India LPG Update - Aug 2008

India is all set to grow close to 8% in the 2008-09 and 7.5% in 2009-10 fiscal years as per the latest figures, despite the high inflation (12.4%....has started to come of the peaks as per some experts….!!) and RBI targeting inflation as opposed to growth. Of course, this will further depend upon the other three most important points, price of oil, health of the US economy (Indian exports greatly depend upon the US economy) and the result of the forthcoming parliamentary elections.

The deregulation and opening up of the Indian economy after the BOP crisis of early 90’s had helped the fuels sector to grow at almost 10% per annum. This growth rate has been maintained to date because of further divestment in PSU’s and opening up of the fuels sector to private investors. However, the energy sector in India is still going through a cycle of public and private ownership. FDI up to 100% is now allowed in most industrial projects. The Indian Govt has taken significant steps (PSC’s, NELP…etc) to open up the economy to FDI and private players.

LPG in India is one of the basic fuels used for cooking. The three sources of supply are crude oil refineries, fractionation of gas and imports. The demand for LPG has grown from 2, 00,000 mt in 1970 to over 12 mill tonnes in 2008. Total LPG prod in India for 2007-08 stands at around 8.79 mill tonnes of which 6.73 mill tonnes (76%) comes from crude oil and the remaining 2.06 mill tones or 24% from Natural Gas. The imports will probably stand close to 3 mill tonnes in 2008 on account of increased demand and RIL converting its Jamnagar refinery as an EOU thereby refusing to sell LPG to PSU's at import parity pricing.

LPG consumption has grown at the rate of roughly 9.7% since 1990 with largest leap of around 20% per annum seen between 1990 and 2002. Since then an average growth rate of around 10% has been recorded. The customer base of the PSU’s increased from 17 million in 1990 to 99.6 million in 2007-08, an average growth of around 10.5% per annum. The PSU’s are adding around 6.5 million customers every year. The bottling capacity has shown a healthy rate of around 6.5% since the 1990’s keeping up with the demand.

Although the demand is increasing at a blistering pace owing to the rapid development in India, the infrastructure is lagging behind in a number of sectors including the fuels sector. There is an urgent need to develop more refinery capacity, LPG receiving terminals, storage, pipeline and bottling facilities. A number of private and foreign players have entered the market with independent and JV’s with PSU’s in the recent past.
IOC is building an import terminal at Ennore with a capacity of 60,000 mt.
IOC’s Paradip refinery is slated for expansion –planned 1 mill tones of LPG capacity.
CalTex has a planned terminal coming up in S. India.
Shell Gas is coming up with a 90,000 MTPA terminal at Pipava Port in Gujrat in W. India.
Total Fina and HPCL are building the largest underground storage terminal in Vizag (East coast) with capacity of 60,000 mt and will be able to handle 40,000 dwt vessels.
BP plc has plans in Haldia for LPG storage.
SSLPG has a storage terminal in Kakinada.

LPG has managed to make some inroads in the auto sector owing to the pain of high gasoline prices. However, its share of market is quite low at the moment as the priority for LPG in India is to provide for the cooking fuel first and thus makes it a very politically sensitive subject as well. CNG has over taken LPG in the auto sector and its use is gaining favour in major cities like New Delhi, Mumbai where the infrastructure exists to pipe the gas to filling stations. The other issue with using LPG in the auto sector relates to adulteration thereby defeating the very purpose of environment protection!!!... and economics.

In our opinion, the present economic and political environment is very conducive to investment in the Indian fuels sector, especially storage. A storage facility close to deepwater ports on the upper west coast (Pipavav, Mundra, Kandla, Mumbai) and along the east coast of India (Paradip, Vizag, Krishnapatnam), that are well connected to the inland transportation infrastructure will be highly sought after.