LPG in India Subsidy with a Purpose

WLPGA - North Africa LPG Summit

20th May 2010

1. Indian Energy Sector Overview

2. LPG Business scenario

Contents

3. Subsidy Evolution 4. Subsidy current trends 5. LPG Vision 2015 of Indian Government 6. Deregulation attempts 7. Conclusion

Indian Energy Sector Overview Energy Mix 2008 vs 2032

Energy Mix 2008

Fossil fuels to continue dominant role in the energy mix Low per capita consumption (377 kgoe) compared to world average (1660 kgoe)
kgoe : Kilogram Oil Equivalent

Hydro

6%
Nuc 1%

Oil 31%

Coal 53%

Gas 9%

Energy Mix 2032

Nuc 6%
Hydro 2%

Oil 29%

Coal 51%
Source : IEP 2006

Gas 12%

Indian Energy Sector Overview Demand Supply Gap for Crude Oil & LPG
Crude Oil Present Crude Oil Production: 34 MMTPA
180
MMT
21000

LPG Demand vs Indigenous Production Thousand Metric Ton (TMT)

142 100 104 108 120

130 80 30 -20

*
TMT

18000 15000 12000 9000 6000 3000 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Year

Product Demand Crude Production

Increasing Gap

31
2002

33
2003

33
2004

34
2007

41
2012

MMTPA

: Million Metric tons Per Annum Demand

Production

Import

Many Initiatives to reduce the demand-supply gap

Favorable New Exploration Licensing Policy increase in domestic E&P activities Focus on strategic alliances / overseas ventures for equity oil

In-spite of continuous efforts demand - supply gap is increasing. Imports climbing

Source: PPAC & Working group report XI plan

LPG- Emerging as the Most Affordable Alternative

Urban Household Rural Household

Other fuels, 13%

LPG 17%

LPG 87%

Other fuels 83%

Use by Households While 87% of urban households are using LPG only 17% of rural population in India is on LPG. In rural areas firewood is the most common fuel, considering the availability and affordability

An affordable alternative is a necessity for Rural masses.

LPG- Products and Share

LPG market segmentation - Four segments Domestic LPG
Bulk: 2.2%

N.Dom : 6.9%

Auto LPG:1.7%

Fully Subsidized
Current Growth > 6% 89% of total LPG business
Dom: 89.2%

Domestic LPG Non Domestic LPG Bulk LPG Auto LPG

Marketed by Government Oil Companies

YEAR Domestic (TMT) Non Dom Packed (TMT) Non Dom Bulk (TMT Au to (TMT) Total (TMT) Ratio of Dom to Non dom.

2005-06 2006-07 2007-08 2008-09 2009-10

9447 9742 10307 10634 11364

283 425 578 713 879

158

77 136 200 179 223

9965 10531 11344 11778 12746

95:5 93:7 91:9 90:10 89:11

229
259 252 280

Growth Slow but Steady

Independence in 1947 Initial years with multinationalsESSO, Caltex, Burmah Shell National Oil Company, IndianOil incorporated in 1959 Developing country with dependence of Imported Oil Cheap and affordable oil a priority LPG marketing commenced in 1955 by Burmah Shell in Mumbai on West coast IndianOil Commenced marketing LPG during 1965 in Calcutta and Patna on east coast Catering to >50% of population
140 120 100 80 60 40 20 0 1990 1995 2000 2005 2008 2010

Customer population (in millions) 1990-2010

116 101.7 84.5

47.4 16.2 23.2

Sales in TMT 1990-2010

14000 12000 10000 8000 6000 4000 2000 0 1990 1995 2000 2005 2008 2010

12746 11778 Industry 9965

5902 3850 2414

Objective of LPG Subsidy

After First Oil shock during
1973-74, Government adopted Administered Pricing Mechanism (APM). India imports About 80% of its Crude Oil requirement and 25% of LPG Highly susceptible to international oil prices. For development- low Oil Prices a key factor Government policy for Stable domestic LPG prices. Administrative Pricing Mechanism Cost + reimbursement Oil Marketing Co 12% post tax return on Investments

No Competition
Assured Returns

Subsidy - Characteristics
Subsidy- Difference between Desired and Actual Retail Selling Price

RSP & Under recovery

Subsidy is Open Ended

Per Cylinder under recovery increases with rising International Oil prices Overall burden increases with Volume

LPG in14.2KG cylinderPrice Rs 310( $ 6.90) Under recovery Rs 254( $ 5.65)

Kerosene- per Litre

Price Rs 9.32 ( $ 0.21 )
Under recovery Rs18.80( $ 0.42 )

Gasoline per Litre

Price Rs 47.93 ( $ 1.07 )

Under recovery Rs 5.52( $ 0.12 ) Under recovery ranges between Diesel per Litre 15 to 55% of the product cost Price Rs 38.1 ($ 0.85 ) depending on International prices. Under recovery Rs5.21 ($ 0.12 )

LPG Under Recovery is increasing

De Regulation Opportunity Lost

In April2002 Indian Government dismantled APM

Initial subsidy of Rs. 67.75($ 1.5) per 14.2 Kg cylinder as on Mar2002 To be phased out in 3 years. Rs 22($ 0.5 )/ year. Then, Retail prices to be market determined in line with international Oil prices.

Due to domestic pressures and high international prices, scheme extended for five more years .
Shifted to a scheme with subsidy equally shared by Government, Upstream & down stream Oil Companies. Under-recoveries (Subsidies) of Oil Companies compensated by Government in the form of bonds

Increase in International Prices and Resistance from various quarters derailed the deregulation plan.

LPG Domestic- Subsidy Trend in RS. 598.41 578

600 550 500 450 400 350 300 263.2 250

557 457.39 483

456.15

Desired RSP per 14.2 Kg Cyl

453.08 406.83
294.75 294.75 294.75

407.6

357.21

378.5

310.35

310.35

279.7 304.7 304.7 279.7 279.7

281.2 281.2

Actual RSP of 14.2 Kg cyl

50000 40000 30000 20000 10000 0 PDS SKO Dom . LPG Pe trol De is e l 2003-04 3751 5523 2004-05 9480 8362 150 2154 2005-06 14384 10246 2723 12647 2006-07 17883 10701 2027 18776 2007-08 19102 15523 7332 35166 2008-09 28225 17600 5181 52286 2009-10 17364 14257 5151 9279

ct t D -08 ec 20 1s 08 tF eb 20 09 1s tA 1s t A pri l0 ug 9 us t2 00 1s 9 tN ov 1s 09 tJ an 2 1s t A 010 pr il 20 10 1s

04

05

06

1M

1O

20

20

20

ar -0 8

-0 5

-0 6

-0 7

In Rs. Crores

Subsidy- Distortions
First Order
Losses to Government/OMCs
Diversion of subsidized product to commercial and Auto LPG use.
Loss of revenue to Government, Oil Companies

Second Order

Demand Supply Functions All strata of society i/c rich enjoying subsidy. ( Refineries making LPG instead of more efficient In efficient and excessive basket) consumption Inter fuel Substitution

Third Order
Diversion Governance Policy/Investments

Absence of competition. No investment from Private players

Domestic LPG Business Overview

All India Total Customer Strength : 114 M New Customers(2009-10) : 8.5 M Daily Bottling Bottling Plants : 2.7 million cyl : 182

Supplying to more than 50% of Indian Population

Plants even in remotest parts

such as Leh (highest altitude of 11,800 Ft above sea level)

and Andamans (Farthest

islands)

Refineries, Gas Processing Plants & Imports 182 Bottling Plants 9396Distributors 114 million Customers

Domestic LPG Consumption Per Capita Decreasing!

Year 2005-06 2006-07 2007-08 Per Capita( Per Year) 109.8KG(7.7Cyl) 106.6KG(7.5cyl) 105.6KG(7.4cyl)
112 110 108 106 104 102 100 98 96 94 2005-06

Consumption in a Year(KG)

2008-09
2009-10

102.9KG(7.2cyl)
100.0KG(7.0cyl)

2006-07

2007-08

2008-09

2009-10

More and more customer enrolment from lower strata of society and multiple connections Affordable prices necessary for lower strata of society.
66% of the Population consuming less than 6 cylinders per annum

Efforts by Government to Popularise LPG- Vision 2015

Increase LPG penetration by Access Subsidisation Enrolling 10 million new Free of Cost LPG Cylinder customers per year till 2015 to and regulator by enhance the reach of LPG to Oil Marketing Company 75% of population from current level of 50% Access subsidization by Community Kitchen providing free of cost Common kitchen where 10 to 20 families can cook equipments for converting Kitchen to be set up by Kerosene customers to LPG Oil Marketing companies Operation by Low Cost LPG distributorships Local administration (Rajiv Gandhi Gramin LPG Charges based on time slots Vitarak) for remote /rural areas. Availability of LPG at low prices - a pre-requisite for Community Kitchens Successful implementation of initiatives

De-regulation Deployable Themes

Subsidy can be administered only by segmentation and/or restricting the sale of number of cylinders per family based on average per capita consumption per annum i.e. fixed quota per customer per annum. Subsidy shall be phased out step by step. Use of Technology a major tool in administering subsidy.

Increasing prices inevitable.

Use of Technology
Segmentation and targeting subsidy in a country with 1.2 billion population Technological Solutions
Biometric based distribution pilot planned in three cities
Fully aligned with Unique ID project by Government of India- Expected Smart Card

Pilot on RFID tags on cylinders underway.

If successful , largest project in the world to tag more than 180million cylinders

Conclusions
International analysts look at subsidy sceptically
By books any subsidy is bad

For Indian LPG, subsidy is a double edged sword to steer way for
Cheaper fuel for masses Cleaner fuel for mankind

Subsidy per-se is not bad, if administered effectively and targeted rightly.

Ensuring subsidy reaches targeted segment is a challenge

Oil Companies and Government of India are mastering the art of better subsidy administration through deployment of right technology
Avoid subsidizing the Product. Instead targeted customers to be given subsidy directly.

THANK YOU