The Hindu Business Line : Sharp fall in LPG demand upsets refiners' plans

A sudden dip in liquefied petroleum gas (LPG) demand in the country has upset the calculations of domestic refiners. The refiners were betting on the demand growing at 12 per cent to 15 per cent annually, but they had to sell the contracted quantities imported from the Persian Gulf and re-work strategies to minimise the blow.

Based on the growth in LPG demand averaging between 12 per cent and 15 per cent over the last 18 months , State-owned Indian Oil Corporation had contracted 12 LPG cargoes of 13,000 tonnes each for both February and March from Ras Tanura in Saudi Arabia, Mina-Al-Ahmadi in Kuwait and Ruwais in the United Arab Emirates.

However, with the actual growth in LPG since January slipping to a meagre 2-3 per cent, IOC could ship only four of the 12 cargoes contracted for February and it has decided to ship a similar quantity in March. The balance eight cargoes each for the months of February and March are being sold through a "working arrangement" with Reliance, a source familiar with the developments disclosed.

The dwindling LPG demand has left the refiners with two options. One, either ship all the contracted quantities and take less of LPG from Reliance under the product exchange agreement whereby IOC, HPCL and BPCL use products from the Jamnagar refinery of Reliance to meet a part of the total LPG demand.

This would entail a "problem with the refinery configuration of Reliance," since it will not be able to cut down on the production of LPG alone. On the contrary, producing LPG at the projected demand would create "excess capacity with attendant storage problems" for Reliance.

The second option for the refiners is to sell the contracted quantities and source the entire requirements from Reliance. "After tough negotiations, both IOC and Reliance reached an understanding whereby Reliance will sell eight of the 12 cargoes each contracted by IOC in February and March, against which IOC will take 50 per cent of such contracted quantities sold from Reliance," the source said. As per the arrangement, any loss incurred in disposing off the LPG quantities contracted by IOC will be borne fully by Reliance.

Following this, Reliance has been able to sell five of the eight LPG cargoes of 13,000 tonnes each (for February) against which IOC has agreed to take 32,000-33,000 tonnes (half of 65,000 tonnes) from Reliance.

Reliance is in the process of selling the balance three cargoes for February and is hoping to dispose off another eight cargoes for March contracted by IOC. Shipping industry sources reckon that the LPG cargo imported from the Persian Gulf would cost about $350 per tonne.

When contacted, both IOC and Reliance declined to comment. One of the reasons behind the sudden dip in LPG demand is the Government's decision to clamp down on the diversion of subsidised domestic LPG for commercial use.

Besides, public sector oil refiners have to fork out huge demurrage costs, as ships carrying LPG are waiting to discharge the cargo at Mangalore port due to ullage constraints. "Ships are waiting at Mangalore port to unload the LPG cargo mainly due to lack of clearance from tanks, which implies that sales have slackened," a Mangalore port official said. Ullage is the quantity that a cask lacks of being full.

"Lack of clearance from tanks is a strong indication that consumption is not taking place, reflecting in lower sales," the official said.

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