Policy Research Institute - PRI Bangladesh

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Encouraging the use of LPG by households


Published: Thursday, Apr 28, 2016


Posted : 28 Apr, 2016 00:00:00



Encouraging the use of LPG by households

Mehrin Karim

Bangladesh is one of the few countries that provide natural gas connections to its residential areas at a fixed monthly charge without regards to actual consumption. Partly owing to this and more generally because of low domestic prices of natural gas, there is now a severe shortage of natural gas. The Bangladeshi government has realized this and has been taking measures to conserve gas. One of the initiatives is to encourage the use of Liquefied Petroleum Gas (LPG) as an alternative to natural gas for household use. It is doing so by not providing new gas connections to households and other commercial enterprises and by reducing number of hours of supply to connected consumers. The government's natural gas conservation policy is therefore based on rationing gas supply rather than by proper pricing to encourage its efficient use.

At the household level, the strategy of encouraging LPG instead of natural gas is a smart move. This analysis looks into this and suggests ways the policy might be improved.

Owing to the absence of new major discoveries and a very liberal use, a burning issue for Bangladesh now is the growing shortage of natural gas. If Bangladesh's gas demand continues to grow at the current pace of 7.0% per annum, the current reserve will be completely depleted by fiscal year (FY) 2022-23 (or FY 2023) [Table 1], unless gas supply capacity is substantially added through new gas field exploration/development and gas imports.

Encouraging the use of LPG by households

On the demand side, the rapid use of gas in power production has been the main source gas consumption growth.  More recently, faced with gas supply constraint, the power sector is increasingly relying on fuel oil. Thus, the rapid growth in the share of oil-based power supply- from only 8.0 per cent in FY2010 to 28 per cent in FY2015- is a reflection of a major primary fuel constraint in Bangladesh (Figure 1).

Encouraging the use of LPG by households

Along with reliance on rental power, substitution of high cost fuel oil with low cost domestic gas has contributed to the rapid increase in the average cost of electricity generation. There is now a severe rationing of gas. Even though priority has been given to power sector, which has come at the expense of fertilizer production, the rising demand for gas in power production far outstripped gas supply. With competing demands for natural gas and its constrained supply, the share of gas-based electricity supply fell to 66 per cent.

The Power Sector Master Plan (PSMP) 2010 aims at achieving a fundamental shift in the fuel-mix option, by proposing a steady shift away from Bangladesh's over dependence on gas as the primary fuel. The Master Plan aims to achieve a fuel mix more in line with other dynamic emerging market economies with greater focus on coal: domestic coal accounting for 30% of total generation and imported coal accounting for another 20% of power generation by 2030. The share of natural gas in the generation mix, including imported LNG, will steadily decline to 25%. Dependence on liquid fuel will be limited at 5.0%, and nuclear, renewable energy and power imports accounting for the remaining 20%.

In addition to the demand from the power sector, demand from industries (especially cement), commercial sector and household sector have also contributed to the rapid expansion of gas consumption. One major policy that has contributed to this expansion is that the domestic gas has been underpriced and rather inefficiently allocated across competing uses. Proper pricing of gas and allocation based on economic efficiency will be a major policy challenge moving forward.

In the area of household consumption the policy of encouraging the use of LPG is a sound policy. However, to implement it properly the government first needs to price domestic use of gas properly by linking setting proper gas prices and by linking total gas bill for household based on actual consumption rather than charge a flat rate, irrespective of use. And second, the government needs to facilitate a competitive LPG market.

Presently, there are seven LPG operators in the private sector of Bangladesh. Their operations can be broken down as: Buying bulk LPG from foreign refineries or traders; shipping the bulk LPG to their terminals in Bangladesh via seagoing gas carriers; storing the bulk LPG into spheres or bullets via jetty pipeline; finally, filling the gases into pressurized cylinders for onward distribution to the final consumers.

Bangladesh has much potential in terms of LPG consumption as only 6.0 per cent of its entire population has access to natural gas, that too mostly in urban areas. The government has granted more than thirty new licenses to private operators who are willing to set up downstream LPG operations. As the Bangladeshi market for LPG expands, competition will concurrently increase with new license holders entering the market. Going forward five to ten years, when customers will find a variety of LPG brands to choose from, competitors will have to resort to their operational efficiencies to offer the best value for money.

Bangladesh consumes more than 100,000 tonnes of LPG a year, 80 per cent of which is imported from Saudi Aramco, the state-owned oil company of Saudi Arabia. The rest is produced by state-run Bangladesh Petroleum Corporation (BPC) from oil refining process. Internationally, the price of LPG is benchmarked to the Saudi Aramco Contract Price and is stable for that month. Freight charges are reduced with the increasing size of the Bulk LPG Cargo. For example, the freight per tonne charge of a 5000 MT Capacity LPG carrier is much lower than the freight per tonne charge of a 1500 MT Capacity LPG gas carrier (based on similar length of travel). It is very important that LPG operators understand this scale economy of trading and finds a way to take advantage of this and pass on the benefits to the households.

A good news is that LPG prices have dropped by more than 50 per cent in the international market since February 2014 as a result of weak demand and rising output. The price per metric tonne of LPG was USD 1,400 in December 2013, but has dropped to USD 550 in April 2016. If Bangladesh domestic LPG prices were adjusted in line with international prices, then the price of a 12kg cylinder would now have been between Tk. 700 and Tk. 850. However, LPG importers and dealers of the country continue to charge the consumers high prices starting from Tk. 1200 to Tk. 1600.

This is a serious problem and needs investigation. In a competitive market prices must be linked to cost of production or import. The fact that domestic LPG prices have not been reduced despite a 50% reduction in the imported price suggests either a lack of competition or price setting behaviour of government. Because the government sets domestic prices of all energy products including fuel oil and the fuel prices have not been adjusted by policy despite the halving of imported prices, LPG distributors are possibly working on this principle. The government must look into this carefully and take corrective actions.

In conclusion, Bangladesh is quickly running out of natural gas and the status quo promotes a faster depletion of the resource. Current policy framework does not assist in making the switch from natural gas to LPG. The market is clearly not working in encouraging people to make the switch and endangering the energy security of the nation.

However, if the government designs and implements its policies to promote use of LPG in the proper manner and if the LPG operators can grasp the right opportunities to combine their operations, the future may create a greater scope for them and then a healthy industry will grow, giving birth to many ancillary opportunities along with it.

(The writer is a Senior Research Associate at Policy Research Institute and can be reached at mehrin.karim07@gmail.com)