Crucial Factors for Expanding the LPG Market

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Crucial Factors for Expanding the LPG Market

• NOOR LPG

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Presentation Outline

• LPG Market in Pakistan
• What drives demand for LPG?
• Projected supply/demand patterns
• Expanding the market for LPG- NOOR LPG

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LPG Market in Pakistan

• Pakistan consumes 1900 Mt of LPG per day.
• 1700 MT is locally Produced.
• Auto usage accounts for more than 50 of total
  consumption.
• Domestic consumption represents 35 of the
  market.
• Industrial consumption tends to peak only in
  winter months- shortage of natural gas.
• Commercial consumption- including hotels,
  bakeries, etc is around 10

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Supplies of LPG

• Bulk of LPG supplies are from Gas Fields- 60
• Refineries account for 30
• Imports at best represent 7.5
• Smuggled LPG 2.5

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What Drives Demand for LPG?(The Crucial Factors)

• Availability of the Product
• Prices of Competing Fuels
• Government Policies

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Availability of the Product

• Enhancing product availability is crucial for
  expanding the market.
• However price of the product is a critical
  determinant of expansion
• Enhancement of local Production
• Enhancing supplies through imports

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Enhancing local Production

• Examples- PARCO in 2001 and JJVL in 2005
• Both increased supplies by over 400 MT per day.
  Increased supplies created a glut causing a crash
  in retail prices.
• Lower prices stimulated demand- market expanded
  (new plants created all across the country-
  millions invested).
• Within 6 months of each new production, the
  surplus disappeared as market expanded.

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Enhancing supplies through Imports

• Imports represent under 10 of the countrys
  total consumption
• Dec 2006- CP Policy Implemented to augment
  supplies (by equating local LPG Producer Prices
  to Saudi Aramco CP).
• It was hoped that a higher Producer Price
  (equated to imported price) would attract
  additional imports which in turn would fulfill
  the latent demand for LPG.

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Result

• Higher Producer prices (up by 57) translated
  into higher consumer prices- up by 16 in 07,
  thereby dampening demand.
• Imports failed to make major in roads due to
  higher Producer Prices and imports arose by under
  10 compared to 2006. (Incidentally growth in
  imports was higher in the absence of the CP
  policy in 2006 when they arose by 63 compared to
  2005).
• The LPG Industry which had witnessed an
  investment of USD 200 million between 2001-2006
  suffered a major set back as investors shied away
  in the face of rising prices.

  2006 2007 Net Rise
  Rs/ 11.8 kg Rs/ 11.8 kg
Avg Consumer Price 536 624 16
Avg Producer Price 299 468 57
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Result (Cont)

• Between July- October (2007) most LPG producers
  resorted to giving discounts between USD50-100
  minus CP in order to off load their stock- thus
  undermining the entire rationale of the policy
  i.e. Producers should sell for as high as Saudi
  CP because market dynamics would allow them to do
  so.
• It is estimated that nearly 3000 retail outlets
  shut down their operations in the year 2007.
• Major reversal to burning wood for domestic
  consumption occurred- leading once again to a
  multitude of health concerns.
• Any latent demand that may have existed vanished
  at the higher prices as consumers switched to
  using kerosene and wood.
• The CP policy implemented to augment supplies had
  the exact opposite effect on prices as compared
  to PARCO and JJVL- for the first time additional
  supplies resulted in higher prices .
• LPG Marketing companies endured losses resulting
  in a pull back from investing in the LPG business

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What went wrong?

• LPG Market could not withstand an overnight
  linkage to higher import prices- perhaps a
  gradual upward movement could have yielded better
  results.
• Prices of Petrol, diesel, kerosene and natural
  gas were capped in order to provide relief to the
  consumers whereas LPG prices were linked to
  international prices which only widened the gap
  and exacerbated the situation.
• The entire exercise was implemented without
  taking into account serious issues including lack
  of storage facilities, inability to prevent cross
  filling of cylinders and most important- the
  consumers inability to pay for the product.

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• The whole exercise did however prove one thing
• Demand for LPG is extremely price sensitive
  hence the downward sloping demand curve costlier
  imports and a higher Producer Price cannot
  stimulate demand. It defies all economic logic.
• Key Lesson- Additional supplies at the right
  price and not just additional supplies, will
  stimulate demand and therefore it is wrong to
  state that demand has always arisen to absorb
  additional supplies.
• What is the right price?
• The price at which LPG competes effectively with
  other fuels for the same market.

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Prices of Competing fuels

• 50 of LPG Consumption is in the auto sector
  where LPG competes with petrol, diesel, and CNG.
  The price caps on petrol, diesel and continuous
  subsidy on CNG widened the gap vis a vis LPG
  severely displacing its market.
• 35 of LPG consumption is for household use
  (usually in rural areas devoid of pipeline
  supplies) where LPG competes with kerosene and
  wood.
• At the current price LPG is nearly 4 times more
  expensive than natural gas and bulk of its
  consumption is in low income areas.
• The market for LPG can only expand if a level
  playing field is maintained vis a vis other
  fuels.
• Following the delinking from CP Prices, LPG
  prices have fallen and are at their current price
  truly competitive with other fuels. Since the
  start of the year LPG retail prices have declined
  by over Rs.12,000 per tonne (thats USD 200).
• What the CP policy failed to achieve in 11
  months, has been achieved by de linking of prices
  within 4 months- LPG retail prices for the
  consumer across Pakistan have declined.

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Government Policies

• The Government especially through the MPNR and
  OGRA plays a key role in shaping the future
  market of LPG.
• Policies geared towards enhancing the use of LPG
  must be put in place.
• LPG must be given a fair treatment versus other
  fuels to allow its market to expand.
• Cross subsidy mechanism to be allowed for setting
  up LPG- Air plants as set up in Gwadar by SSGC.
• Implementation of Fast track LPG extraction
  projects.

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OGRAs Role

• Approval in principle for Autogas was given in
  September 2005 and yet not one station has been
  established.
• OGRA must review and revise the Autogas
  Framework.
• Licensing Procedure and Design Vetting to be made
  simpler and one window operation for obtaining
  all the NOCs.
• OGRA must also take a tough stance on the issue
  of cross filling of cylinders it poses a serious
  threat to life and is in violation of all
  trademark laws.
• Strict Action must also be taken against
  manufacturers of substandard equipments.

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Projected Demand and Supply Patterns of LPG
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Global LPG Market

• LPG Markets around the world are witnessing high
  prices- mainly driven by crude oil prices
• These higher prices are slowing down demand
  mainly in developing countries
• It is expected that nearly 46 million tons of
  additional supply will become available over the
  period 2006-2012.
• Bulk of this will come from Expansion of LNG
  Facilities in the Middle East Increased
  Refining Capacity In China and Far East
  Countries.
• However this additional supply has been delayed
  and is causing further pressure on prices.

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• Cumulative Global LPG Demand stands at 240
  Million tons.
• 70 of the demand is driven by the
  Domestic/Commercial and Chemical Sector
• High prices are mainly due to demand for LPG as
  feedstock for Petrochemical Industry.
• Bulk of the demand will come from Asian
  Countries.
• It is expected that LPG Prices will moderate
  somewhat over the next 3-4 Years but crude prices
  will be a major factor.

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Projected Patterns for the Pakistani Market

• Pakistan currently represents 0.25 of total
  World LPG Demand
• The Country has one of the lowest per capita
  consumptions of LPG- 2.8 per kg
• Experiment with the CP Policy did not bear the
  desired results.
• As proven demand for LPG is extremely price
  sensitive.
• The solution is to make all efforts to enhance
  local production.
• The Country has the potential to expand its
  current Production by 40 to almost 700 tons-
  Downstream of OGDCL Fields
• This expansion has been delayed since 2006
  causing loss in revenue to the GOP and depriving
  the consumer of a safe and environment friendly
  fuel.

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Projected Supply

• Downstream of OGDCL Fields
• Chanda Expansion
• Bosicor Expansion
• Indus Refinery
• Mehar Gas Block
• Khalifa Refinery

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Demand Forecasts

• As repeatedly emphasized demand for LPG will
  depend on two factors
• Price of LPG
• Prices of competing fuels particularly petrol and
  natural gas
• Assuming that a price parity with other fuels is
  maintained, the market has great potential to
  expand particularly in the household and auto
  sector.

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• According to most estimates the greatest
  expansion will be in the auto sector following a
  ban on new CNG stations.
• Potential also exists for increased consumption
  in the industrial sector with frequent gas
  shedding on the cards.

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• Additional supplies of 800 tons are available and
  can be made commercially operational within the
  next 12-24 months.
• This alone will allow for 50 expansion in demand
  allowing the market to grow from 670,000 tonnes
  to nearly a million tonnes a year.
• Favoring imports over increasing local production
  will have the same disastrous effect of shrinking
  the market and dampening demand.
• Therefore imports can only play a positive role
  if LPG prices remain competitive with other
  fuels.

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• Demand for LPG will rise once again with
  additional local supplies.
• A Level Playing field with other fuels will also
  allow for market expansion.
• All Efforts must be made to increase local
  Production.

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Expanding the market for LPG

• Autogas
• LPG Microfinance
• SNG
• LPG Industrial Applications

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Autogas

• There are over 10 million vehicles in the world
  running on LPG- World LP Gas Assoc.
• That fact alone should dispel all myths about the
  hazards of LPG as Autogas.
• Examples of countries where Autogas use is
  prevalent
• USA, Australia, Poland, Turkey, India, China,
  Japan and South Korea.
• Pakistan already has an established market of
  Autogas- its time to internalize the externality.

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Autogas

• Stringent Requirements pertaining to area
  required are threatening its development.
• Why 10,000 Square feet?
• Increased Autogas usage will reduce dependence on
  Petroleum Products
• Incentives need to be given to encourage its use
  Reduce Area Requirement, Waive Off Duty on
  Machinery and Kits, etc.

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NOOR LPG Autogas Station

• NOOR LPG is in the process of establishing the
  countrys first LPG and LPG/CNG Station
• All NOCs including DCO has been approved
• Enar has in principal approved our site layout.
• Order for procurement of equipment has been
  placed.
• Operation to commence by May 2008

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SNG

• SNG or synthetic natural gas is basically LPG
  mixed with air to produce a gas as a direct
  replacement for natural gas
• SNG is not new to Pakistan- First SNG plant set
  up for Quetta City back in 1970s
• SSGC established one in Gwadar in 2006
• In the face of continuing gas crisis it is the
  best option for areas devoid of pipeline or for
  those where the cost of laying down the pipeline
  is uneconomical- Prime Example would be the
  Earthquake affected areas.

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SNG- NOOR LPG

• NOOR LPG in collaboration with Dynamic
  Engineering Automation is in the process of
  establishing Pakistan's first Industrial SNG
  System for Emco Tiles.
• EMCO Tiles opted for a SNG system as a result of
  severe gas curtailments in the winter season.
• The proposed SNG system will have a capacity of
  delivering 80 mmbtu/hr.

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Conclusion

• Deregulation of LPG Market following de linking
  from CP has allowed for market expansion and
  lowering of prices- Retail prices are USD 150
  lower than CP.
• LPG Market has enormous potential for expansion.
• Key factors for this to occur are prices of
  competing fuels and product availability at the
  right price.
• Autogas Framework must be revised.
• OGRA must play a more proactive role regarding
  safety issues and cross filling of cylinders.

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Government Support!
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• The Government of Indonesia in an effort to
  encourage LPG consumption over kerosene is
  subsidizing LPG by nearly USD400 per tonne.
• They are in fact prepared to absorb additional
  subsidies as LPG consumption rises.
• All we ask for is a level playing field for LPG
  to compete.