ISSUE 08 | OCTOBER 2017 | USD 30 OLD HABITS DIE HARD: NON-SUPPLY REASONS WHY LPG USAGE IN KENYA STILL LOWER THAN EXPECTED BY ELIZABETH MUCHIRI LPG INFRASTRUCTURE GROWTH & SOUTH AFRICA AS THE LPG ENERGY HUB OF AFRICA INTERVIEW WITH NIALL KRAMER HOW LPG IS PRODUCED AND STORED BY UWANDU IFEANYI THE KENYAN-TANZANIAN IMPORT FEUD: 2 SIDES OF THE COIN BY RYAN PASUPATHY
REVOLUTIONIZING THE LPG INDUSTRY IN AFRICA AN INTERVIEW WITH NICK QUINTONG, CEO & CO-FOUNDER PAYGO ENERGY
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Greetings from LPG Business Review: Africa Hello
We are closing in on the end of the year and we hope that it has been a good one for everyone so far. The industry may feel like it has been sluggish, many initial steps have been put in place that are going to have long lasting effects on the industry in the years to come. Vincent Choy Managing Director email@example.com Chloe Lee Marketing Manager firstname.lastname@example.org Ryan Pasupathy Editor email@example.com Puspo Aurum Creative | Graphic Designer firstname.lastname@example.org Our Address: LPG BUSINESS REVIEW 52 Foch Road, #02-02 Singapore 209274 PT Olifen Global Indonesia 7th Floor, Graha Anugerah Jl. Raya Pasar Minggu Kav 17A South Jakarta - Indonesia
As big LPG using nations like Nigeria and South Africa continue to develop their laws and bolster up their infrastructure, smaller African nations will be able to benefit from these developments and perhaps be more able to follow suit further down into the future. In this issue, we have interesting interviews with Nick Quintong of Paygo Energy who is revolutionizing the LPG industry in Africa through smart metering of LPG. He tells us about his project and what he plans to achieve. There is also an interview with Niall Kramer of SAOGA who tells us about the growth of gas use in South Africa and where the industry there is headed. The issue also has another three articles; one on the recent KenyanTanzanian feud that resulted in an LPG import ban from Tanzania into Kenya, another on the non-supply reasons as to why Kenya is still seeing lower volumes of LPG use and a look at how LPG is produced and stored in a typical set up in Nigeria. Once again, we wish you all the best in your business and we hope that you continue to find us a trusted resource for information and developments in the LPG industry in Africa. We are always on a constant search for new partners and contributors that will increase our potential to make the LPG industry in Africa more interconnected so do feel free to contact us if you are keen to work with us. We thank you once again for all your support and hope you continue to support us in the years to come.
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Ryan Pasupathy Editor
OCT 2017 | LPG BUSINESS REVIEW | 01
CONTENTS FEATURES: 20
The Kenyan-Tanzanian Import Feud: 2 SIdes Of The Coin By Ryan Pasupathy
Old Habits Die Hard: Non-Supply reasons why LPG Usage In Kenya Is Still Lower Than Expected By Elizabeth Muchiri
Revolutionizing The LPG Industry In Africa Interview With Nick Quintong
LPG Infrastructure Growth & South Africa As The LPG Energy Hub Of Africa Interview With Niall Kramer
How LPG Is Produced and Stored By Uwandu Ifeanyi
NEWS: 03 FGE CONFIDENTIAL: 36 STATISTICS: 39
02 | LPG BUSINESS REVIEW | OCT 2017
WORLD LP GAS NEWS INFRASTRUCTURE
The management of Nigeria Liquefied Natural Gas (NLNG) has commended the management of NIPCO Plc for building the largest LPG storage facility in Africa. The facility is a 5000 MT facility located in Apapa, Lagos. - Tribune Online Nigeria Petredec and Bidvest Tank Terminals have announced they have entered into an agreement for the development of a new facility for the import and storage of LPG in Richards Bay, South Africa. - Logistics Update Africa The Nigerian Association of Liquefied Petroleum Gas Marketers (NALPGAM) has said that the entry of Nigerian Independent Petroleum Company (NIPCO) into the cooking gas market has broken the monopoly of International Oil Companies (IOCs) through their affiliates in Nigeria. The companyâ&#x20AC;&#x2122;s recent expansion project, which will make it the biggest LPG plant in Nigeria, will definitely have a positive impact on storage and availability of LPG in the domestic market. -Vanguard Nigeria
OCT 2017 | LPG BUSINESS REVIEW | 03
NEWS TRADE & SUPPLY CHAIN
The government of Ghana has signed a Memorandum of Understanding with Equatorial Guinea to receive Liquefied Natural Gas (LNG) from that country to supplement Ghanaâ&#x20AC;&#x2122;s energy needs. This was made known by President Akufo-Addo while on a three-day visit to Equatorial Guinea. - Citi FM Online The price of LPG in Nigeria has dropped by 30 percent from N400 per kilogram (kg) in May to N280 per kg currently. According to a market survey carried out by Daily Trust at different parts of the country, major retailers of the product such as NIPCO Plc and IK Gases Ltd sell at N280/kg while other small retailers sell at N300 per kg. - Daily Trust Nigeria Tanzaniaâ&#x20AC;&#x2122;s energy regulator have announced plans to connect 42 companies to LPG to ensure adequate supply of energy in a country with erratic power supply. Kapuulya Musomba, the Acting Managing Director of the Tanzania Petroleum Development Corporation (TPDC), said priority will be given to companies situated in industrial parks. - Xinhua.net Price of cooking gas falls in Maputo, Mozambique by 3.6 per cent, from 50.74 to 48.91 meticais per kilo while petrol and diesel prices rise. The government has said that this is because of the changes in the world market price of refined fuels and the exchange rate of the meticai. - All Africa PetroGas the newest dealer in fuels and lubricants in Gambia has announced that the company has plans to expand their product line by selling LPG and cooking stoves as part of the UNIDO-GEF6 pilot project. - The Point Gambia Imports of LPG in Zimbabwe have soared 67 percent to 2.5 million kg per month from 1.5 million kg per month compared to a year ago as consumers move away from polluting fuels, data from energy regulator ZERA shows. - The Herald Zimbabwe
04 | LPG BUSINESS REVIEW | OCT 2017
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NEWS LEGAL & SAFETY
The Energy Regulatory Commission in Kenya is on the spot following re-emergence of illegal Liquefied Petroleum Gas dealers operating largely in residential areas. Over the past two months, thousands of gas cylinders impounded by police in Nairobi have been handed back to the dealers through direct or direct intervention of the commission, a move that has sparked outcry from law enforcers. - Daily Nation Kenya SNV has called for a national policy framework specifically for improved cook stoves in Ghana. The policy framework would clearly state governmentâ&#x20AC;&#x2122;s overall plan for the sector and map out specific activities to be taken to accelerate the availability and adaptation of the cook stoves. The policy would include financing mechanism for the sector as well as training and other related implementation plans. - Business Ghana Tanzania and Kenya have ended a two-month diplomatic row that led to import bans of LPG which resulted in heavy financial losses for businesses from either side. - Standard Digital Kenya
06 | LPG BUSINESS REVIEW | OCT 2017
NEWS EVENT & INNOVATION
Easigas South Africa is introducing a new service to its customers in the form of a multi-faceted energy monitoring and management service offering; which will also offer assistance to its commercial and industrial customers who need to be aligned with existing gas-related legislation. - Cape Business News Morocco will host the 30th World LPG Forum from October 3rd to 5th. The forumâ&#x20AC;&#x2122;s program features keynote address by Moroccan minister of energy, mines and sustainable development Aziz Rebbah, presentations by experts and debates on liquefied petroleum gas industry, which will continue to grow due to increased focus in the world on air quality and clean energy access. - North Africa Post The 2017 Liquefied Petroleum Gas Sensitisation Workshop which was held in Owerri, Nigeria, themed: Promoting the Benefits of Encouraging Safe Use of LPG was organized to stem the growing spate of LPG plants fire incidents reported across the country as well as allay the fears of Nigerians over the use of gas cylinders in homes for domestic activities. - Africa Independent Television Gilbert Assi has been unveiled as the managing director of Vivo Energy Uganda and replaces Hans Paulsen, who has been promoted to a new senior role in the Vivo Energy Group. - The Independent Uganda
OCT 2017 | LPG BUSINESS REVIEW | 07
REVOLUTIONIZING THE LPG INDUSTRY IN AFRICA INTERVIEW WITH NICK QUINTONG CEO AND CO-FOUNDER PAYGO ENERGY For those who are unaware, Nick Quintong is the CEO and Co-Founder of Paygo Energ y. The fresh startup is prepared to take LPG distribution and usage to the next level starting with Nairobi, Kenya. We managed to spend some time with Nick to find out about more about the company and its plans for revolutionizing the LPG industry from what we know it as today.
OCT 2017 | LPG BUSINESS REVIEW | 09
INTERVIEW Tell us how and why you and your co-founders ended up starting PayGo Energy: PayGo’s founding team worked in the utilities and services industry in Kenya prior to starting PayGo Energy. In 2014, companies like M-Kopa were testing the ‘payas-you-go’ business model to reduce cost barriers to accessing electricity. We observed similar cost barriers for low-income customers accessing clean cooking fuel, so we thought we could we apply a similar approach. What started as a quest to improve product market fit, led to a much broader challenge, which is how do we leverage technology to help the industry unlock new markets. What are some of your most notable experiences/ achievements so far? First off, we have made great strides in the design for manufacturing front, working closely with key industry players and regulators to ensure that we launch with a product that meets the needs of our customers and
key stakeholders. Second, we have been able to demonstrate clear market validation and product market fit through our pilots in Nairobi. And lastly, we secured venture capital from Novastar Ventures, Energy Access Ventures and others, that allowed us to invest heavily in design, engineering, and software development.
10 | LPG BUSINESS REVIEW | OCT 2017
What were some of the challenges and difficulties you faced in trying to get PayGo Energy started? The first challenge is navigating a hardware development process that is fairly lengthy and capital intensive. We now have the capital and partners in place to de-risk the process, however, we know we need to get it right, so it remains a key focus area. The
second challenge is developing a product and service that meets the needs of the industry as well as end-users. From an end-user perspective, PayGo makes clean, modern cooking, affordable. Consequently, the UX/UI and the service model needs to make cooking with gas easy and convenient. From an industry perspective, PayGoâ&#x20AC;&#x2122;s technology accelerates adoption and perhaps, more importantly, de-risks investments in cylinder fleets. PayGo has the potential to disrupt illegal refilling with a market-based approach, which is the first of its kind. Developing a complete solution that meets the needs of the industry and the market is a challenge, but we feel like we are well positioned to crack it.
is installed, customers can use M-Pesa (Mobile Payment System in Kenya) to top-up their account with as little as $0.50 USD to start cooking. If their account balance runs out, access to gas is shut off via a remote valve until they top up. In the background, our software platform is trending their gas consumption and predicts when a household is going to run out of fuel so that we can exchange their cylinder before they run out of gas.
in design for manufacturing with a consortium of design, engineering and manufacturing partners that have deep domain expertise in smart metering for gas. Second, we have invested heavily in software development, which will be the backbone for the PayGo platform. Lastly, we are expanding our pilot activities in Kenya to continue to gain important insights, on the ground, from customers and stakeholders in the industry.
What are the costs involved for the consumer when using PayGo? Our pricing model is still under development. However, prices through our system can be competitive with the retail cost of gas.
Tell us about PayGo Energy and exactly how it works. From a customer perspective, households pay a small fee to access the service, we then deliver a cylinder, smart meter, and a two burner appliance to their home. After the PayGo system
PayGo Energy was recently reported to have raised US$1.43m during its latest round of equity funding. What are the plans for using this capital? We are investing in three key areas. First, we have invested
Are there plans for expansion to countries outside of Kenya in the near future? The market dynamics in Kenya are not that different from countries like Uganda, Mozambique, India, and the Philippines. So there is an opportunity to expand beyond Kenya in the near future. What we look for is markets with low LPG consumption per capital and developed LPG infrastructure. [LPG BUSINESS REVIEW]
OCT 2017 | LPG BUSINESS REVIEW | 11
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HOW LPG IS PRODUCED AND STORED I doubt anyone reading this is wondering, but
in case there is someone, LPG is really just a fancy name for the usual cooking gas you know. It is an acronym that means Liquefied Petroleum Gas, so you need not worry about it being some big term you have no need for. With the rising costs of Kerosene and instability of electricity, many
people have resorted to finding an alternative for cooking. Imagine the horror of cooking in the night, completely famished and the power goes off. Therefore, to be the wiser, a lot of people have found other means and most have settled for LPG because it is ultimately cheaper and also cooks food faster. How LPG is Produced? For many years when there was no use for LPG, it was regarded as a wasted product from refining crude
oil, thus, for long, it was considered just a by-product. The production of LPG does not entail manufacturing because it already exists in another product. So, it could actually be referred to as a by-product but a useful one. LPG is processed via two distinct methods. It is either processed by cleaning natural gas of impurities such as hydrocarbons which include the methane, ethane, ethene, propene, isobutene, butadiene, pentane and pentene, and fluid, through a plant frequently called stripper plant. It can also be obtained by refining crude oil. When crude oil is pumped into a distillation tower to pass through distillation, different products are extracted at different stages of the refining â&#x20AC;&#x201C; one of them is LPG. The distillation power has been programmed to extract these products that include petrol, diesel,
OCT 2017 | LPG BUSINESS REVIEW | 15
ADVERTORIAL kerosene, LPG among others at certain temperature degree. The LPG obtained from crude oil is usually called ‘associated,’ which simply just translates to associated with oil and that not obtained from crude oil is called, ‘non-associated.’ How LPG is Distributed: LPG value chains start from the production, naturally. It then moves down to refineries for further processing and then to terminals, then to bottling and storage where they are stored into the gas cylinders and finally it moves to the retail sellers who sell through cylinders to consumers. [Production – Refining – Downstream Terminals – Bottling and Storage – Retail Distributors] After knowing what LPG is all about and how it is obtained, it wouldn’t be a far-fetched thought to try to understand how LPG is stored and what a storage plant is all about. We all know what a plant is generally and I know you know we don’t mean a plant as it relates to agriculture, but the plant in question here is in relation to factories or industries. A plant according to the dictionary simply means the land, buildings, machinery, apparatus, and fixtures employed in carrying on a trade or an industrial business. What Is An LPG Plant And Types Of LPG Plant? LPG must be stored in pressure vessels, therefore an LPG plant can be said to be the land, buildings, machinery, apparatus, and fixtures that are carrying out the industrial process and trade of LPG. The plant contains everything that has been put in place in order to ensure the smooth utilization of LPG by consumers. However, there are different kinds of LPG plants, starting from the bulk storage of LPG to the end user; A spherical LPG pressurized vessel used in refineries and
terminals for bulk storage in large volumes with truck loading facility Auto LPG Filling Stations for filling LPG in cars. LPG bulk plants with vaporizers for use of LPG as burning fuel in industries, LPG bulk plants for use of Liquid LPG in Aerosol and perfumes LPG Filling plants for filling LPG cylinders. We are going to stick to LPG filling plants for filling LPG cylinders considering that we are talking about cooking gas. Many people would see investing in LPG plant as a good move and this belief is not misplaced because as mentioned earlier, a lot of people are now treading the route of cooking gas for its profitability. There are however, certain points that must be taken into consideration in order to have a proper smooth running LPG plant. Technicalities On How To Set Up A LPG Cylinder Filling Plant: Having an idea of the technicalities involved in setting up an LPG cylinder filling plant is crucial and has a lot to do with one’s success in the business. It is one thing to do a business and another to know how to succeed in a business. Therefore, it is not enough to know how to invest in cooking gas but it is equally important to know how to work the business to succeed. After all, nobody sets out to fail in a business venture. The first thing to take note of is the location. Having a good location is important to reach the consumers and for the sake of convenience. If you open a business where the consumers cannot reach you, you might just as well close it as it defeats the whole purpose of having a physical location. The second is to register your business. You need to get a license in Nigeria before you can get the permit to operate. Then of course, every other business venture is expected to register with the CAC
16 | LPG BUSINESS REVIEW | OCT 2017
(Corporate Affairs Commission) to be recognized as a legitimate business and even to protect your business. Then, you need to construct your filling plant. It is important to scout for a good and affordable – depending on what you can afford – company that specializes in construction of LPG filling plant so as to get the best for your money. After that, you need to employ capable hands that have same vision as you do and are ready to work with you. Get knowledge and apply your newly learned wisdom. Get information on everything available on LPG and apply it. And be sure to advertise - You need to get your business out there for people to know. The location needs to be strategic because if you get your location wrong, it could affect the entire business. The location needs to be a place that is close to customers. All things being equal, customers would prefer to patronize a seller close to them, so identify a target market in setting up your plant. Also, you are not supposed to be too close to residential buildings to prevent hazards. You are dealing with gases and they can be extremely hazardous to health of everyone if no handled properly. The trick, therefore is to be close to customers who would largely be in residential areas but not too close to the houses so as to avoid health hazards. The DPR (Department of Petroleum Resources) requires a standard plant to be located on four plots of land. The minimum distance from a tank and a fixed source of ignition (residential buildings, filling shed, storage building etc.) which should be 15 metres. LPG Design And Construction: In constructing an LPG plant, one needs to remember all the requirements of DPR concerning having a plant. After you get all the equipment and accessories
ADVERTORIAL mentioned below, it is always better to contract the construction to safe and trusted hands who will design the plant as recommended by the government of the land. To fill 6kg, 12kg, 25kg and 35kg cylinders, the filling container should be equipped with three electronic filling machines. The LPG storage should consist of one (1) LPG tank with a geometrical capacity that is dependent on the size of the plant. And of course, the general construction would involve installing LPG fractionation system, compressors, refrigeration system, mini LPG storage, hot oil heating system, power generators and other supporting units. The Different sizes of LPG cylinder refilling plant: There are different sizes of LPG cylinder refilling plants and the difference is based on the size of their gas storage tank. There is the mini plant with 10,000 litres gas storage tank, the medium plant with 20,000 - 30,000, and the large plant with 40,000 - 50,000 litres gas storage tank. The mini plant of 10,000 is recommended to be the minimum size for operation. LPG Plant Cost In Nigeria It is difficult to really estimate the cost of LPG plant because of various market and social factors that could come into play when planning to build an LPG plant. Undoubtedly, it is a good business to invest in and expect to get profit because not only do most homes rely on cooking gas,
but it is also used outside the home as well in restaurants, hospitals, hotels and even government organizations. Therefore, the initial costs should not be a discouraging factor. As expensive as it is expected to be, it is worth the money. Certain factors like the price of oil in the global market and price of other facilities could change but it is a risk worth taking. Some of the factors that are necessary for a LPG plant include; land, license - depending on location, gas supply, the actual construction, and facilities like gas tank (the metric ton of the tank varies by size and of course, cost), a fire proof pump, filing systems, safety goggles, boots and overall, weighing scales and pressure gauges, return hoses, and fire extinguishers
among others. All these would have to be calculated in the cost of the LPG plant. LPG Plant Equipment Every plant needs equipment. They are part of the heart of every plant. They include the testing pool, valve screwing, electronic carousel, mechanic carousel, electronic scale, mechanic scale, test unit, conveyor band, gas detector, level gauges, and fire extinguisher. It is important to note at this juncture that LPG plant equipment is not limited to those mentioned here. So apart from trying to make your job easier by providing you information, it is not out of place for you to do your homework when setting up your [LPG BUSINESS REVIEW]
UWANDU IFEANYI Uwandu Ifeanyi is a research analyst and the Founder of Kiakiagas.com (Kiakia Gas Nigeria Limited) which is a leading energy solutions service provider in Africa. We are committed to using Gas to bridge the energy access gap in Africa by converting consumers from traditional forms of energy to gas powered and renewable energy solutions. Mr Uwandu is a tech enthusiast who is passionate about the development of Africa as a continent and has participated in many not-for-profit ventures that has added value to young people around the continent.
OCT 2017 | LPG BUSINESS REVIEW | 17
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THE KENYAN - TANZANIAN IMPORT FEUD: 2 SIDES OF THE COIN 20 | LPG BUSINESS REVIEW | SEP 2017 20 | LPG BUSINESS REVIEW | OCT 2017
FEATURE The Kenyan ban on gas imports has finally been lifted. But not without
causing significant lasting economic cracks throughout the two East-Africa nations. For those not in the know, Kenya put a ban on all land border gas imports from Tanzania on April 24th. The ban was not only for LPG imports but also included wheat. This in turn led Tanzanian officials to react with a counter-ban on unprocessed foods, milk products and cigarettes from Kenya. What exactly sparked off the tension between the two countries? It was reported by Standard Digital Kenya, that officials from the Kenya Revenue Authority denied entry for 42 Tanzanian delivery trucks that were carrying wheat for a bakery in Nairobi. It is uncertain what the actual issue was for Kenya refusing entry of the delivery trucks but what followed from there was a a cold feud between the two countries that lasted almost 3 months. The Kenyan Side Kenyan authorities told the media that the ban on LPG that was implemented because it was discovered that most LPG consumers in Kenya were purchasing half-filled cylinders from dishonest traders. The government felt that despite doing everything in their capacity to resolve the problem, they were simply unable to prevent it and this was their latest attempt to stymie the problem in addition to their new bill which would
increase penalties for cooking gas filling plants that ignore the rules. Currently the the penalties are between Sh30, 000 and Sh40, 000 but the new bill should it be passed would see the the penalties raised to Sh3 million and Sh4 million with jail a term. The strong move was carried out to eliminate illegal filling plants which have been popping up all over Kenya and were posing new security and safety risks. There were also reports by the Energy and Water Utilities Regulatory Authority (EWURA) that dishonest traders had set up illegal gas refilling stations along highways and even a ‘big refilling station in Dar Es Salaam’, that was involved. It also served as a way to prevent cheap LPG that the government believed was coming from Zambia through the Tanzanian border. The Kenyan government strongly believed that the constant rise of illegal refilling was only making the industry more dangerous and putting more lives at risk. The risk of disaster is increasingly high and the fact that many of these stations are in
the middle of densely populated residential areas made it even worse. The government also stressed that these illegal refillers were indirectly robbing the government coffers by denying them millions of shillings in tax revenue. The government said that they had received information that many importers in Tanzania under-declare the quantity and value of the LPG or even both. The Tanzanian Side Tanzania on the other hand, accused the decision by the Kenyan government, to be a move by influential Kenyan firms to monopolize the gas business in the country. The Tanzanian government did however, say that they supported the ban as they had knowledge that there were several established illegal refilling plants that were refilling cylinders and selling them to Kenya. An official statement was released saying that there were about three known illegal refilling plants along the border that had to be dealt with. Associations in Tanzania on the other hand, called ‘foul play’
SEP 2017 | LPG BUSINESS REVIEW | 21 OCT 2017 | LPG BUSINESS REVIEW | 21
and said that they feel there were no good reasons to ban LPG trade between the two countries. They felt that the consequence of the ban was that companies in Kenya would be able to operate in a monopolistic setup giving them an unfair advantage over their competitors in Tanzania. The Tanzanians also pointed out that the ban was not solely for LPG - if it was only the issue of illegal refilling of LPG, why is there also a ban on wheat? It was felt that because of this, the ban was aimed at hindering the export of processed goods from Tanzania to the Kenyan market. The sentiment in Tanzania was that, the Kenyan government wanted Tanzania to remain an exporter of raw materials and not compete with Kenya in the processed goods market. Some prominent locals in Tanzania also pointed out that the port in Dar es Salaam has a much better system that is more efficient for importation compared to Mombasa that make gas imports from Tanzania to Kenya significantly cheaper. It is also a fact that companies without floating storage incur demurrage charges due to delays in offloading of product at Mombasa port,
unlike Dar es Salaam where occupancy is relatively low. On claims of underdeclaration, the Tanzanians have said that the situation should be managed on a case-by-case basis. Most of trucks are weighed by Government weighbridges in which electronic slips from weighbridges are issued and used to check against the invoices issued by suppliers. The Consequences Kenya has been receiving LPG from Tanzania for the past 10 years and this was the first ban to have ever taken place. Each year, more than 200,000 metric tonnes crossed the border and was disseminated throughout the Kenyan LPG market. According to the Kenyan National Bureau of Statistics, consumption of Liquefied Petroleum Gas for the six months to June dropped 38.91%. Data shows that LPG consumption for the first half of the year declined by 36,050 metric tonnes to 56,590 tonnes from 92,640 tonnes during the same period last year. Where prices are concerned, the data shows that cooking gas prices hit the Sh2,000 in April this year, which were the highest
22 | LPG BUSINESS REVIEW | OCT 2017
prices since September last year. Prices are still averaging slightly above the Sh2,000 mark. The feud is thought to have caused the two nations millions upon millions in foreign exchange earnings. Following the lift of the ban on the 23rd of July, the two countries also formed a multiagency committee to be made up of government officials from either side. The committee is to be chaired by the two ministers of Foreign Affairs and will compromise the ministries of East African Community, trade, finance, interior, energy, agriculture, transport, tourism and will also incorporate other key government agencies as the need arises. The feud might have left some lasting cracks between the two nations but it is hopeful that there is no bad blood left between them. Perhaps prices will come down as LPG flows into Kenya from Tanzania once again. Looking past the conflict though the new committee may help them solve greater problems that will arise in the future or even possibly lead to a better, more well connected LPG industry in East Africa. [LPG BUSINESS REVIEW]
OCT 2017 | LPG BUSINESS REVIEW | 23
INTERVIEW LPG INFRASTRUCTURE GROWTH & SOUTH AFRICA AS THE LPG ENERGY HUB OF AFRICA INTERVIEW WITH NIALL KRAMER CEO SOUTH AFRICAN OIL AND GAS ALLIANCE, (SAOGA) As South Africa continues to grow as a gas using nation, we decided to find out what we could from Niall Kramer, CEO of SAOGA on his thoughts of the current state and future of LPG in the country.
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NIALL KRAMER Niall is an experienced corporate marketing leader with strong global, Asian, African and SA experience in oil & gas, marketing and corporate areas. He was educated at UCT and he joined Caltex in SA in 1990 where he moved from across many functions, in both Corporate and Marketing, and was posted to Singapore, Thailand and New Zealand. 20 years later in 2010, after leading the marketing integration for what became Chevron (with the merger of Caltex, Texaco and Chevron) for Europe, Africa, and the Middle East, he became Director Business Development for both Strika Entertainment and Market Pulse Int. In 2013 he joined Shell Upstream BV to manage stakeholder relationships on the key Karoo Shale gas project.
What is your personal opinion on the possibility of South Africa becoming the LPG Energy Hub of Africa? I think this is the wrong question, an energy hub implies a number of different forms of energy. While there’s no question that SA has opportunity for much larger amounts of gas (including LPG) than we currently use. I wouldn’t like to see such a narrow focus. We’re trying to develop a gas economy and LPG is just a part of it. We like LPG because it’s at the pointy end of that strategy, it is already in the market, people understand LPG and it’s already used in the hospitality and heating markets. We have
variable penetration across the country – there are a number of refineries around the coast and some inland and while the refineries produce LPG, it’s not their primary focus. There tend to be stock ups of LPG at the refineries. What are some of the challenges that the industry will face in trying to achieve this? The market challenge is to smooth that supply, so that it leads to demand. By way of example, in the Western Cape where we are, the demand spikes during the winter months. This is when you need LPG in large
quantities. There are stock outs where people are scrambling to find LPG and people point fingers at the local refiners. A company called Sunrise Energy has started addressing that by putting import and storage infrastructure into Saldanha bay and that should help some of that issue. There’s also a large plan for LPG storage up in Richards bay which is all the way on the other side of the country and this is around large bulk storage and fairly large scale. There have been enquiries here from the Competition Commission who has taken the view that the sector needs to be constructing larger storage facilities as while demand is high,
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INTERVIEW local manufacturers can’t produce enough LPG. That’s the basic story line around LPG and it is largely industrial-commercial. The gas economy that we’re trying to develop would be gas that would drive the power system, that would be electricity, as well as gas that’s used in industry but not particularly focused on LPG, instead focused
on a total gas economy. Tell us about SAOGA’s efforts in the LPG sector, what has the organisation been working on recently? SAOGA is an industry body that represents upstream, midstream, oil and gas and primary focus at the moment is lobbying advocacy around lobbying and policy
and that is to support the easier establishment of a commercially viable gas industry. We don’t have any particular projects focused on LPG but we have projects around gas in its broader sense which largely means methane. [LPG BUSINESS REVIEW]
INFRASTRUCTURE GROWTH IN SOUTH AFRICA
The Sunrise Energy Terminal at Saldanha Bay Sunrise Energy has recently launched its openaccess LPG terminal at Saldanha Bay in aid of supporting South Africa’s growing LPG use in its overall energy mix. The terminal recently handled its first trial shipment in May. The project is in no way small, with phase one costing USD 83 million, covering 10.9 hectares, comprising of 5 storage tanks with 5,500 tonnes of storage which are set to handle 210,000 tonnes of LPG a year. The project is planned to expand in three phases to support growing LPG demand over the next 27 years. Saldanha port manager Vernal Jones said “This investment of R1.09Bn will create broader LPG access in the Western Cape. The terminal will boost the capacity of existing LPG distributors and enable the entry of new small, medium-sized and micro-enterprises, who have had restricted access to the market because of supply constraints and lack of access to enabling infrastructure.” The Sunrise Terminal will become the country’s largest facility for handling imports and exports of LPG.
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The Petredec Storage Facility at Richards Bay Bidvest Tank Terminals is going to develop a new LPG import and storage facility at Richards Bay for Petredec. The facility will be a 22,600 tonne storage facility. There will be four mounded tanks capable of storing more than 5,500 tonnes of gas. Construction is expected to start in September 2017 and be completed in late 2019. The opening of this new large scale terminal will allow seaborne re-exports to neighbouring countries, in effect, unlocking previously unattainable economics. This will in turn create lower prices for the local South African market. Petredec CEO, Giles Fern told the press that ‘delivering LPG to South Africa on a previously unprecedented scale brings with it financial savings to our customers that will ultimately benefit consumers with lower gas prices believes that further investment in large’. It is his belief that dedicated infrastructure is the only way to increase LPG’s popularity and bring lower prices to consumers.
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FEATURE OLD HABITS DIE HARD:
NON SUPPLY REASONS WHY LPG USAGE IN KENYA IS STILL LOWER THAN EXPECTED
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FEATURE The gazetting of Legal Notice no 121 of 2006, which was enacted in 2009, was supposed to cause a dramatic change in LPG usage. It caused the
standardisation of the domestic cylinders in Kenya and creation of the LPG Cylinder Exchange Pool, allowing customers to exchange any brand of empty cylinders with any other brand when buying a filled
Figure 1: Estimated LPG volume growth in Kenya
cylinder. Since then, the domestic market has recorded remarkable growth as indicated in Figure 1. The actual growth in volume sales has seen an almost doubling of the
volume from about 80,000MT in 2007 to 175,000MT in 2016. During the same period, the number of LPG marketers in the domestic sector has grown over five-fold, from seven in 2009 to over forty by end of 2016. The number of cylinders is estimated to have tripled from just about two million to the current six million. On the retail side, a large number of retail outlets have mushroomed in all urban, periurban areas and rural shopping centres, indicating the deep and wide reach of cooking gas usage. Displays of cylinders are visible in every roadside shop, especially in the densely populated areas. Only a decade ago, filled cylinders were only available in petrol stations, branded distributors and a few other outlets who would sell all brands albeit at a high price. An insightful review into the downstream value chain reveals a somewhat different scenario. Considering that the noted volume of 175,000MT in 2016 includes the volume sold to bulk consumers such as manufacturers, it is evident the volume growth is not as rosy as would be desirable. Indeed, the volume growth rate lags behind the growth rate in number of licenced LPG marketers. A quick calculation on cylinder turnaround time indicates an average of less than one refilling every four months. How is it then that number
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FEATURE of cooking gas users is increasing but the volume is not increasing accordingly? The main reasons are the prestige associated with LPG which makes users use it sparingly, lack of encouragement from the marketers to sell more, and the regulator inability or unwillingness to rein on illegal refillers who fill gas into branded cylinders and frustrate brand owners. Cooking gas is a special commodity Many domestic LPG users treat their cooking gas as a precious commodity that is used sparingly, preferring to use other fuels even when they can afford to use it almost exclusively. Listening to a group of women (those responsible for cooking in responsible for cooking in Kenyan homes), one would be forgiven for thinking there is a medal for having a cylinder last the longest time possible. They will brag about how long the cylinder has lasted and the tricks they use to make sure the cylinder lasts as long as possible, even when they have to spend more money on other fuels for cooking. An interaction with current users of domestic LPG indicates that this
fuel is reserved for certain meals, restricted to certain persons within the households, and even specific periods. Thus, most families will use LPG for quick cooking meals such as tea or boiling rice, and revert to charcoal for making chapatti (Indian bread), grains and lentils. In some households, cooking gas is only used by the mother of the house. While many working women have domestic workers, when it comes to cooking, domestic househelps are instructed to use kerosene or charcoal during the day when the lady of the house is away. While the stated concern if safety, there is an aspect of gas being so special that only the high-ranking members of the households can use it. In the rural areas, LPG is used only when one is in a hurry or for visitors. In many rural and even some urban homes, the cooking gas cylinder is placed in a prominent location, more for its status symbol that itâ&#x20AC;&#x2122;s utility. So long as LPG is considered as a special product for occasional use only, many consumers will continue acquiring cylinders for prestige with little utilisation.
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Role of LPG Marketers The marketers of domestic LPG in Kenya can be categorised in three main categories; the well established brand owners with own storage and filling facilities, the â&#x20AC;&#x2DC;newâ&#x20AC;&#x2122; entrants with own brands, and thirdly the unknown shielded illegal refillers who fill all brands they can lay their hands on, but with a particular affinity to popular brands owned by the established brand owners. Established brand owners These typically have been in the market for more than a decade and both retailers and consumers prefer their brands to any other brand. In most cases, their brands are available in their branded petrol stations, and amongst a few well selected distributors. They are highly selective on distributors, insisting on documentation to know the customer, minimum quantities per order and prepayments. Although they usually will not sell directly to retailers in residential areas, their cylinders are the most visible in all retail outlets, who usually sell assorted brands to attract customers.
FEATURE In the last few years, there has been little marketing effort from this category. New entrants with own brands Less than a decade ago, there were only a handful of brands and gas available, limited distribution outlets, relatively high prices and different valves for each brand, and frequent intermittent shortage. The ‘liberalisation’ of the cooking gas market opened a floodgate for new investors, majority aiming to make a quick back. Since they have own brands, these marketers make efforts to disctribute their brand all over the country, suing existing independent (non-branded) retail network. Apart from seeking out retail outlets to sell their brands, majority of these new entrants make no efforts to differentiate their brands and sell ‘gas-is-gas’. It is an open secret that a number of these new entrants also do cross filling, or illegal refilling of their competitors brands, especially targeting the popular brands in order to make quick sales and give the customers what they (customers) want. Illegal Refillers Illegal refillers do not own any brands but access empty cylinders of any brand they can, refill and pass onto the consumers under the pretext ‘gas-is-gas’. Illegal distributors sell their refilled cylinders mainly within their ‘catchment areas’, but some have
invested in distribution methods that reach consumers, especially in high density population areas. Illegal refillers usually do not sell to new customers (those buying gas and cylinder) as this reduces their cylinder stocks. As much as the regulators turn a blind eye to illegal refillers and reason that they are able to sell gas at a lower price, rampant filling of other companies’ brands do not and cannot grow the business. They perpetuate the myth that getting a gas cylinder is difficult and mysterious, further making cooking gas appear as a precious commodity. How to increase LPG usage Increasing LPG usage requires concerted effort from the marketers in educating consumers and encouraging increased LPG usage, while regulator should provide more support by reining on illegal refilling. What the companies can do Established marketers The leading brand owners need to put more efforts in recruiting retailers in residential areas and far flung locations, without relying only on branded outlets and a few selected dealers. They also need to be flexible and sell and deliver smaller quantities, even if this leads to increased documentation. And since their brands are known and recognised, the main areas of investment and focus is logistics, and making affordable and robust cookers.
Elizabeth is a consultant in the LPG sector in Kenya. She worked at BOC Gases for many years, before she joined National Oil in 2008 and launched start-up LPG company, Green Energy Ltd. Since 2013, she has been consulting and helping clients get into the LPG business.
New Entrants Licenced refillers who illegally refill other brands concentrate all their efforts in acquiring the cylinders of popular brands, and miss the opportunity of growing their own market. Once it is evident that illegal refilling is not a long-term business strategy, majority of new entrants would focus on growing their own brands. They can then compete with the current popular brands and also grow their brands, inevitably growing the LP business. Illegal Refillers Since the illegal refillers have already invested in storage and filling facilities, it would require little effort to legitimise their business. They can then partner with brand owners or join the bandwagon and introduce own brands. Combined Effort Finally all the gas companies could combine efforts and work on ways of increasing the size of the cake as it were. In this way, even a small slice of the pie (small market share), will still be sizeable market for any marketer commensurate with individual investment in cylinders, brand promotion efforts and distribution. Marketers can do this by educating consumers, availability of gas equipment, etc Combined efforts can also seek to supply safe, robust, and affordable gas equipment and accessories. This can enhance safety perception and give new users peace of mind to continue using LPG. What the regulators should do The regulator needs to realise that growing the market is more than increasing the number of cylinders in the market. More importantly, they need to enforce the rules in order to minimise illegal refilling and encourage legal marketers to grow the business. [LPG BUSINESS REVIEW]
OCT 2017 | LPG BUSINESS REVIEW | 33
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FGE CONFIDENTIAL US Propane Exports to Asia “US propane imports into Korea and Japan are growing. This has meant a stronger connection between US and Asian propane prices.” US propane has become an essential part of propane supply in Asia for three countries in particular - Korea, Japan and China. The chart following shows the share of US LPG export cargoes in the total imports of these three countries.
Furthermore, since 2015, Korea has become an increasing propane-heavy importer due to: • a gradual drop in butane demand for auto-gas, and • more propane demand for PDH use and steam cracker upgrades. The propane-butane ratio for LPG imports into Korea has changed dramatically over the past three years: US exports mainly propane and that is exactly what the Koreans want. Total Korea LPG Imports: Propane and Butane Ratio 2014 2015 2015 2017 (Jan - Jun) 48% 55% 65% 74% Propane 52% 45% 35% 26% Butane
The trade from the US Gulf to China has been growing, but the share of its LPG imports into China has remained largely unchanged. The story is different for Japan and Korea. US Gulf volumes account for: • more than half of Japan’s LPG imports, • and almost three-fourths of Korean LPG imports this year. This has been occurring despite the problematic arbitrage economics between the US Gulf Coast and the Far East. The table following shows the volumes behind this graph. US to Asia LPG Trade 2015 2016 Million Tons Korea Japan China
1.6 2.4 2.8
3.4 3.4 3.3
2017 (Jan - Jun) 3.4 3.4 3.3
Korea. Korean lifters have taken their LPG cargoes to Korea, though some of them have expanded their LPG trading activities in other countries. There is a 4% tax advantage for buyers in Korea taking US-origin propane.
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Japan. The lifters also take their cargoes to Japan, though few of them have followed in the footsteps of Korean companies to trade them elsewhere. All major Japanese importers - except for Iwatani - have introduced Mont Belvieu propane prices to their wholesale system this year. By doing so, they have reduced the indexation risk between US LPG prices and CP. China. The growth in US-to-China LPG trade in general does appear to be slowing down. The main outlet here has been the PDH sector. Interest in US supply has diminished, in particular because of the contractual problems of some PDH operators buying US-sourced propane last year. Still, Chinese PDH economics are good at the moment and Chinese buying appears to be supporting Asian propane prices. Pricing The recent run-up in Mont Belvieu prices has reminded everyone that US propane supply does not necessarily mean cheap supply, even with cheaper shipping and the shorter VLGC distance due to last year’s Panama Canal expansion. What is strange about the propane prices in Europe and Asia today is the backwardation. Forward prices are normally higher in December than in August. This year they are lower.
Market Feature—Is the Propane Cracking Season Over? “The propane-to-naphtha price spreads are at extremely low levels for this time of year.” Mid-August may still be summer in the
Northern Hemisphere, the time when winter buyers have retreated from the marketplace and propane prices should be reflecting petrochemical steam cracking economics. Not this year. Europe. In Europe, propane discount to naphtha today is a desultory $17 per ton. This is not even the lowest for the year and is well below any level for the spring or summer of 2016. 8-10% LPG, part contract deliveries at protected discounts and part spot at ever reducing discounts. FPC did buy a spot 22,000 ton propane cargo at MOPJ minus $15 per ton this week. But the company does appear to have lost patience with the LPG market and plans to stop feeding LPG to their steam cracker by the end of September, relying then instead only on naphtha.
Ust Luga propane cargoes continue to move to Stenungsund; and Dow Chemical is continuing to take US cargoes into its plants at Terneuzen and Tarragona. Right now: • the Ronald N is heading for Terneuzen, • and the Clipper Saturn for Tarragona. More US cargoes are in fact moving to Europe now because of the maintenance downtime at North Sea terminals during September. However, the flexible crackers at coastal locations do seem to be cutting back on their propane intake. Asia. The same story of reduced petrochemical demand for LPG is true for Asia. The propane discount to naphtha here is at an even lower $6 per ton. A year ago it was close to $80/ton. The bellwether for propane cracking in Asia has been FPC’s cracking at Mailiao in Taiwan. They can crack up to 20% LPG of their feedstock slate. More recently they have been running at
The US Pricing Impact Why are propane prices so high this August? We think a critical factor is the cost of US propane being supplied to the Asian markets. Mont Belvieu propane prices are markedly higher now than they were a year ago. US propane is now an essential part of the propane supplies in both Europe and Asia. As such, the higher Belvieu prices have been providing a cost-push element to the propane prices in Europe and Asia.
OCT 2017 | LPG BUSINESS REVIEW | 37
Market Feature—Saudi LPG Exports for 2018? “Saudi LPG export volumes uncertain for 2018.” Saudi
Aramco has delayed by one month its discussions with contract buyers on LPG volumes for 2018. Is there some uncertainty about how much they will in fact produce and export? Actual LPG export volumes have been up and down in recent years. The following are our estimates: • 7.0 million tons in 2015, • 9.4 million tons in 2016 (with the start‐up of the Shaybah field), • and an estimated 8.7 million tons in 2017 (based on the trend so far). LPG production still hinges to a considerable
extent on crude oil production in Saudi Arabia. It remains to be seen whether Saudi Arabia will need to make further crude cuts in order to balance the oil market going into 2018. If Saudi Arabia does reduce its oil production, then LPG exports are likely to be lower in 2018. In this circumstance, the Indian buyers will be particularly disappointed. Their contract requirements will probably be higher in 2018. Less available from the Saudis and we may see them more in the market, particularly for butane, with similar consequences as we saw in 1Q 2017.
Venezuela— LPG Problems There “Venezuela’s Oil Industry shortfalls mean growing LPG imports.” Venezuela may be a
country rich in hydrocarbon resources. But the country is failing its populace in its ability to supply them with basic household fuels. Nine out of ten households use LPG cylinders for cooking purposes. Only one in ten households has access to a gas pipeline. The Government launched a program twelve years ago to introduce natural gas pipelines for some five million households, but this commitment has not been fulfilled.
Finding LPG cylinders for cooking use has become increasingly difficult. Queues are lengthy at state filling stations; and many frustrated users have reverted back to wood burning. Oil industry analysts attribute the problem to a sharp drop in Venezuela’s oil and gas production, resulting in less domestic LPG output. State oil company PDVSA is broke and narrowly avoided default last year. Venezuela is consequently having to import LPG to make
up for domestic shortfalls. The LPG import total over the first six months of 2017 was in excess of 26 kb/d, more than 400,000 tons. How ironic that the port of Jose in eastern Venezuela, once a major LPG export terminal, is now being used for LPG imports. The main seaborne supplier has been Trafigura, in 20,000 ton lots out of Trinidad, with some volumes also coming out of Argentina and Colombia. Trafigura has been moving its US Gulf LPG export cargoes to outlets elsewhere.
Feedback Do you have comments, questions, or opinions on this piece or issue? We would appreciate your feedback. Send us your feedback or comments to FGE@FGEnergy.com 38 | LPG BUSINESS REVIEW | OCT 2017
STATISTICS LPG Consumption
% Household Use
% Industrial Use
% Transport Use
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STATISTICS LPG Consumption
% Household Use
% Industrial Use
% Transport Use
*Information correct as of Jan 2016 1 Metric Tonne (MT) of this product
1 Metric Tonne (MT) of this product
We are working on growing and developing a more comprehensive LPG statistics database. If you have such data, let us know, we would love to get in touch with you. We can be reached at firstname.lastname@example.org.
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