project of mpol lpg

8/8/2019 Project of MPOL LPG

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Distribution and Pricing Innovation in LPG for

Penetration in Rural IndiaMPOL PROJECT

Submitted By:

Amit Patel (20091005)

Hardik Shroff (20091014)

Manish Choudhary (20091023)

Raghunath P. (20091032)

Ronak Sacheti (20091041)


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Contents

1.Introduction ................................ ................................ ................................ ....................... 3

2.LPG VALUE CHAIN ................................ ................................ ................................ .............. 4

3.LPG market in INDIA: ................................ ................................ ................................ .......... 5

4.Various Product marketed in LPG...................................................................................... ....6

5.Market penetration: ................................ ................................ ................................ ........... 8

6.LPG penetration: Issues in rural areas ................................ ................................ ................. 9

Consumer Vs Distributor growth rate in India ................................ ................................ .. 10

7.Initiatives by the PSUs ................................ ................................ ................................ ..... 14

8.Initiative by the Government of India ................................ ................................ ............... 15

9.Innovation in price: ................................ ................................ ................................ .......... 17

10.Innovation in distribution ................................ ................................ ............................... 20

11.Threat from Substitutes ................................ ................................ ................................ .. 21

12.References ................................ ................................ ................................ ..................... 23


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Intr ducti n

For people in rural areas as well in cities, energy is life. Modern energy life services are

paramount for rural development and improved quality of life in developing countries. Inmuch of the world, rural energy supply is limited to small amounts from the inefficient

energy sources, as most rural areas are poor and poorly served. Small improvements in

energy access, properly targeted and applied, can radically transform a rural household, a

small enterprise, or remote community. Here comes the role of LPG in improving the quality

and standard of living for rural areas.

There is so much pressure on introduction of LPG why it is so; the following are the reason s

which makes LPG better than other domestic fuels:

y It burns cleanly

y No smoke or residual particulate matter, according to the study of WHO 2006 smoke

from indoor cooking fires kills 1.6 million every year, more people than malaria, and

almost as many as unsafe water and sanitation. WHO have highlighted LPG as the

cost effective solution for reducing pollution from cooking fuel.

y Relatively low pollutant emissions as it emits low green house gases( GHGs)

y Helps fight deforestation by substituting tradition al fuels

y Frees woman and girls from drudgery of searching of firewood


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LPG VALUE CHAIN


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LPG mar tin INDIA

In India LPG was first introduced as domestic fuel in the year 1960 . Initially the LPG

marketing commenced in 1960 by Burmah shell in Mumbai. In 1965 public sector OilCompany, Indian Oil commenced operation of LPG marketing in 1965 at Kolkatta and Patna.

The points which make LPG unique in INDIA are as follows:

y Second largest packed LPG market in the worlds

y LPG cylinders, home delivered to more than 108 million households

y Customer population increasing by 6 million each year

y 9382 distributors of LPG across India

y 190 bottling plants setup evenly across India

y For better affordability product is subsidized

y For better logistics by packing near to the market, bottling plants even at remotest

corners: At Leh highest altitude, At Andamans etc.

In India consumption has grown very rapidly, consumer strength grew from 20M to 100m in

a decade. Simultaneously sales jumped from 1241TMT in 1985 to 11400TMt in 2008.

Currently around 50% of the Indian population is served with such sales. Since more or less

urban areas are covered, growth is poised towards rural areas


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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. H owever, 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.

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)

Vari u Pr duct mar tedin LPG

The LPG market is segmented according to the purpose of the use of LPG as a fuel. There are

mainly three segments, domestic (89.2% of business), non domestic (commercial and

industrial including bulk -9%) and Auto LPG (for transportation-1.8%). 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. Accordingly the weight of the cylinder varies

(standard weights), as the usage depends on the type of consumer and to lessen the

transportation cost.


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Weight of cylinder according to segment:

y Domestic LPG

o Pac

e

produc

in 142Kg, & 5

g cyinders, home de

ivered through

distributors

Non Domestic LPG

Commercial

Pac ed product 19Kg de ivered supply through distributors

Industrial

Pac ed product 35Kg and 47 5 Kg delivered supply through distributors

IndustryBulk: Delivered to Storage Tanks of Customers-Business Associates

to garner Customers

Auto LPG:

Through Retail Outlets along with MS

Diesel and/or stand alone outlets

Domestic, 89 20

on Domestic, 9

Auto LPG, 1 80 Share of products

Domestic

on Domestic

Auto LPG


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Mar et penetrati n:

In India population is around 110 million of that 72% live in rural areas while rest 28% live in

urban areas. Due to high per capita income in urban areas the market penetration of LPG insuch area is as high as 87%. Now considering the rural areas which largely depend upon

firewood and kerosene as common domestic fuel, the market penetration of LPG for such

area is as low as 13%. Therefore an affordable alternative is a necessity of the rural masses.

One can clearly visualize the market opportunity that lies in rural sector. But if one has to

give a thought that despite the reforms by the government in allowing parallel marketing

companies to enter into the market still the potential of rural market is not explored to a

substantial level. What can be the reasons for such discrepancies that exist between urban

and rural market in terms of LPG usage.


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LP penetration: Issues in rural areas

y

Low per capita income: Most of the rural households use natural biomass or

kerosene

Due to low per capita income they cant afford LPG refills which cost

around Rs 335 per 142 kg cylinder. Moreover kerosene is available at a subsidized

rate therefore consumer living in rural areas has no incentive to buy LPG so far as

price isconcerned.

The below chart shows that kerosene and firewood isstill have dominant share inrural areas

Kerosene, 54

LPG, 17

Firewood, 10

Cowdung

cake, 10

Others, 1

Coal, 1

Crop

residue, 7

Share of various fuels in rural market

Kerosene

LPG

Firewood

Cowdung cake

Others

Coal

Crop residue


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y Adequ

tesuppl

and accessibilit

: LPG marketing companies generally finds difficult

to appoint a dealer for distributing LPG in rural areas also the company itself feels

reluctant to open their own distribution centre due to economic infeasibility. Since

only 17% of the rural population is using LPG neither the individual dealer nor the

company finds the project viable for setting up distribution centre over there. For any

dealership to be profitable the refill of the LPG cylinder should be sufficient enough

to provide for fixed cost, variable cost and adequate return on the capital employed,

which is generally missing in most parts of rural areas. Moreover dealers face

unfavourable economies of scale and the complementary infrastructure like roads

and repair service.

Consumer Vs Distributor growth rate in India

Suppl

issues:

I. Present supply shortage: LPG is in short supply even at the present requirement.

Growing domestic consumption would lead to an ever -increasing imbalance.

II. Competing demands: There are likely to be further problems of supply if LPG is used

increasingly for automobile fuelling both because of four wheelers (private vehicles

and taxis) being converted and due to mandatory norms requiring the use of LPG, as

in the case of three-wheelers (auto-rickshaws).

0.00

5.00

10.00

15.00

20.00

25.00

30.00

consumer growth rate

distributor growth rate


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III. Indigenous production: The costs of new production infrastructure -- refinery

capacity and gas fractionation, and bottling units are already high (as indicated in

Section 3.1) and would be difficult to recover with the current price structure.

IV. Imports: More importantly, the Asia Pacific region will have a sizeable deficit in the

supply of LPG that would have to be met by importing from the middle-eastern

countries, any interruption in the Arab Gulf region may lead to disruption in physical

supplies and price risks.

Distribution/deliver

issues:

I. Infrastructure: The existing infrastructure at Indian ports for LPG is inadequate to

meet present demand. Also, over 75 per cent of indigenous LPG production is from

the western region, and half the LPG import infrastructure is also located there. Due

to inadequate import facilities on the east coast, inland movement is required and

the costs are substantial. Internationally, pipelines are the preferred mode of

transport, but in India only around 32% of such transport is through pi pelines. Due to

non availability of tank-wagons, 30% of oil product movement is undertaken by road,

which is not only hazardous and polluting but also involves 15 to 20 times the specific

energy use as through pipelines and 5 times the energy use by rail.

II. Consumer problems: Currently, vast (rural) areas of the country are located far from

distribution centres, so that users have to pay for the extra costs of cylinder supply.

Moreover, for small and remote markets, refills often take more than a week, so that

for those without a second cylinder there are gaps in fuel supply, requiring a standby

fuel also. (And, signing up for a second cylinder obviously increases the deposit cost,

precluding lower income households from investing).

III. Distributor problems: For LPG dealers considering rural markets, the small number of

purchasers and low rate of consumption (and refills) lead to poor economies of scale,

that, along with poor road infrastructure make it difficult to establish commercially

viable distribution networks.

IV. Safety: LPG delivery (as in the case of other pressurised or gaseous fuels) involves

cylinder management; this necessitates more careful transport than kerosene or

firewood that in turn imposes additional requirements on prospective dealers.


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y Lac ! ofawareness: Rural households perceive LPG to be unsafe. They generally feel

that food made from LPG is not as tasty and healthy had it been made from coal or

kerosene chulas. They are not aware of the short term ill- effects of using dirty fuels;

cook in open streets, assuming pollution to diffuse. This lack of awareness has made

many LPG marketing companies think of programme that will change the mindset

about such perception.

y Lac " of promotional activities by companies: The PSUs are not interested in doing

promotional activities to promote LPG in rural market. Neither the PSUs nor the

distributor/dealers have sales force for pushing the product in the market. There are

few or minimum strategies or efforts by PSUs to advertise about LPG in rural India

and they dont send their sales force to rural areas to increase the sales of the

company. Hence, people in rural areas who have economical capability to use LPG

are not being reached and educated about the benefits of LPG.

y Blac#

Marketing: Even though subsidies for refills are provided for domestic

connections, domestic cylinders are often diverted to running vehicles. The average

use calculated on the basis of the total quantity of LPG in some areas, divided by the

number of domestic connections works out to over 200kg per connection per year;

this is too high for cooking and indicates an obvious diversion to other uses. 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 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


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y High upfront costs: Not only the refill cost is high but also the initial payment

towards deposit and installation. Considering the current upfront cost and refill

payment the average poor person having LPG connection spends around 20% of its

income on LPG, which in case of average urban middle class household is only 4 -5%.

Due to such high cost they tend to switch to the cheaper source of alternative fuels.

The below diagram shows how prosperity increases with the use of more efficient

fuels.

To avoid such problems government and PSUs have made initiatives for increasing the

demand for LPG in rural areas


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Initiatives b the PSUs

Indian OilCorporationlimited (IOCL):

On 16th

august national companies including Indian Oil Corporation launched Five kg cooking

gas cylinders in 12 states for which consumers have to pay Rs 90 per refill. The cylinders

would be available at a security deposit of Rs 350 with distributors commission of Rs 8 per

cylinder. A customer also gets a further discount of Rs 4.5 per cylinder on direct delivery

from distributor on cash and carry basis.

The scheme was implemented on the basis that poor people who could not afford 14.2 kg

cylinder upfront as well as refill cost will now be able to buy 5 kg cylinder whose upfront as

well as refill cost is low thus switching them from traditional fuels to LPG.

Hindustan PetroleumCorporationlimited (HPCL):

HPCL now has a scheme called rasoi ghar (kitchen) for communal use of LPG stoves in

villages. Individual households would not have to invest on stoves or pay a connection

deposit, as with personal connections, but would have only to pay for the use of the fuel and

the facility, on the basis of the duration of usage. In order to identify all the factors that can

influence the effective operation of HPCLs rasoi ghar and to develop a viable model, a pilot

project was taken up at village Agwan, Tal Palghar, in Thane district (Maharashtra state).

Accordingly, the idea of a community kitchen was mooted to the panchayat of the village.

The pilot project was commissioned on 17.8.2002.

The model involves the panchayat donating a small room accessible to the socially and

economically backward classes, HPCL contributing gas stoves, LPG cylinders and cooking

utensils and a woman from Self-help group (SHG) being appointed as a caretaker. Women

bring in their raw material and take back cooked food paying a small fee of Rs 2. The money

collected is used to buy refilled cylinder and pay honorarium to the caretaker. Thus the

model is economically viable.


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The main motive of doing such an activity is to create awareness about LPG. This will not

only teach them the benefits of LPG but also the limitations of traditional fuels.

Bharat PetroleumCorporationlimited (BPCL):

In order to reach far-flung rural customers, BPCL had introduced the Rural Mobile Vehicle

(RMV), in 2002 in the state of Andhra Pradesh. BPCL introduced 20 RMVs during the year

2002-03. Each vehicle costs about Rs 40 lakh and helped in distribution and filling of

cylinders in villages.This mobile filling unit is designed to cater to the requirements of LPG in

rural markets where the customers have to depend on distributors located at far off places

for refill supplies. It also operates as a mobile LPG distributorship of BPCL, through which

prospective customers can get new connections immediately at company prescribed rates.

Thereby solving the problem of accessibility.

Initiative b the Government of India

After the success of Deepam programme in Andhra Pradesh, The Minister of Petroleum and

Natural Gas has launched scheme called Rajiv Gandhi Gramin LPG Vitrak (RGGLV) on

October 16, 2009. The Scheme aims at setting up small size LPG distribution agencies in

order to increase rural penetration and to cover remote as well as low potential areas for all

the locations having potential of average monthly sale of 600 cylinders (refill sales) per

month of 14.2 kg and 1,800 customers considering monthly per capita consumption of 5 Kg.

RGGLV is initially being launched i n 8 states covering over 1200 locations where the reach of

LPG is very low. The Scheme will also provide new employment opportunities for the rural

population leading to overall economic prosperity.


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Salientfeaturesofthescheme are:

y Size of the agency: The agencies under the RGGLV will be of small size requiring

lesser finance/infrastructure. These agencies would be viable with monthly refill sales

of 600 against 2,500 at present.

y The agencies would penetrate deeper into the rural areas where regular

distributorships become unviable due to the scale of operation and investment.

RGGLV distributors may be viable for around 1,500 customers in the cluster of

villages being served.

y Cylinders will be sold on cash and carry basis

y These agencies will be self operated: The distributorship himself will manage the

agency, with the help of his family member and one or two employees. Owner has

option for part time job

y Age limit for the distributor is being kept as between 21 and 45 years leading to new

employment opportunities for the rural youth.

y Under this scheme, all agencies will be in the joint name of husband and wife. This

will be a step towards empowerment of rural womenfolk.

y The likely capital expenditure for setting up of a new RGGLV distributorship wi ll be

about Rs. 3.21 lakh with land measuring 20 meter X 24 meter being owned by the

candidate being an essential requirement.

y The distributor will be able to recover the capital expenditure by the time 1,800 new

LPG connections are released. The indicative net income of the distributor would be

about Rs. 7,500 per month.

y An important feature of the scheme is that no interviews would be conducted and

selection of the distributors would be by draw of lots from amongst all candidates

who have secured more than 80% marks on the criteria of financial capability and

educational qualifications.

Besides the above mentioned initiatives taken by both PSUs to solve the problem of 3As i.e.

affordability, accessibility and awareness; innovation in terms of price, distribution and

awareness can to a large extent reduce such problems.


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Innovation in price:

The main issues to be addressed before formulating a pricing strategy are as follows;

y Upfront cost which includes deposit, regulator and installation

y Beneficiaries of the subsidies on refilling fees

To address the above mentioned problems 4 strategies for rural areas can be formed, which

are as follows:

1. Initial upfront cost to be borne by the government for rural areas only and refilling is

subsidised for rural consumers only using Smart card system

2. Using micro financing option for initial upfront cost and refilling is subsidised for

rural consumers only and using smart card system

3. Direct cash transfer to woman household(initial cost +subsidised amount) and LPG

at prevalent market price

4. LPG coupons of worth initial cost for one time and subsidised amount coupons to

woman rural households

Strategy 1: Initial upfront cost to be borne by the government for rural areas only and

refilling is subsidised for rural consumers only and using Smart card system

The current upfront cost of the 14.2 kg cylinder which includes deposit and regulator is Rs

1400 for all of the India except 7 north -eastern states. The initial deposit is Rs 1250 and the

cost of the regulator is Rs 150. For the NE states the deposit is Rs 900 and the cost of the

regulator is Rs 100. For a 5 kg cylinder the initial cost all over India is Rs 350. Now

considering the per capita income of urban areas Rs 1400 one time refundable deposit for a

15 kg cylinder is nothing but for people living in r ural areas, one month salary. So penetrate

into rural areas government should borne this cost. Exactly same was done in the initiative

DEEPAM launched by the Government of Andhra Pradesh.

Now coming to refilling part subsidised LPG should be available to rural residents only and

not to middle class urban residential. These households get a large part of the subsidy even

when they have the capacity to pay the market price for LPG and will use LPG even when the

price is raised.


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Since providing universal subsidy through price below the cost misdirects the subsidy to the

relatively affluent, a strong case can be made for subsidizing LPG as a clean cooking fuel for

the poor .

This can happen with the use of Smart card system and UID platform. This system entitles a

household a fixed quantity of LPG at subsidized price beyond which the market price would be

charged thereby helping the minimum level users and restricting subsidy capture. One of the

shortcomings of doing this will involve poor getting cheap LPG cylinder - selling it to middle

class family at a little higher price and then burning firewood & dung to cook in his own

home. Therefore you need more than smart card mechanism to resolve the issue.

Strategy 2:Using micro financing option for initial upfront cost and refilling is subsidised

for rural consumers only and using smart card system

In the above mentioned strategy the initial cost is borne by the government which can have

a drastic impact on fiscal deficit so to cure this problem micro financing options can be used.

Salient features of this strategy are:

Micro Credits thru Cooperative-Banks and Grameen Seva Sahkari Mandalis.

y Specially adopted micro credits for Rural LPG Connections

1. Without any collateral security or guarantor

2. With minimum documentation

3. With long pay back periods

4. Monthly collection / as per the crop cycle

Strategy 3:Direct cash transfer to woman household (initial cost +subsidised amount) and

LPG at prevalent market price

Instead of subsidy, direct cash transfer to poors may be provided and everyone is charged

the market price. But then suppose a poor man given 100 Rs. to buy LPG, he may not buy it

and instead buy liquor and beat up his wife to collect fire wood from jungle for cooking.


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Thus, the argument for providing subsidy in kind rather than in cash rests on the problem of

intra-household distribution of expenditure where a woman s needs may get a lower

priority, and on the merit good nature of LPG use. Th e intra-household distribution problem

can be addressed to some extent by transferring cash to the account of woman of the

household .

This schemes not only take care that urban middle class households doesnt get subsidized

LPG but also take care that the subsidized amount makes LPG viable than all other

traditional fuels .

The main disadvantage of this strategy is that even if the cash is transferred to the woman

household in rural areas there is no guarantee of the purchase of LPG cylinder.

Strategy 4:LPG coupons of worth initial cost for one time and subsidised amount coupons

to woman rural households

To overcome the problem of direct cash transfer into rural women account, coupons can be

issued worth initial deposit and refilling fees. Also smart card system will have to be applied

to see that such coupons dont get misused. The main advantage of using such system is that

the government need not have to provide subsidy in cash.

Along with methods such as introduction of 5 kg cylinder, RMVs and community kitchen

model an appropriate strategy can be implemented considering the pros and the cons of

above listed strategy for better rural penetration.


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Innovation in distribution

If LPG has to reach rural India, availability and accessibility are the two most important

parameters through which it can penetrate the Indian villages.

Strateg1: Introduction of sales force in the distribution channel between the

distributor/dealers and customer in rural market. The sales force will help to penetrate in

the villages and increase the visibility of the LPG in rural areas. Continuous approach to the

villagers and persistent attitude of sales force will make people understand the benefits of

using LPG and schemes offered to them by state/central governments.

Strategy2: Number of distributors/dealers should be increased in rural areas and they

should also be evaluated in terms of number of new connection in their area.

Strategy3: Concept of milk run should be used by PSUs in remote areas to increase the

frequency of delivery. Delivery method of mixed loads from different suppliers. Instead of

each of several (say 5) suppliers sending a vehicle every week to meet the weekly needs of a

customer, one vehicle visits each village on a daily basis and give up deliveries for respective

customers. This way, while still five vehicle loads are shipped every week, each vehicle load

delivers the full daily requirements of their respective customers.

Strategy4: Tie up with other product line companies for sharing of distribution

infrastructure.


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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:

I.

PNG is ConvenientII. 24 hours uninterrupted gas supply

III. No changing or handling of gas cylinders

IV. No more last minute emergency

V. Make payments after you consume, through banks, drop boxes, ECS, Net, etc.

VI. PNG is economical, works out to be up to 10% cheaper than LPG,

VII. 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:

I. 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.II. Our supply designs, executions and operations are being done as Per International

best Practices.

PNG is Clean:

I. Being a gaseous fuel, very clean compared to any other fuel with more than 94%

combustible particles.II. Burns with a flame always hence, no blackening of vessels.

III. Sulphur content less than 10 PPM.

IV. Most preferred fuel in vehicles in Mumbai today.


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PNG is versatile:

I. 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.

Given the above situation and challenges it is very difficult to predict about the future

scenario but LPG is must for rural India if the government wants to raise the living standard

of Indian villages.


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References

MoP&NG, 2003a. Annual report for the year 2002-03, available at

www.petroleum.nic.in/annrep2003.pdf

MoP&NG, 2003b. Availability, Demand and Security of Supply of Autofuels,

Chapter 7 ofAuto Fuel Policy Report, Petroleum Planning & Analysis Cell

(PPAC), Ministry of Petroleum and Natural Gas, Government of India, available

at www.petroleum.nic.in/ch_7.pdf

MoP&NG, 2003c. Petroleum Statistics, Petroleum Planning & Analysis Cell

(PPAC), Ministry of Petroleum and Natural Gas, Government of India, available

at www.petroleum.nic.in/Petstat.pdf

Business Line (Bureau report, New Delhi), 2004b. Minister to lay foundation

stone for LPG cavern storage project, Business Line, Bangalore, 19th February

2004, p.5.

CMIE, 2003. Energy, Centre for Monitoring Indian Economy, May 2003,

Mumbai

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