Rampant gas explosions in Ghana have in recent times served as a wakeup call for the regulators of downstream petroleum activities. The National Petroleum Authority has renewed action concerning the formulation and implementation of an LPG Cylinder Exchange Policy which is envisioned will effectively curb the incidences of gas explosions among others.
Though a policy document or implementation plan has not yet been passed, the general strategy of the model involves restricting the refilling of LPG cylinders to a few companies and exchanging already filled cylinders for empty ones. This paper presents some preliminary thoughts on the potential and implications of the policy and explores the experiences of Brazil, India, Kenya and Tanzania.
The Current Status of the LPG Sector
The Energy Commission reported that a total of 279,000 tonnes of LPG was supplied and consumed in Ghana in 2015 and upwards of 290,000 tonnes was required to meet demand in 2016. Of the total consumed, 70.86% was supplied through imports, 0.72% via the Tema Oil Refinery (TOR) and 28.4% supplied via the Atuabo Gas Processing Plant. LPG is transported mainly via a total number of 307 Bulk Road Vehicles (BRV’s) to 647 gas filling stations across the country which serve customers who largely bring their empty cylinders to the gas filling stations to get them refilled.
The current model of LPG distribution based on the establishment of LPG refill stations across the country was long declared outmoded by the Energy Commission in 2012 when it was noted that the current distribution model was ineffective and inequitable in promoting LPG for cooking. The Commission notes that, 450,000 tonnes of LPG is needed to increase LPG penetration to 50% over the next three years assuming a population growth rate of approximately 2.5%.
The 50% LPG penetration target for 2020 stipulated by the National Policy of LPG promotion is however unlikely to be achieved given the limited number of distribution outlets nationwide, limited supply and distribution infrastructure and the limited total storage capacity and coverage which constrains distribution and access. More alarming in recent times is the increase in the number of gas explosions which were fatal because of the citing of LPG refill stations in residential communities.
The Proposed Model
The Energy Commission recommended migration to the LPG Bottle Recirculation model (Cylinder Exchange Model) where consumers pay an upfront deposit for the cylinders and subsequently exchange their empty cylinders for cylinders filled with LPG on payment for the LPG. The National Petroleum Authority has stipulated that the new distribution model to be adopted would involve LPG retail outlets receiving empty LPG cylinders and supplying consumers with already filled cylinders. The table below presents the perceived potential and implications of the policy;
Table 1: Preliminary Thoughts on the Potential and Implications of the Cylinder Exchange Policy
Increase access to LPG through expanded distribution
Effects on demand for LPG: Likely to increase demand due to ease of access; the deposit price per cylinder is likely to be cheaper than the one time price for purchasing a cylinder
Facilitate adoption of clean fuel for domestic, commercial and industrial uses
Effects on supply: likely to shrink supply in the short term (transition period), supply may not grow at a rate commensurate with growth in demand creating the potential for shortage
Improved supply will depend on overall robustness of strategy; capacity and efficiency of bottling plants, flexibility and willingness of existing businesses to take advantage of new opportunity provided; ease of commencement for new businesses etc.
Access to fuel has potential to boost existing businesses and subsequently improve economic growth
Effects on existing businesses:
307 BRVs already in operation may focus on carting LPG from source (example; Tema Oil Refinery) to bottling plants
Increase direct and indirect employment for example; through the creation of more LPG retail businesses
647 gas refill plants, options available:
1. Shut down their business
2. Convert to retail outlets
Reduce fatality of gas explosions
3. Redefine business models to take advantage of opportunities created via cylinder exchange model
There are three main pathways by which the Cylinder exchange policy may be deployed;
A. Using retail outlets where empty cylinders are brought to the retail outlets by consumers and exchanged for filled ones
B. Using the door-to-door model where designated distributors supply filled cylinders to households in exchange for empty ones upon request.
C. A combination of both
An LPG demand assessment study in Accra conducted in 2014revealed that 83% of respondents who had a lower share of LPG adoption placed significant importance on proximity to gas filling stations indicating that such stations should ideally be within a five minute walking distance to solve the problem of lack of time and financial resources for transportation. The door to door cylinder exchange model was found to have potential to reach this group of people thereby increasing access to LPG. The study finds that, an 8ton truck delivering 96 cylinders a day, placing cylinders at a five minute walking distance from consumers in areas with high concentration of consumers seeking access to LPG and visiting three locations per day could increase LPG access by 9000 households per year.
This method effectively solves the problem of limited number of distribution outlets nationwide as the needed gas is taken directly to consumers. The main caveat here would be the need, prior to the roll out of this policy to improve access to certain areas by road. Also, alternative methods of transportation for example rail transport may be explored to ensure nationwide access.
The retail outlet model may be more practicable among convinced users who already have access to LPG, have sufficient resources to cover transportation and primarily look to optimizing LPG usage. It would be easier for this group to have access to filled cylinders by exchanging them at cylinder retail outlets. The caveat here too is that, the elimination of loss of productive man hours used in getting LPG from outlets is not guaranteed.
FATAL GAS EXPLOSIONS
Even though Ghana has experienced a number of gas explosions in the past, the thing that draws attention and public outcry concerning the recent explosions is the level of fatality. Gas refill stations have increasingly been brought closer to consumers in order to meet needs and this practice invariably has multiplied the fatality rate of explosions. Any move to reduce fatality will require an effective means that will remove gas refill sites from residential communities without undermining access to LPG.
The common sense deduction then is that the cylinder exchange model has full potential to reduce the fatality of gas explosions because it eliminates the need for consumers to be exposed to direct dispensing of LPG. However, given Ghana’s unique situation as the only country in the world that still relies solely on gas refill stations located in residential communities, it is the only country that has recorded fatal deaths due to LPG explosions and fires at gas refill stations within residential communities. The direct effect of the cylinder exchange model on reducing gas explosions may only be correctly analyzed perhaps after a couple of years of implementing the policy in Ghana.
Further, gas explosion may be more a function of adherence to safety measures than of the location of gas stations. A study assessing the impact of fuel filling stations on the environment in Ghana found that most gas filling stations under study violated critical safety requirements exposing the community to several levels of risk.
Brazil has a beautiful success story of the implementation of a Consolidated Cylinder Recirculation model which achieved for the country greater than 90% LPG penetration as at March 2017. The country employs a model where consumers exchange empty cylinders for filled ones. It effectively combines the use of retail outlets (40%) and home delivery (60%) of cylinders.
The country has a long history of the implementation of this model, approximately 77 years. As at 2015, the statistics were astounding;
· 33 million cylinders delivered per month, 12 cylinders delivered per second
· 22 distributors such as Amazon Gas, Fogas, Supergasbras, NacionalGas, LiquiGas, UltraGaz etc.
· 55 thousand LPG Retailers
· 60 million households reached; 96% of the population uses LPG as cooking fuel, 100% of cities served by LPG
· 350 thousand direct and indirect employment
The domestic LPG market boasts of excellent customer service compared to other high demand service as revealed by the customer satisfaction index, performing better than both water and electricity services.
This success wasn’t achieved overnight; Brazil had to go through several stages of growth and transition in the evolvement of this cylinder exchange model. Notably, in the introduction stages, there was the effort to subsidize appliances, cylinders and LP gas itself, allow for free market pricing, develop the necessary infrastructure to open up the market among others. Some of the challenges experienced as time went on include cylinder cross filling by industry agents, limited enforcement of regulations, actions on the part of the government to control price at every stage of the distribution channel as well as the restriction of the use of LPG as only a fuel for cooking. The industry experienced a period of renewal from 1996 till now with actions such as self-regulation, enforcement of the regulation to ensure an end to cross filling, the reinstitution of free market pricing among others.
One of the main strategies that sustained the industry till now is the Cylinder Rehabilitation Program which periodically removes cylinders with defects from the market and rehabilitates them and also periodically introduces new cylinders into the market.
It is useful to note that it took approximately 32 years (1938 to late 1970’s) to achieve 95% LPG penetration using the cylinder exchange model in Brazil.
India mainly adopts the door to door LPG Cylinder Recirculation/Exchange model to supply LPG to households (95% of consumers reached via home delivery). Cylinders are bottled and supplied by three Oil Marketing Companies; Indian Oil Corporation, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited. LPG distributors are private players licensed by the government to distribute LPG and receive commission per cylinder sold. Further, there are
· 3 million LPG cylinders delivered every day for cooking purposes
· 210 million cylinders in use
· Over 10 million delivery trucks.
· 153.2 million households reached
· 12,720 distributors/LPG retailors
India has a unique LPG adoption story in that, it has, through its LPG recirculation scheme coupled with aggressive subsidy reforms, succeeded in attaining 70% LPG adoption rate as at 2017 and looks to increase this rate to 80% by 2019.
In 2015, India launched the PAHAL scheme, a Direct Benefit Transfer Scheme in which LPG cylinders are sold at market price and the entitled consumers (who already have an agreement with a dealership) get the subsidy directly in their bank accounts. This is one of the largest cash transfer programs in the world. In 2016, it launched the Ujjawala scheme which provides free LPG connections to poor households with a focus on providing LPG access to women. The scheme effectively solves the problem of misdirected subsidies. Through these subsidy schemes, LPG consumption by households increased to 19 million tonnes within two years registering an annual growth rate of 10%
Prior to these reforms, it was noted that the benefits of initially instituted subsidies accrued disproportionately to wealthy households in urban areas with the majority in the bottom two thirds of the income distribution scale currently receiving little or no direct benefit from LPG subsidies.
Even though Kenya has adopted the Cylinder Recirculation model, as at 2013, only 5-7% of the population was using LPG as a primary fuel with a greater adoption in urban areas (though consumption has been growing strongly and future growth potential observed). Several key issues account for the slow rate of adoption of LPG in Kenya despite the use of the Cylinder recirculation model including;
1. The relatively few number of LPG bottling/filling plants and the concentration of same in two major cities constrains supply of filled cylinders to urban centers. There are only 21 retailers within the country. Further, transportation of cylinders by truck from major cities to rural areas is very costly.
2. Consumers in general are unable to bear the initial costs of cylinder deposits and purchasing of other components such as gas stoves. The cost of LPG fuel itself in Kenya is also among the highest in the world and as such LPG is unable to compete with cheaper wood fuels, i.e. charcoal and firewood which are the dominant fuels used in the rural areas. Further, even though there is no VAT on LPG gas, there is a 16% VAT on cylinders and appliances as well as a 25% import tax. Given that most cylinders are imported, this translates to high cost of cylinders.
3. The cost of storage, filling/bottling infrastructure and cylinder manufacturing plants is high constraining investments in this sector. Limited bulk storage and filling capacity exacerbates supply constraints. Currently, Kenya has 10 filling stations nationwide which are privately owned by marketers, 1 domestic cylinder manufacturing plant and 3 cylinder validation companies. Cylinder revalidation is required every 8 years to ensure safety of cylinders however this target is unattainable given the few number of validation companies and the high cost of operating them.
4. Kenya has implemented formal regulations to encourage development of the LPG market however enforcement is weak. The Energy Regulatory Council (ERC) has been said to have been historically ineffective with enforcement of regulations and this is a major source of risk that inhibits investment specifically, via encouraging illegal refilling and cylinder theft. For instance; cylinder branding requirements are not well enforced making cylinder theft easy.
5. Limited government regulatory enforcement capacity allows the development of gray/black market for illegal cross filling and cylinder theft. Illegal filling is said to run 20-30% of the cylinder market. Another factor that leads to the creation of black market is the common valve requirement. Illegal filling and cylinder theft discourage private sector investment.
Addressing these major constraints will facilitate the penetration of LPG in Kenya via the cylinder recirculation model. Potential interventions have been suggested by the Global LPG Partnershipincluding but not limited to;
a. A comprehensive LPG switching programme that will ensure the provision of financing for to take care of upfront costs of LPG adoption, education and awareness creation concerning the health and environmental benefits of adopting LPG among others.
b. To improve regulatory and enforcement capacity, review and updates of Energy Act and LPG regulations have been set in motion
c. Provision of carefully targeted and regulated subsidies on LPG for poor households
d. Taxation of wood fuels to incorporate social costs
e. Formation of strategic public-private partnerships to facilitate the development of filling/bottling facilities all over the country
Tanzania also employs an LPG Cylinder Replacement model where cylinders are filled by LPG marketing plants and then circulated in exchange for empty ones. Cylinders are collected and transported by trucks from bulk distributors and retailed in the urban areas of Tanzania. There is no rural distribution of LPG as yet as well as no subsidy on LPG. Because of this, LPG penetration rate is very low and LPG consumption per capita stands at 0.1kg. Other barriers to LPG penetration in Tanzania include; the high costs of LPG fuel, the high cost of LPG cookers and the limited availability of LPG fuel as well as the cookers.
Lessons and Recommendations
The Cylinder Exchange Model/LPG Bottle Recirculation Model, in and of itself may not be enough to increase access to LPG, especially rural access, and must be buttressed by other measures notably measures to reduce initial costs for cylinder deposits, to ensure malpractices such as cross filling and cylinder theft are curbed or that a black market does not develop and measures to secure supply of LPG fuel and cylinders. While the data on LPG Bottle Recirculation/Cylinder Exchange model as well as LPG penetration is replete, the data does not suggest a direct correlation between the recirculation model and LPG penetration.
It is also observed that, while limited enforcement of regulation was a challenge for all the countries considered; it did not become an inhibiting factor to LPG penetration in Brazil and India which adopted several measures to improve enforcement in order to curb malpractices. For Kenya however, lack of political will, political interference and vested interests have been major stumbling blocks that facilitate malpractices and by so doing inhibit LPG penetration.
What we should do
1. One of the main hindrances to the adoption of the Cylinder Exchange Model especially by rural folk is the initial financing cost of signing onto the program; that is, paying the deposit. It will be prudent on the part on the regulators to, in conjunction with private sector, develop feasible financing models that would ease adoption.
2. It will be expedient to fast track the recapitalization of the Ghana Cylinder Manufacturing company to facilitate production of smaller size cylinders (3kg and 6kg) or engage the private sector to provide them. This will facilitate rural access to LPG given the relatively cheaper cost of the smaller size cylinders.
3. Position the country to eliminate malpractices (such as unauthorized cylinder filling, unlicensed distribution, under or over filling and cylinder theft by standing ready to enforce regulations through innovative means). For example; the Indian Ministry of Petroleum and Natural Resources in 2012 created an online portal that provided real time information on the supply chain distribution system including distributor ratings. This reduced diversion of LPG commercial sales and facilitated overall transparency in the distribution business
4. There is the need to correctly identify and separate market segments, that is, domestic, commercial and industrial in order to adequately serve each consumer segment.
5. The regulator must stand ready to enforce fool proof safety measures that will curb gas explosion at bottling/filling sites. There is also the need to undertake rigorous public education and sensitization on LPG and handling practices especially in view of the potential for increased access to rural areas
6. The Cylinder Exchange implementation plan should have a long term view and should be scalable for example through the establishment of more bottling plants which are appropriately distributed geographically per year so that future demand growth is well catered for.
7. Gas Tanker businesses as well as gas refill stations should be worked with and supported to redefine their business models in order to take advantage of the potential business opportunities that are expected to emanate from the implementation of the Cylinder Exchange Policy. This will also help to prevent a situation where existing gas refill stations rush to dispel/sell off stored gas to avoid perceived losses caused by an outright ban and by so doing create an artificial shortage of LPG. Tanker operators may merge and form partnerships with bottling companies so that their services may be employed in transporting LPG from production points to bottling plants.
8. Explore and acquire highly efficient distribution management software that would facilitate the running of the cylinder exchange model in order to prevent situations where consumers are not able to access services. For instance; Supergasbras, one of the largest LPG retailers in Brazil which supplies 1.5 million tonnes of LPG per year to over 10 million households via the cylinder exchange model employs the SAP Secondary Distribution Management software which provides efficient administration and automation of the entire process chain from order entry to transport planning and invoicing.
9. Employ transparent methods in selecting distributors such as competitive bidding with terms of selection covering such issues as ability to increase penetration, service and maintenance costs among others
For media enquiries, please call Ms Barbara Andoh s 0302 972 939 / 0554309966
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