Traders complain as local LPG costs higher than Aramco benchmark

January 27,2018

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LAHORE: Liquefied Petroleum Gas distributors are in a tight corner as they are unable to compete with the imported LGP that costs less because of government policies.

The dilemma of the local LPG sector is that its distribution is entirely in the private sector, but production is solely in the public sector.

The public sector producers demand upfront bonus, which increases the price of local gas over and above the benchmark Aramco rate.

The Oil and Gas Regulatory Authority (OGDC) fixes the same gas well rate of local LPG as that of Saudi Petroleum giant Aramco. The local distributors, however, point out that the LPG price of Aramco includes the freight that it incurs for transporting the gas to the ship.

In other words, Aramco LPG rates are FOB (Freight on Board) rate.

The LPG is produced in Saudi Arabia in far away gas fields and is transported to ports located at 1,000-1,500 kilometres. The distributors say that it is unfair to charge the Aramco rate at the well-head. It should be determined after deducting the transportation charges.

They pointed out that major consumption of LPG was in Punjab, while production centres are in Sindh and Khyber Pakhtunkhwa. The transportation charges of LPG from these destinations vary from Rs6,000 to Rs8,000/ton. This huge difference increases the cost of LPG significantly as the benchmark Aramco rate is used to determine the other government levies on this gas.

Another drawback faced by the LPG distributors is that they have to get allocation of LPG through auction. They have to bid for at least five ton LPG lot for a period of five years.

This is called signature bonus. The bidding system is also not fair. The value of LPG signature is determined on the basis of the highest bid.

If some bidder agrees to lift five-ton LPG lot for say Rs8,000/ton; all other bidders would be required to match the bid. There is no separate bidding for each lot.

This rule allows vested interests to quote high signature price of any five-ton lot of each gas producer to ensure better market conditions for imported LPG. The government levies on both imported and the domestic LPG are the same. The imported LPG is also cleared at Aramco rate and sales tax is also levied on this price.

The domestic LPG is cleared at well-head rate of local producers which is equivalent to the FOB rate of Aramco. Thus, local producers pay sales tax on higher price which makes their product expensive.

The distributors who have invested millions in distribution infrastructure face problem in selling their LPG cylinders through their distribution network when the imported product is freely available at lower rates.

To maintain their market, they are forced to sell their cylinders at below their production cost.

They do not have the option of not lifting their quota from the producers because they already have deposited millions of rupee with the producer as signature bonus.

If they do not lift the supply, they lose Rs5,000-Rs8,000 per ton. Signature bonus is in fact their cost. Signature bonus for five-ton of LPG for a period of five years costs the distributors Rs45.6 million that is paid up front. The producers are unfairly earning at least Rs5,000/ton over and above the Aramco price. The producers say they have to have a guarantee from the distributors that they will lift their quota, and signature bonus provides that guarantee.

However, the distributors say that a guarantee is returned if a deal is executed as per agreement but in this case the money deposited is not refundable. This makes local LPG more expensive.

They said instead these producers should take Rs8-10 million as advance and deduct the cost of supplies if distributors do not lift the stock according to the agreement.


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