Negligible subsidy regime provides window for pvt players to expand biz

With negligible subsidies being borne by the government on domestic liquefied petroleum gas (LPG), private players are looking to expand this business.

This opens the door for companies like Reliance Gas, Gogas, and Puregas.

These private players were focusing more on commercial LPG since cooking gas subsidies were not available to them. Only governmentowned oil-marketing companies (OMCS) got them.

But with global LPG prices tempering and the government phasing out cooking gas subsidies in May last year, the opportunity for private players in the domestic market has grown. Despite prices rising to record highs, the subsidies have not been restored.

A domestic LPG cylinder of 14.2 kg now costs ~884.50 in Delhi. While earlier governments attempted to keep LPG prices largely below ~500 a cylinder, the current government has allowed the free play of market forces.

This could now help companies like Reliance Gas, a part of Mukesh Ambani-owned Reliance Industries (RIL), to get into the domestic LPG business aggressively. Reliance Gas offers domestic connections in Maharashtra, Madhya Pradesh, Gujarat, and Rajasthan. These regions are largely serviceable from RIL’S refinery in Jamnagar.

In Ahmedabad, a domestic 15-kg cylinder of Reliance Gas costs ~1,200. This translates into ~80 a kg. Dealers of Puregas, part of Aegis Logistics, sells a similar LPG cylinder for roughly ~1,300, which equals ~87 a kg. For Gogas, a unit of Confidence Petroleum, a 15-kg domestic LPG cylinder retails at ~1,200.

Comparably, a domestic LPG cylinder sold by OMCS is around ~891.50 a 14.2-kg cylinder.

The private companies say they offer faster service and connections within 48 hours. Most dealers of private companies give cylinders immediately with minimal paper work. Comparably, getting an LPG connection from an OMC can take days if not weeks.

“There is much higher scrutiny while giving OMC LPG connections to minimise pilferage. While the subsidy regime has largely been phased out, scrutiny still remains,” an LPG dealer who has an Indane Gas agency (part of Indianoil) told Business Standard.

OMCS also try to prevent the diversion of cylinders meant for domestic cooking for commercial purposes. Domestic gas attracts 5 per cent goods and service tax while commercial LPG is expensive because it is taxed at 18 per cent.

Despite market-linked pricing, OMCS also go the extra mile to keep domestic LPG costs a bit lower than commercial LPG. “There are some additional costs that we recover from commercial cylinders. This keeps domestic LPG cylinders of OMCS cheaper despite the lowered subsidy,” an Indianoil official said.

The private players are also banking on relaxations given in the Parallel Marketing System (PMS) of LPG as allowed by the Ministry of

Petroleum and Natural Gas. According to CRISIL, the scope for parallel marketers in India includes importing, storing, transporting, bottling, marketing, distribution, and sale -- or any activity relating to the LPG business.

Since LPG is a scarce commodity, its export or free market retailing is not allowed in a business-as-usual scenario. The oil ministry’s January 2014 order reiterates that sales of indigenously produced LPG are permitted only to OMCS, namely Indianoil, Hindustan Petroleum, and Bharat Petroleum. In 2015, this order was relaxed and the Centre allowed RIL to sell up to 10,000 tonnes per month of LPG from its refineries to private cooking gas marketers. This was subject to RIL ensuring that it supplies an equal quantity of LPG to OMC refineries at cost-neutral or cheaper rates.

This helped the Mukesh Ambanirun firm gain more from the PMS scheme because private players interested in LPG marketing would be able to buy it directly from RIL refineries.

But this was not enough to meet all requirements. According to an official of a private company, their cylinders also cost more because they are selling imported LPG, which is subject to a 5 per cent customs duty.

“The LPG sold by OMCS is made from crude oil, which has no import duty. The private players without refineries, basically everyone except RIL, has to either buy finished products from domestic refiners, or import them from the international market. This pushes up input costs, resulting in more expensive domestic cylinders,” he said.