to a median value of 3.44 USD per gallon (PkRs 140.0 per kg).
In and around Texas and elsewhere, LPG prices at gas stations are in the range of around 2.8 USD per gallon and go as high as 3.4 USD in some locations. It appears that in the US, taxation policies do not differentiate or discriminate among the end use. In Texas, spot price of LPG last week was Pak Rs 56.6 per kg (USD 1.363 per gallon), which compares with the usual producer prices of Rs 50-55 per kg in the local market.
It is intriguing to find very low LPG prices in India, 50% of the ones in Pakistan. It is perhaps due to local production, which prices are kept particularly low in India. Local antagonists claim that excessive profits are made by the local producers, while their cost of production according to these sources is only 20% of the producer price. It might be correct to some extent and explains the low costs prevailing in India
EXPANSION OF LPG SUPPLY CHAIN We live in the gas surplus region or adjacent to it. Iran and Qatar together house 33% of world natural gas resources. In the 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.
Already, it has been reported that depending on the season, 200-300 tons of LPG per day is imported from Iran, through the informal sector. The smuggling cluster can be transformed and expanded into regular and legal business, supplying much needed energy. Possibilities of establishing a LPG/petroleum market on the border of Iran, somewhere near on the coast, say, in Gawadar may be investigated.
Iran has become a hub of LPG business. Not only it has its own surplus of 2 million tons per year, it falls on the transit route of LPG exports from Turkmenistan and other central Asian Countries. Iran has a large supply of LPG bowsers which are utilised in transporting LPG to the adjoining countries. The same infrastructure can be shared by Pakistan as well.
In fact, there appears to be a case for installing a LPG pipeline from Iran to Pakistan. This may not be a billion dollars affair, but can possibly be done under 250 million US dollars. Recent LPG pipeline project in India of 1014 kms length and a transmission capacity of 1.7 million tons per year (5000 tons per day) cost only 248 MUSD, and was completed in 2003. The project consisted of a 1014 kms (10-16 inch dia) pipeline. Another project recently commissioned by National Oil Company India, has a capacity to transmit 700,000 tons of LPG through a pipeline of 273 kms, linking Panipat with Jullandar. If a similar project is installed at Gawadar to take surface deliveries from Iran and ocean freight deliveries from other middle-eastern sources, competitive pricing would be obtained and there would be diversity of supply sources reducing supply risk.
Also, there should be a scope and rationale to establish a LPG hub somewhere on and around the Pak-Afghan border to cater for the requirements of the Northern Areas, KP and Fata. There is severe problem of modern cooking fuel in these areas. LPG prices here are found to be 25-35% higher than elsewhere in Pakistan. Piped gas has reached less than 13% of the population of this region, which is lower than the country average of 20%. LPG from Turkmenistan and other Central Asian countries comes down to Afghanistan through an established trade network. The same sources can be tapped for meeting the requirements of the northern region. A LPG hub can be established there with storage and distribution infrastructure. As mentioned earlier, subsidised or GST-less LPG can be distributed under private supply network, under a fuel Ration Card system. Alternatively, the proposed LPG hub can be created around Chanda gas field in Kohat, integrated with LPG imports from or via Afghanistan.
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 US 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 subsidised 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.
THE RATIONALE FOR A REGULATED REGIME GoP and the Ministry of Petroleum and Natural Resources (MP&NR) 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. The 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. The Regulatory status has not prevented the power sector to attract IPPs. In fact it is doubtful that IPPs investment would have come about without a regulated policy framework. Same may be true for LPG.
Improving the supply logistics has a potential of bringing the LPG import prices down. LPG supplies are limited due to insufficient local production. And imports are inhibited by the low prices of local production, a miracle indeed. Normally, it is the other way round. The solution lies in regulation and differential tariff. It is common knowledge that electricity is produced at varying prices, from as low as Rs 1.0 per unit for hydro to as high as Rs 12-15 per unit for oil-based electricity and in between many other rates.
Similarly electricity is retailed at as low as Rs 3.0 per unit to Rs 15.0, with a lot of other categories in between. Similar is the case with natural gas pricing. Why this can't be done for LPG. Producers' prices can be linked or determined under a cost-plus system. Admittedly, it is different in some respect. Differential tariff may be abused and difficult to implement. But so are electricity and natural gas tariff, to quite some extent.
Often residential tariffs are paid for commercial uses. There can be various approaches; for example, taxing and allowing imported LPG for Auto use and available from only LPG (Petrol) pumps. This would release considerable LPG for household sector. LPG's wider availability would fill the gap left by increasingly unavailable CNG. Of course, this has to be accompanied by price regulation and control: let OGRA work out details for the proposed regulated regime.
(The writer has been a Research Fellow at Harvard University and has recently authored,"Pakistan's Energy Development; the road ahead")