Crucial Factors for Expanding the LPG Market

1. NOOR LPG Crucial Factors for Expanding the LPG Market NOOR LPG

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

3. NOOR LPG 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%

4. NOOR LPG 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%

5. NOOR LPG What Drives Demand for LPG?(The Crucial Factors) • Availability of the Product • Prices of Competing Fuels • Government Policies

6. NOOR LPG 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

7. NOOR LPG 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.

8. NOOR LPG Enhancing supplies through Imports • Imports represent under 10% of the country’s 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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12. NOOR LPG 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.

13. NOOR LPG 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

14. NOOR LPG 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.

15. NOOR LPG • 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.

16. NOOR LPG 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 (that’s 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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18. NOOR LPG 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.

19. NOOR LPG OGRA’s 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 NOC’s. • 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.

20. NOOR LPG Projected Demand and Supply Patterns of LPG

21. NOOR LPG 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.

23. NOOR LPG • 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.

24. NOOR LPG 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.

25. NOOR LPG Projected Supply • Downstream of OGDCL Fields • Chanda Expansion • Bosicor Expansion • Indus Refinery • Mehar Gas Block • Khalifa Refinery

26. NOOR LPG 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.

27. NOOR LPG • 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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29. NOOR LPG • 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.

30. NOOR LPG • 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.

31. NOOR LPG Expanding the market for LPG • Autogas • LPG & Microfinance • SNG • LPG & Industrial Applications

32. NOOR LPG 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.

33. NOOR LPG 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.

34. NOOR LPG NOOR LPG Autogas Station • NOOR LPG is in the process of establishing the country’s first LPG and LPG/CNG Station • All NOC’s 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

35. NOOR LPG 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 1970’s • 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.

36. NOOR LPG 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.

37. NOOR LPG 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.

38. NOOR LPG Government Support!

39. NOOR LPG • 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.