Role of LPG in gas crisis — I

Winters are approaching, in fact are there already. There is usually higher gas demand in winters due to heating and later heating requirements. Local gas supplies have been decreasing 10% per year. In the last few years, LNG filled quite some gap and used to be quite affordable. As is common knowledge, there is energy and especially gas crisis all over the world.

Suppliers are not responding to our tenders due to the tight supply situation. Europe is a large well-paying market. LNG is not available at right prices. As against typical 10-12 USD/mmbtu, LNG prices have been thrice of the aforementioned price. Only very recently, LNG prices have started coming down due to filling up of gas storages of Europe. Fortunately, there are long-term LNG contracts under which we have been and will continue to get enough to use one of the RLNG terminals.

LPG market has been growing fast at a rate of 17% per annum mainly due to gas shortages. The share of LPG consumption as a percentage of natural gas consumption is only 3.88%.However,if LPG supplies of 1.3 MTPA is diverted, LPG share as a percentage of domestic sector gas consumption will be about 17%, which is not insignificant, in terms of ability to have an impact with increased supplies. Out of about 1.3 million tons annual consumption, the market share of domestic sector is 41%; commercial’s 43% and industry 16%. LPG appears to have some potential to fill the gap, although not much. GoP intends to increase supplies by having G-to-G contracts. With increased supplies, the gas deficit problem of network gas may be alleviated to some degree.

Almost half of LPG supplies or more are supplied through imports and the residual by local production. There has been a pricing problem among imported LPG vs. local one. Local LPG is priced on the basis of Saudi Contract Prices (SCP) which index is used in LPG sector as Brent is used for crude oil. Imported LPG has always been more expensive — a perplexing problem. An LPG terminal has been wound up earlier due to this and other problems. Imported LNG dealers complain about it. Why is imported LPG expensive? We will take it up a bit later and what can possibly be done in this respect.

Why is imported LPG expensive? It is under private sector, albeit somewhat regulated. They say if oil sector is liberalized and privatised, petroleum prices would come down. There are several reasons, some logical and some not logical but even may be scandalous. Would LNG be cheaper if allowed in private sector? LNG or LPG may be cheaper, in some cases and situations when imported by private sector. However, the profit is pocketed by the private sector and not shared with the consumer.

LPG, LNG and Oil are commodities. Prices among others also depend on the volume and credibility. Indices like Brent or JKM or TTF indicate average prices. There are discounts for good and large customers and premiums to small and less reliable customers. And there is no way to find this out. Here lies the declared and undeclared profit. Due to this reason, commodities are imported in many countries under G-to-G long-term contracts, which may be indexed. Demand from private and public sectors is aggregated for interim and variable requirements under spot tenders by organisations like TCP (Trading Corporation of Pakistan). There appears to be a need of doing the both. Reportedly, GoP has recently managed to have LT contract with Qatar for supplies of one million tons per year or more. G-to-G contracts need not be handled by the public sector government-owned companies. GoP can allocate and nominate private sector buyers and resellers to the Qatar LPG supplier company. Bulk LPG contracts under G-t0-G arrangement would hopefully fetch lower prices and thus the perennial issue of disparity between imported and local LPG prices would be resolved.

There is a third option as well. There is a considerable LPG import in the form of smuggling from Iran. The illegality adds to transport costs and the share of the facilitators. Some arrangement can be explored to bring order into it. How about a border trade agreement which has been on the table for a long time?

Turkey is able to import pipeline gas and even perhaps LPG from Iran under sanctions? Our diplomats may be able to do something in this respect. LPG storage infrastructure may be able to stabilize prices, especially in winters. There are informal LPG storages. Under a policy regime, more overt storages may come into the market.

Local LPG had been earlier under quota regime wherein the powerful used to get quotas allocated mostly as a political bribe. Even some very respectable and honorable lawyers benefited from this bounty under the Zia regime. How is the allocation now in the absence of quota? It is a difficult issue when the price is fixed. Consumer prices may increase if producers ask for a premium. Demand may contract.

LPG prices

International average typical prices for LNG October have undulated around USD 0.71 per Liter. The average can be deceptive. Actual retail prices vary from 0.324 USD per litre in Russia, 0.541 USD in Turkey and USD 1.022 in Spain. The difference is due to taxation. Pakistan LPG retail prices for the same period are Rs 201 per kg (0.768 USD/L). LPG prices in the region (India) are also around the same. Usually, petroleum prices in India have been higher than in Pakistan due to higher taxation and some possible camouflaging and diversion.

Ogra (Oil and Gas Regulatory Authority) has increased prices of LPG by Rs 2.94/kg for November. LPG prices may rise in future as well. There is a case for reducing or even totally doing away with taxation on LPG, at least, for winters and the crisis period. Presently, about Rs 34 per kg is charged as GST and Petroleum Levy. By doing this, 17% reduction in LPG retail would be there bringing down LPG prices from Rs 202/kg to Rs 168/kg. Perhaps, there is no commitment with the IMF (International Monetary Fund) on it, although any tax cutting is not liked by it.

There is a price disparity problem. LPG cylinder price of Rs 202 per kg translates into Rs 4,333 per MMBtu. While the lowest slab of pipeline gas (PNG) is Rs 122 per MMBtu. The highest domestic slab is Rs 1,400 per MMBtu, power sector Rs 857, industry Rs 1,057. LNG import price is Rs 2,800-3,000 and domestically produced gas price is around Rs 1,200. Please look at this widely varying spectrum. Consumer gas tariff has not been revised for the last two years.

Saudi Contract Prices (SCP) in October came down to 590 USD/tonne (0.3 USD/Liter). In April 2022 and September, SCP hovered between 800-940 USD/t. In January to September 2021, LPG SCP hovered around 550-650 USD/t and Dec-Feb 2020, SCP LPG was at as low as 350 USD/t level. Producer price in Pakistan as set by Ogra for October was Rs 132,303 per tonne (601.377 USD/t or 0.305 USD/L). There may be some price variation issues due to propane and butane ratio in LPG. We have taken propane prices only. However, the difference may be very small.

Pipeline gas (methane) is limited to the network areas, which cannot cover possibly all the populations. Gas coverage in Pakistan is around 20-25%.While there is disenchantment in Pakistan due to the heavy share of low paying domestic sector creating circular debt issues even in the gas sector, in India there are big plans to increase gas coverage to 70% of the populace.

Copyright Business Recorder, 2022