LPG: the poor man’s fuel

Published July 12, 2021
The government has decided to once again deregulate the LPG pricing and wants to create a competitive marketplace. — Reuters/File
The government has decided to once again deregulate the LPG pricing and wants to create a competitive marketplace. — Reuters/File

LIQUEFIED Petroleum Gas (LPG), which is the so-called poor man’s fuel, is once again at the mercy of policymakers facing a policy reversal instead of improvement.

The process for even the policy reversal is moving at a snail’s pace. By the time it reaches the implementation stage, the current political government will be at the last leg of its rule and may not be able to deliver the desired results, leaving the poor man of the far-flung areas at the mercy of market forces.

In 2016, the previous government reversed the LPG’s deregulation initially introduced in the early years of military ruler Pervez Musharraf, followed by further policy tweaks in 2011 and 2013. Some investments came in and a number of distribution and marketing companies mushroomed. The large production companies and influential plant operators, however, ruled the roost and consumers continued to remain at the receiving end. The intended competition appeared to have been replaced by monopolies in both public and private sectors as prices skyrocketed.

The 2016 LPG policy that reversed the deregulation did help reduce prices to some extent for the first time after a long period. The policy, however, could not be fully implemented. For example, the utilisation of petroleum levy and gas infrastructure development cess (GIDC) for subsidising LPG imports or price stability promised in the policy did not effectively materialise. Also, the setting up of LPG Air-mix plants cross subsidised through the natural gas tariff in far-flung areas could not take off beyond a few locations and the regulator never intervened effectively with the support of local administration as promised in the policy to act against price manipulations and violation of standards.

The government has decided to once again deregulate the LPG pricing and wants to create a competitive marketplace. A set of policy recommendations finalised by a committee constituted by the Cabinet Committee on Energy (CCOE) unequivocally seeks an end to airmix plants by public-sector companies and has proposed sale of LPG through existing petrol pumps.

It’s been suggested that the petroleum levy on LPG should gradually be phased out as the market moves towards a deregulated and competitive regime

Ironically, the price of the rural poor man’s fuel is generally 20 times higher than the price of natural gas consumed by his urban counterpart i.e. lifeline domestic consumer. Equally surprising is the policy direction for a minor fuel that generally serves the poorest of the poor as opposed to all major energy sources from natural gas to petroleum products, LNG and electricity. This is apparent from the fact that LPG accounts for about 1.2 per cent of the country’s total primary energy supply, according to Economic Survey 2019-20. The survey concludes: “This low share of LPG in the total energy mix is mainly due to supply constraints and a higher price in relation to competing fuels like natural gas, wood etc.”

Later this week, the CCOE will be taking a policy decision on a report titled “Sustainable LPG Supply Chain Policy” by a committee led by the deputy chairman of the Planning Commission. The CCOE constituted the committee more than a year ago in June 2020. Interestingly, the Petroleum Division had then submitted a summary for the sustainable LPG supply chain that the committee has now finalised. A few days ago, the CCOE again asked the Petroleum Division to “make an assessment of the expected outcomes of the policy recommendations”. After the CCOE’s clearance this week, the Petroleum Division will move a summary to the Council of Common Interests (CCI) for the deregulation of the LPG supply chain business.

Under final recommendations, there will be a deregulated LPG market where the government intervention will be minimal in setting the consumer LPG prices that will rather “be determined on completely deregulated free and competitive market forces”.

The final report has suggested encouraging investment in the development of indigenous production and additional storage through fiscal incentives, like zero-rated import of machinery and equipment as well as tax holiday. There will be a demand review committee to assess the demand-supply situation and determine the indicative import requirements and publish the monthly market situation. The Oil and Gas Regulatory Authority (Ogra) and the Petroleum Division will separately formulate the terms of reference (TORs) for reporting requirements and rules of the review committee.

In terms of pricing and taxation, the committee has recommended that the domestic producer price discovery should be made through competitive monthly and quarterly auction/bidding processes to be finalised by Ogra for an efficient and transparent auction. Ogra will also define the non-discriminatory technical pre-qualification criteria for short-listing the eligible firms for the bidding. The process will be in place in six months. Interestingly, the bidding in the previous policy had led to the takeover of major production quantities by only a couple of powerful players.

The committee has also called for the discontinuation of Signature Bonus (a sort of premium) by producers with the introduction of competitive auction. Producers will settle the existing signature bonus contracts and move to auction in six months. It has also recommended the removal of advance income tax on the import of LPG, similar advance income tax/WHT treatment on both imported and local LPG and a uniform GST application on the sale of both imported and local LPG.

The low share of LPG in the total energy mix is mainly due to supply constraints and a higher price in relation to competing fuels like natural gas, wood etc.

The committee wants that the petroleum levy, envisaged in the existing policy as a balancing number to equalise domestic and imported LPG prices, should gradually be phased out as the market moves towards a deregulated and competitive regime.

On the positive side, the new policy seeks direct subsidy for target areas through cash transfers, like Ehsaas programme for the provision of direct cash transfers to targeted households, linked to their consumption of LPG. A mechanism has to be finalised in six months. Unspecified special incentives have been advocated for domestic LPG production, establishment of import terminals, storages, filling plants and LPG infrastructure etc.

On the demand side, the committee has called for an end to LPG air-mix plants in the public sector but encouragement to privately owned and operated LPG air-mix plants for new housing societies and high-rise buildings in the cities. Also, it has suggested that the development of LPG switching kits for natural gas-based domestic appliances should be encouraged and marketed by the two Sui companies the introduction of competitive auction. Producers will settle the existing signature bonus contracts and move to auction in six months. It has also recommended the removal of advance income tax on the import of LPG, similar advance income tax/WHT treatment on both imported and local LPG and a uniform GST application on the sale of both imported and local LPG.

The committee wants that the petroleum levy, envisaged in the existing policy as a balancing number to equalise domestic and imported LPG prices, should gradually be phased out as the market moves towards a deregulated and competitive regime.

On the positive side, the new policy seeks direct subsidy for target areas through cash transfers, like Ehsaas programme for the provision of direct cash transfers to targeted households, linked to their consumption of LPG. A mechanism has to be finalised in six months. Unspecified special incentives have been advocated for domestic LPG production, establishment of import terminals, storages, filling plants and LPG infrastructure etc.

On the demand side, the committee has called for an end to LPG air-mix plants in the public sector but encouragement to privately owned and operated LPG air-mix plants for new housing societies and high-rise buildings in the cities. Also, it has suggested that the development of LPG switching kits for natural gas-based domestic appliances should be encouraged and marketed by the two Sui companies.

Published in Dawn, The Business and Finance Weekly, July 12th, 2021

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