LPG Market in Sri Lanka

The LPG market in Sri Lanka has grown from around 70,000 mt in 1995 to over 170,000 mt at present. Out of this, the Ceylon Petroleum Corporation produces around 15,000 mt of LPG and the

balance quantity is imported.

It is estimated that more than 75% of the LPG consumption is by the households for cooking purposes. It is also estimated that there are about 25% to 30% households using LPG as a cooking fuel and these households represent the relatively affluent segments of the society. Other applications of LPG include commercial uses such as hotels and restaurants as well as industrial uses such as ceramics, plastics and metal.

Cost of imported LPG

The international market price of LPG is called "Saudi Aramco Contract Price" or "CP". The CP varies every month and it closely follows crude oil prices. CP is also strongly influenced by the pent up demand during winter season. With the oil prices consistently escalating during the past two years, the CP too has moved upward into unprecedented levels.

The average CP, which was $291/mt in 2003, had moved up to $352/mt in 2004 and to $434/mt in 2005. The CP escalated to $582/mt in January 2006 and has shot up to $625/mt this month.

Cylinder pricing

The price of a LP Gas cylinder is built on the cost elements in the supply chain. Of these elements, the cost of products (CP) is the major driver of price. The landed cost of product consists of CP, shipping and insurance and other costs to bring the product to Sri Lankan shores.

At today's price level of Rs. 960/= per 12.5 kg cylinder the landed cost alone accounts for over 91% leaving only 9% for distribution margin and company overheads thus leaving no profit margin for the company. The price of a 12.5 kg LP Gas cylinder on the basis of current landed cost of product should be over Rs. 1,130.

Affordability

The average usage of a 12.5 kg of LPG is approximately 2 months. This means that at Rs. 960 per cylinder, the daily cost of LPG to an average household is Rs. 16. Considering that there are four persons per household, the daily cost of domestic LPG per person is only Rs. 4. Compared to daily cost of many other consumer items that one purchases from the market today, this cost cannot be considered high. In terms of a price increase, for example of Rs. 120 per 12.5 kg LPG cylinder, the same logic would say that the daily increase in cost per person per household is only 05.0 cents.

Shell's investments

Since its market entry in 1995, Shell Gas has invested over US$ 150 million in the LPG industry in Sri Lanka.

These investments consists of US$ 33 million for 51% stake in the Colombo Gas Company and US$ 82 million investment on the LPG import and storage Terminal.

Shell has also invested heavily in modernizing its filling plant, upgrading LPG road tanker fleet and conforming to international safety standards.

Shell is working with the Government for instituting a sound regulatory framework for the betterment of the LPG industry and its growth in Sri Lanka and including legalizing safety standards. Unfortunately, even after 10 years of business in Sri Lanka, Shell Gas companies carry the burden of accumulated losses.

Dr. Mahesha Ranasoma, Director Marketing and Corporate Affairs, Project Director - Shell Live Wire
