The draft of 'LPG Production and Distribution Policy 2011', prepared in secrecy without any inputs from stakeholders by the Ministry of Petroleum and Natural Resources, is set to spark controversy as it is aimed at delivering a financial windfall to a bankrupt, private sector LPG marketing company.
Two major policy changes have been planned. Both are geared at ensuring financial viability of an LPG company, which is being auctioned under orders of the Sindh High Court and which, according to the top brass of the Petroleum Ministry, would be acquired by the cash-strapped Sui Southern Gas Company Limited (SSGC) and Sui Northern Gas Pipelines (SNGPL), come what may.
Interestingly, both the SSGC and the SNGPL can avoid the auction process, due now on July 27, and save themselves billions by approaching the court and paying the floor price of Rs 1.5 billion for Progas, in accordance, with the consent decree signed in court. However, according to fresh reports from Ministry sources, SSGC is now preparing a bid for Rs 2.8 billion. Ministry sources also say that SNGPL is resisting coming on board for Progas. At the same time, industry insiders allege that some Ministry officials have "advised" potential competitors for Progas to stay away from the auction process.
One of the stated objectives of the draft policy is to "streamline LPG distribution at competitive prices." However, the new policy will do the opposite, said an analyst.
The new policy is expected to increase the price of locally produced LPG substantially to make the Pakistani industry uncompetitive, and provide the advantage to Progas.
Since 2007, local LPG producers have been allowed to equate their prices with Saudi Arabian export prices for product that is produced, sold, and consumed in Pakistan. Prices of local LPG producers will continue to be capped at the Saudi Aramco Contract Price for each given month. However, the Ministry wants to impose a Petroleum Development Levy (PDL) that would go straight to the government and which would, at today's rates, raise the consumer price of LPG by up to Rs 14 per kg. This at a time when the Oil and Gas Regulatory Authority (Ogra) has controversially "capped" consumer prices at Rs 105 per kg.
"The ambition to increase LPG prices is at odds with Petroleum Minister's recent public statements, claiming that the Saudi Aramco CP benchmark would be "erased" for local production, and that the government would import LPG and "blend it" with local production to bring prices down.
"There is complete arbitrariness in the policymaking under this government," says an industry source not wishing to be identified for fear of offending officials. "This is perfectly demonstrated by the fact that we've had five ministers over the last three years in one of the most critical ministries there is," he said.
"The shocking variation in the incumbent top brass of Petroleum Ministry's words and deeds does not inspire any confidence," the industry observer added.
The source said that the new policy was made to boost Progas, and discourage investment in local LPG production. "It will shut down the local industry, which has seen an investment of over $250 million since deregulation in 2000, only to make the failed business model of one company work," he said.
The second major change in the policy is that all LPG marketing companies will now be required to import 25 percent of their total supplies. "If they do not do so for consecutive three months, the local LPG allocations of marketing companies will be cancelled by producers upon direction of Ogra," threatens the draft policy.
Notwithstanding the fact that this mandatory import requirement will not be maintainable in a court of law, given that it negates the deregulation policy which led to investments in the LPG sector in the first place, the new policy would require import of 9,000 tons of LPG each month.
This is also interesting, because there are only two terminal facilities available in Pakistan for the seaborne import of LPG: Engro Vopak Terminal Limited (EVTL) and Progas. Last year, over 90 percent of all imported LPG cargoes came through EVTL even though its handling rate is higher than that of Progas. Given that EVTL can only store up to 5,000 metric tons of LPG at any given time, the 25 percent mandatory import requirement will necessitate diversion of imported cargoes to Progas, therefore, securing its financial interests.
The Petroleum Ministry also wants to "establish a monopoly" in the LPG sector, which represents 0.6 percent of the total energy mix, down from almost 1 percent five years ago.
"We don't care that the minister wants to buy Progas," said an LPG distributor based in Karachi. "But 50,000 people working in the industry and millions of LPG consumers across Pakistan should not be asked to pay for it," he said. "This is a transparently criminal move and we will appeal for justice," he added.
"Local production has fallen; prices have risen sharply; we are sustaining losses because consumers have switched to burning firewood and are using other fuels, and now Petroleum Ministry wants to raise prices even further!" said the distributor.
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