DISTRIBUTION AND

RETAILING OF LPG IN
INDIA
Contents
1. Introduction

2. LPG in India – Overview

a. Demand – Supply Scenario

b. Major Players

3. Understanding LPG Supply Chain

a. Procurement

b. Storage

c. Distribution and Retailing

4. LPG Marketing

a. Market Segments

b. Brand Positioning

c. Internal Marketing

d. Customer Retention Techniques

5. Challenges to extending LPG for domestic use

a. Supply and accessibility

b. Affordability

c. Pricing policies

6. LPG Programmes in India

a. Deepam LPG scheme

b. Gramin LPG Vitrak-GLV

7. Competition Scenario
 a. Among OMCs and PMCs

b. Threat from substitutes

Conclusion

Exhibits

Introduction

LPG i.e. Liquefied Petroleum Gas is a mixture of Propane and Butane and with tertiary gases.
In India, distribution of LPG began with Burma Shell Corporation in 1955. It started as an
alternative to the then popular fuels of India, Coal, Kerosene, wood and Dried Dung Cake. As
per its prices, it was not feasible even to the then middle class to shift to LPG. So, Govt
promoted LPG by providing subsidy during connection and later on base of per unit of gas.
Govt Policy acted as a spark to the fuel. No sooner, there was a long list of applications for
registration of connection. Oil companies had not planned for such demand in terms of
cylinders, gas and distribution points. Slowly, mass production of gas cylinders started in
India with rising imports of LPG from middle-east countries and that lead to easing the
supply demand gap.
LPG in itself is largely a mixture of Propane and Butane with a high calorific value of 50,350
kJ/kg and 49, 510 kJ/kg. This differentiation leads to difference in LPG supplied to Industrial
and Domestic Sector. Industrial is 70% propane and 30% butane whereas for domestic the
values reverse as 30% propane and 70% butane. This value varies with season as well; in
winter, it’s more propane and in summers, it’s more of butane.
In India, LPG finds is prime usage in Domestic sector with 92.3% consumption in
households. 3.4% in commercial sector and 2.4% as Auto LPG and 1.9% in Industry. In
2001, 17.5% of the households using LPG used it as their primary cooking fuel though the
share of firewood as primary fuel was 52% and 10% each on Crop Residue and Cow dung
Cake.
Currently, the LPG business is fragmented in two parts: Industrial & Commercial LPG and
Subsidised Domestic LPG. Both businesses run on base of understanding & regulation.
Industrial & Commercial LPG is a more competitive business segment than the Domestic
LPG as it has competition between OMCs and PMCs together. In Domestic LPG, only OMCs
operate and competition is largely limited by dividing boundaries of area for distribution of
LPG.

LPG in India – Overview

Demand Supply Scenario

LPG in India is largely a regulated market. Pricing and allocation of Distribution joints is
decided by corresponding bodies. Demand for LPG in the Year 2007-08 was 10178 TMT
corresponding to supply level of 11, 278 MMTPA. This supply consisted of 55% from PSU
OMCs, 25% from Essar & RIL and remaining 20% from imports. In the year 2004-2008,
demand stood at 90-95% of Supply. On January 1, 2007 there were 181 bottling plants across
India 49% owned by IOCL, 27% by BPCL & NRL and 23% by HPCL. Bottling plants had a
capacity of bottling 8987 MMTPA as on April1, 2009. There were 9366 distributors of LPG
on the same date with 73% presence in urban area and 12.5% each in Urban/Rural and Rural
area. Demand for LPG is growing at a rate of 6% per annum whereas supply is not constant
and gap is filled by imports.
The LPG being distributed is in 4 cylinder sizes. Domestic Cylinder: 5 kg & 14.2 kg,
Commercial Cylinder: 19 kg and Industrial Cylinder 35 kg. LPG for Domestic customers is
supplied at a subsidised rate and for industrial & commercial rate is market determined. This
difference in pricing scheme often lead to black marketing but companies are now a days
vigilant enough to inhibit this practice. HPCL as a pioneer is including GPS device in its
cylinders to restrain the fraudulent practice.

Major Players
In India, share of LPG retailing largely depends on the LPG producing capacity of its
refineries. IOCL has the highest number of refineries and largest capacity for producing LPG.
It leads the market with 49% share, 27% by BPCL & NRL, and 23% by HPCL. In the PMCs,
major players are RIL and Essar. These two companies generate 90-95% of their revenue
from the Commercial and Industrial segment. The combined LPG producing capacity of RIL
& Essar is 3% of the total indigenous LPG production capacity of India.

Understanding LPG Supply Chain

Procurement

In India, LPG is either imported from outside or is produced as a by-product in the refineries
and petrochemical plants. Imported LPG arrives at the country’s ports by help of LPG tanker
ships.

Storage

From both, the ports and the refineries, LPG is brought to the large storage facilities with the
use of pipelines. Here the LPG is stored under highly refrigerated and pressurised condition.

Pipeli

Pipeli
 Oil Refinery

Distribution and Retailing

From the storage facilities, LPG is directly distributed to bulk industrial purchasers via large
bulk road tankers. For the domestic customers, LPG is distributed in packed form through
dealers. Dealer holds the stock of filled cylinders. When the customer’s LPG cylinder is
emptied, it is replaced by the local operating dealer at the customer’s location itself. The
dealer recovers the cost of transporting cylinders from commission on a per refill basis. A
group of dealers in a given area receive the filled cylinders from the designated bottling plant.
A dealer sends the empty cylinders to the required bottling stations via truck. These bottling
plants take back the empty cylinders and load the truck with the filled ones. The filled
cylinders are then sent back to the dealer. The various bottling plants in turn receive the LPG
from storage facilities with the use of tankers. The tankers are dedicated to transporting LPG,
and hence, the company pays the transporters for both delivery and return trips to the storage
facilities.

Tanke

LPG Cylinder
Supply Tanke Bottling
Storage
 Dealer
LPG Marketing
Till September, 1993 LPG was being marketed in the country by the Public Sector Oil
Marketing Companies (OMCs) only. Since LPG was under short supply, OMCs were
importing the product to meet the requirements. However, inadequate import infrastructure
coupled with limited allocation of Foreign Exchange at official rates made it difficult for
OMCs to import LPG and meet the full demand. In order to overcome this difficulty,
Government issued a notification, dated 3rd August, 1993 introducing the concept of Parallel
Marketing Scheme (PMS). Under PMS, parallel marketers (private companies) were allowed
to import and market LPG in the country to packed and bulk consumers in both domestic and
non-domestic (commercial and industrial) sectors. Since then, parallel marketers have been
importing and marketing LPG under PMS.
Following are the details of LPG Sales by OMCs and parallel marketers till 2003-04:-

OMC's sales
(Fig. in TMT)
Year Domestic Non-Domestic Total
Packed Bulk
2001-02 7,040 171 99 7,310
2002-03 7,737 208 198 8,143
2003-04 8,789 105 181 9,075

PMS Sales
Year TMT
2001-02 178
2002-03 208
2003-04 216

Since domestic LPG marketed by OMCs is subsidized, parallel marketers could not make
significant impact in this sector, however, they are able to compete with OMCs in non-
domestic commercial/industrial sectors (about 85-90% of the sales of parallel marketers are in
these sectors). Exhibit 01 shows the number of consumers of LPG till April, 2008 state-wise
and Exhibit 02 shows the growth in LPG marketing in India.

Market Segments
The LPG market is segmented according to the purpose of the use of LPG as a fuel, i.e. for
domestic (90% of business), commercial and industrial use (rest 10%). Accordingly the
weight of the cylinder varies (standard weights), as the usage depends on the type of
consumer and to lessen the transportation cost. In the industrial category, there are bulk users
too, who are served in bullets (huge tanks). The subsidized price of LPG is provided only for
the domestic segment, and the commercial and industrial rates are as per the market decided
prices.
Brand Positioning
One of the important features is that neither the business persons nor the consumers are able
to see the product, therefore building the perception of trust and importance in the minds of
the consumers makes a difference. Deliverability assurance and Safety measures is one of the
key features of the company providing the service.
As mentioned before that LPG business is mostly self-propelled. Demand, in absence of any
other substitute fuel as of now, implies that it overshoots the Supply. Thus some direct
marketing measures are implemented in the form of pamphlets and stuff and some customer
awareness programmes in mass media.

Internal Marketing
Though the LPG business is ruled by the domestic clients, the subsidy regime doesn’t allow
the companies to eke out profit from this division. Industry and commercial segment provides
the revenues but not enough to compensate for the losses made in the domestic segment.
Thus, the LPG SBU is a loss making unit.
Internal marketing is important to orient the distributors, who are the interface between the
consumers and the company, to act in accordance with ethics and see that there is no
diversion of cylinders. This arbitrage incentive is due to the fact, that domestic cylinders are
priced low and hence commercial enterprises have a tendency to acquire those at a premium,
though lesser than the designated commercial LPG product.
The steps taken by the Government of India/OMCs (oil marketing companies) to prevent
diversion of domestic cylinders are as under. Exhibit 03 depicts the penalties that have been
imposed in case of any breach of law.

Customer Retention Techniques

The LPG business is mostly self propelled and doesn’t need much marketing measures. In the
domestic category, the distributor represents the company and mostly the consumer chooses
that distributor which is closest to his/her locality. Though there are a few factors which
improve the service level of the business:
Again, few OMCs started taking measures to improve consumer satisfaction by providing
home delivery service of household goods by collaborating with Haldiram’s and other retail
goods providers. The commission is shared amongst the distributor and the company in the
ratio of 70:30.
For the industrial and consumers the reliability of providing the LPG cylinders in normal as
well as emergency times is of utmost priority, as the opportunity cost is huge in industry.
Another important aspect is the price of LPG, as the prices charged by the company is not
regulated and hence can be tinkered with.

Challenges to Extending LPG for

Domestic Use

Supply & accessibility

In order to meet the increasing demand of LPG by domestic as well as auto fueling sectors the
country needs additional L PG production capacity, adequate transportation (pipelines & rail
tank wagons), and distribution network.
During the calendar year 2008, the actual sale of LPG was 11820 TMT against the total
indigenous LPG availability of 9228 TMT. The shortfall was made up by importing LPG to
the tune of 2759 TMT.For the year 2009, Total LPG imports of 3112 TMT have been planned
against the projected demand of 12570 TMT at a growth of 6%.

Supply of reliable cylinders

Another challenge pertaining to LPG distribution is assuring the reliable supply of refill
cylinders. For small and remote markets, refills may be delivered once a week or once every
other week. For those users that do not keep a second cylinder, this could mean going without
fuel for as long as two weeks. Signing up for two cylinders to avoid running out of cooking
fuel would further increase the start-up cost of LPG service. Again, this infrequent delivery of
refill cylinders serves as a disincentive against switching entirely to LPG.

Cylinder management
As we know that LPG has to be stored under pressure, metal cylinders are required. To cover
the cost of cylinder manufacture, an initial deposit fee is required. The combination of the
start-up cost and the cash outlay at each refill (which typically cannot be broken up into
smaller installments) presents a serious barrier to the uptake and regular use of LPG by low-
income households.

Import challenges
The LPG import requirement during the year 2009 is estimated to be about 4.7 MMT. The
stretched import capacity of the industry at present is about 414 TMT/month which equals to
approximately 5.0 MMTpa. International factors such as seasonal variations, changes in
international politics cause the problems.

Diversion of LPG cylinders

The reason for diversion of domestic cylinders by distributors is because the domestic LPG is
subsidized. The selling price of domestic cylinders is less as compared to the commercial
cylinder selling price which is fixed on the actual Import parity price. There is a wide
difference between the domestic and commercial rates. Due to this most of the supply
intended to go to domestic consumers are transferred to commercial consumers which results
in shortage for above said consumer base.

Affordability
The economically disadvantaged face the problems of high first costs of LPG (connection and
equipment), and the lumpiness of relatively high refilling bills, and loans are difficult to
service without financial returns from the investment.
On comparing the fuel rates for different fuels, we see that the expenditure occurred for using
LPG is much more costly as compare to others. For example LPG stoves are required to be
designed to operate at 60 percent efficiency or higher, field measurements show efficiencies
considerably lower than the design specifications. If we assume 50 percent stove efficiency
for LPG, 35 percent for kerosene in wick stoves, and 40 percent for kerosene in high-pressure
stoves (where kerosene is gasified before combustion).a 14.2 kg cylinder of LPG is
equivalent to 21 liters of kerosene as a liquid and 19 liters gasified kerosene. Expressed in
rupees per mega-joule (MJ) of energy delivered, LPG is more expensive than kerosene for
low income group population.

Pricing policies
These are a challenge, particularly because of the subsidies already offered. The subsidies do
not reach most of the poor as they are not yet users of LPG, there is diversion of subsidized
LPG from domestic to other uses, and there is also a heavy burden on the central exchequer.
As per the Subsidy Scheme notified by the Government, OMCs are only allowed to market
subsidized domestic LPG. The present total subsidy on domestic LPG marketed by OMCs is
Rs.7.94 per Kg (Rs.112.77 per 14.2 Kg cylinder). Of this, Government is paying Rs.2.86 per
Kg (Rs. 40.65 per 14.2Kg cylinder) and Oil Companies are incurring loss of the balance
Rs.5.08 per Kg (Rs.72.12 per 14.2Kg cylinder). Out of the loss incurred on domestic LPG
sales, as per the subsidy sharing mechanism, ONGC, GAIL and OIL are sharing 1/3rd and the
rest is borne by OMCs. If producers like RIL, ONGC, GAIL and OIL are to be allowed to
market subsidized domestic LPG. They would have to follow price regulation and bear loss,
LPG producers, especially private producers, may not be interested in selling subsidized
domestic LPG under the subsidy Scheme. It will also posses challenge for the government to
ensure the supply of subsidized product to domestic consumers & prevent its diversion to non
domestic purposes.
LPG Programs in India
Deepam LPG scheme
An important scheme implemented for the expansion of domestic LPG use has been the
Deepam LPG scheme in the state of Andhra Pradesh. This project was launched on the 9th
July 1999 for the distribution of domestic connections to women of below the poverty line
(BPL) 41 families in the rural areas of the state. Each connection was accompanied by a one-
off subsidy to the extent of the initial cost, to overcome the barrier to fuel switching. It was
meant to reduce dependence on firewood, reduce the drudgery of collection of/cooking on
firewood, reduce pollution and improve the health of women. Salient features of this scheme
are:
• The scheme was administered by the State government Departments of Rural
Development and Civil Supplies and distributed through OMCs.
• The High Court directed that the scheme be confined only to “white cardholders” (i.e.
those below Rs 11,000/year/family).
• The Department of Rural Development identified the beneficiaries; a target of 1.154
million spread over 22 districts was indicated. Later, the numbers were increased so
that by 2002 about 1.724 beneficiaries (including some of the urban poor) were listed.
• The lists were given to the LPG dealers of the oil companies, who were also expected
to ensure training of the allotted in the use of LPG stoves.
• The Department of Civil Supplies provided a one-time deposit of Rs 1,000/connection
towards the cylinder and regulator.
• Results in terms of the number of connections allotted: till March 2002, 88% of the
urban target and 91% of the rural target had been met (NIRD, 2002).
Learnings from Deepam Scheme
• The scheme was not very efficacious, because although all white-card holders
participated, over 80% of non-white card-holders in the region also did.
• The retention rate was down to 85% in less than three years because of cylinders
having been given away to relatives and being lent to civil servants in local areas
(NIRD, 2002).
• Factors affecting the refill rate were: distance from distribution points, and the season
i.e., there is higher demand during the monsoons.
• Participants’ perceived advantages of LPG were: timesaving, social status, cleaner
environment, and help during the monsoons. LPG was found useful chiefly during the
rainy season because of more employment (implying more cash available for
refueling), more labor demand and moisture making collection and preservation of
biomass difficult. The scheme itself was considered attractive because of the initial fee
waiver.
 • However, the perceived disadvantages were: implementation bottlenecks, reduction in
kerosene quota (in municipal areas), high refill costs of refills, and unwanted envy of
non-beneficiaries.
• Implementation bottlenecks within the scheme that contributed to dissatisfaction
included: limited choice, inability of suppliers to supply stoves and accessories on
time, co-ordination problems at the local level for the supply arrangements, and
irregularities with beneficiaries also having to incur Rs 5 – 30 extra, per cylinder, for
collection/delivery.
• Suggestions from local self help groups (SHGs) for improvement include: credit for
refills and reduction in cylinder size.

Rajiv Gandhi Gramin LPG Vitrak

Ministry of Petroleum & Natural Gas has formulated a scheme, namely, Rajiv Gandhi
Gramin LPG Vitrak Yojna, which is going to be launched very soon. This envisages the
increase in LPG population coverage from 50% to almost 75% by 2015. The scheme is
primarily to reach LPG in villages, so that dependence on conventional fuels like wood, coal
etc. is reduced. This will not only help in conservation of forests but will also have positive
impact on environment as well as on the health of our rural womenfolk.
This Scheme would be implemented by the Oil Marketing Companies (OMCs) namely Indian
Oil Corporation Limited (IOC), Bharat Petroleum Corporation Limited (BPCL) and
Hindustan Petroleum Corporation Limited (HPCL) in addition to their Marketing Plan for
setting up regular LPG distributorships. Identification of locations would be finalized by the
OMCs based on the present penetration/coverage, minimum refill/sale potential for sustaining
the RGGLV.
According to the program, the program will be sustainable for cluster of villages having about
4000 families and consumption of 7 kg per month, out of which half may go for LPG.
Contrary to 2500 cylinders, GLV will be set up with the potential of 1000 cylinders. The net
income for the proprietor expected is Rs 7664/- per month. The selection of the candidate will
be done by draw system. RGGLV will be setup by OMC who have its bottling plant nearest
to the identified cluster of villages.
Competition Scenario
Competition Scenario:
There are mainly two categories of competitions existing in Indian LPG industry. They are as
follows:
1. Inter OMC competition
2. Inter OMC-PMC competition

Inter OMC competition:

OMC’s is India is seen as the facilitator to the nation’s development. Hence, apart from
churning profit for sustainable existence and growth, it has to operate in accordance with the
nation’s interest. That’s why OMC’s are regulated such that to avoid unwanted friction
among themselves and concentrate their whole energy to nation’s cause. So, there exists a
special type of competition among the OMC’s of India.
In domestic segment, OMC has to sell its product at a price decided by the government. So,
there exists no scope of price war, which leaves the OMCs to compete on market share. But,
to avoid unwanted friction and hence deadweight loss to the society, the regulatory body,
MOPMG tries to maintain the optimum number of dealers in an area. In order to that the
number of dealerships of a company is decided by the committee in accordance to their
market share and presence in the region. Hence, chances of competition for market share in
domestic segment are also very limited.
Though, in industrial segment, with lack of price regulation and hence better scope for margin
there is an intense competition in the form of:
1. Price
2. Service
3. Promptness in delivery
4. Hours of catering or working hours

OMC-PMC competition:
PMC, due to subsidised price prevailing in the domestic segment has not shown any interest
to compete with the OMCs. But, in industrial segment it is giving OMCs run for their money.

Threat from substitutes:

Today, PNG is considered to be most eligible fuel to replace LPG. Few, properties of PNG
which are regarded as giving it an edge over LPG are follows:
PNG is Convenient

• 24 hours uninterrupted gas supply,

• No changing or handling of gas cylinders,
• No more last minute emergency,
• Simply, do away with cylinders and its associated problems,
• Make payments after you consume, through banks, drop boxes, ECS, Net, etc.,
• PNG is Economical,
• PNG works out to be up to 10% cheaper than LPG,
• 14.2 kg. LPG is equivalent to 18 units of Natural Gas shown in your meter. At
present, price of LPG is Rs. 255/- you consume Gas costing Rs. 205/- only, saving Rs.
50/- (approx.) every time.

PNG is Safe:
Natural Gas catches fire only when it forms a 5-15% mixture with air whereas LPG catches
fire when it forms 2% or above mixture with air.
• Our supply designs, executions and operations are being done as Per International best
Practices.

PNG is Clean:
• Being a gaseous fuel, very clean compared to any other fuel with more than 94%.
• Combustible particles.
• Burns with a flame always hence, no blackening of vessels.
• Sulphur content less than 10 PPM.
• Most preferred fuel in vehicles in Mumbai today.
• Contribution for a cleaner society.

PNG is versatile
• Apart from cooking, other appliances like geyser, air conditioner, vehicles etc. can be
used on Natural Gas. However, please do not attempt to alter/modify the existing
installation yourself or through any unauthorized person.

Conclusion
We have seen the contrast between the different market segments prevailing in Indian LPG
industry. To be more precise, we saw how the domestic segment is quite different from its
counterpart industrial and bulk segment, be it the implications of subsidy, demands of users
or the interference from the government. Further, we studied the supply and logistic involved
in LPG distribution and how the number of agency in a region is optimised to reduce the dead
weight loss to the society. We had also focused on the marketing party which we found to be
difficult or at least peculiar, due to the fact that customer couldn’t see the product which
makes it by large homogenous.

Lastly, we dealt with the scope of growth for LPG in Indian market and threat from its close
and worthy substitute PNG.

Exhibits
 State-wise and Company-wise LPG Domestic Consumers (As on 1.4.2008)
('000 Number)
State / UT As on 1.4.2008 Total as on 1.4.2007
IOCL/AOD HPCL BPCL Total (Col.2-5)
1 2 4 5 6 7
States
Andhra Pradesh 4090 4427 2290 10806 10342
Arunachal Pradesh 123 0 0 123 116
Assam 1834 24 61 1919 1813
Bihar 1688 315 370 2373 2254
Chhattisgarh 558 327 169 1054 987
Delhi 2656 551 908 4115 4011
Goa 9 244 146 399 391
Gujarat 2980 1073 1217 5270 5067
Haryana 1621 583 1053 3257 3088
Himachal Pradesh 1039 141 71 1252 1179
Jammu & Kashmir 390 824 143 1358 1327
Jharkhand 812 162 129 1103 1026
Karnataka 2375 1835 1361 5571 5225
Kerala 3021 751 1584 5357 5046
Madhya Pradesh 2194 1078 840 4112 3875
Maharashtra 1519 5346 6008 12873 12415
Manipur 218 0 0 218 206
Meghalaya 109 0 0 109 101
Mizoram 188 0 0 188 181
Nagaland 140 0 0 140 129
Orissa 558 624 276 1458 1395
Punjab 2663 882 1097 4642 4406
Rajasthan 1791 1032 1250 4073 3861
Sikkim 114 0 0 114 109
Tamil Nadu 6183 1079 2595 9856 8798
Tripura 256 0 0 256 238
Uttar Pradesh 6202 1361 2687 10250 9688
Uttaranchal 1247 71 183 1501 1428
West Bengal 3447 969 704 5120 4807
Union Territories
Andaman & Nicobar 53 0 0 53 51
Chandigarh 206 66 46 318 313
Dadra & Nagar Haveli 0 30 0 30 30
Daman & Diu 0 26 16 42 40
Lakshadweep 3 0 0 3 2.6
Puducherry 115 91 47 253 230
Grand Total 50397 23912 25252 99562 94180
Source. Public Sector Undertakings.

Exhibit: 01

Growth in LPG Marketing in India

Item Unit Growth in LPG Marketing

 2005-06 2006-07 2007-08 2008-09 (P)
Indigenous Production TMT 7717 8454 6743 7008
Imports - PSUs TMT 2450 1968 2156 1937
Imports - Pvt. TMT 433 321 676 409
Consumption - PSUs TMT 9976 10530 11482 11775
Customer Enrolment Lakhs 44.9 53.9 64.9 53.2
Year-End Position
LPG Customers - PSUs* Lakhs 886 949 1018 1068
LPG Distributors - PSUs Nos. 9270 9363 9365 9366
LPG Markets Nos. 4288 4359 4393 4420
Bottling Capacity TMTPA 8122 8448 8697 8967
(P) Provisional
* Domestic And Non-Domestic
Source: Oil Companies

Exhibit: 02

Details of Provisions of Control Order/MDG/DA to Contain Diversion of

Domestic LPG for Unintended Purposes

Marketing Discipline Guidelines (MDG) 2001 has been implemented which imposes heavy
penalty including termination of distributors found indulging in diversion. Specific provision
for this under MDG is mentioned below:

Irregularity Penal Action

1st instance 2nd instance 3rd instance

Diversion of Fine of Rs 20,000 and Fine of Rs 50,000 and Termination

domestic recovery of differential in recovery of differential in
cylinder to non- retail selling price of 14.2 retail selling price of 14.2
domestic use kg cylinder and 19 kg kg cylinder and 19 kg
cylinder on per cylinder on per cylinder
cylinder basis. basis.

Exhibit: 03

Bibliography