Comment: Pakistan’s LPG (Production & Distribution) Policy, 2016

Liquefied Petroleum Gas (LPG) is a colourless, odourless, and environmentally friendly mixture of hydrocarbons, primarily propane and butane. It exists in a gaseous state at normal temperature and pressure but can be liquefied under reduced temperature or moderate pressure. Ethyl mercaptan is added to LPG to impart a pungent odour for leak detection. In Pakistan, approximately 1,390 tons of LPG are produced daily, contributing less than 1% to the total energy supply mix. Due to its characteristics, LPG is becoming a preferred fuel in areas without natural gas distribution networks. Out of 27 million households in Pakistan, 7 million are connected to the natural gas network, while the rest rely on LPG and conventional fuels like coal, firewood, kerosene, and dung cake.

In June 2000, the Federal Government deregulated the LPG industry to foster healthy competition, improve safety standards, and ensure better consumer services. This led to the formulation of the LPG (Production & Distribution) Rules, 2001, superseding the LPG (Production & Distribution) Rules, 1971. These new rules allowed producers and marketing companies to set reasonable producer and retail prices for their products. Following the promulgation of the Oil & Gas Regulatory Authority (OGRA) Ordinance in 2002, all LPG regulatory functions were transferred to OGRA in March 2003.

Subsequently, the Government introduced various policies, including the LPG (Production & Distribution) Policy in 2006, 2011, and 2013, to increase LPG supplies through both indigenous production and imports. Despite these policy initiatives, LPG prices for domestic consumers remained high due to the linkage of domestic LPG producer prices with international prices, deregulated consumer prices, high producer prices, and overcharging by marketing companies. Recognizing the issue, the Ministry of Petroleum & Natural Resources (MPNR) reviewed the policy and concluded that price deregulation had failed to achieve its objective of making LPG available at affordable prices.

Objectives

The primary objective of the LPG (Production & Distribution) Policy, 2016, is to ensure the availability of LPG for domestic consumers at an affordable price while avoiding frequent price fluctuations to maintain a sustained price level.

Policy Guidelines

1. Production and Disposal of LPG by Public Sector E&P Companies and Refineries:
   • Public Sector E&P Companies are encouraged to set up LPG extraction facilities at gas fields in accordance with approved development plans. If unable to do so, their extraction rights will be surrendered to the Government, which may then allocate these rights through a competitive bidding process.
   • Preference in LPG sales will be given to Gas Utility Companies for LPG Air-Mix Plants to supply fuel to domestic consumers. If the Utility Companies cannot lift the LPG, it will be sold through a competitive bid process to licensed LPG marketing companies.
2. Production and Disposal of LPG by Private Sector E&P Companies and Refineries:
   • Private Sector E&P Companies must include LPG potential in their field development plans. If unable to establish LPG extraction plants, their extraction rights will be surrendered to the Government for competitive bidding.
3. Production and Disposal of LPG by Private Sector Producers (other than E&P Companies and Refineries):
   • Private producers will sell LPG to licensed marketing companies on mutually agreed terms, adhering to the pricing guidelines set by the policy.
4. LPG Licensing:
   • OGRA will issue provisional licenses for two years for LPG marketing to financially and technically sound applicants. These will be converted to marketing licenses for fifteen years upon satisfactory completion of infrastructure works.
   • OGRA will also issue licenses for production, extraction, LPG Air-Mix plants, storage, filling plants, and refuelling stations, requiring permission from the Department of Explosives where applicable.
   • Non-compliance with licensing terms will result in cancellation of licenses.
5. LPG Safety Standards:
   • Licensees must adhere to minimum safety standards throughout the LPG supply chain, following NFPA 58 or equivalent standards.
   • Decanting and cross-filling of cylinders are prohibited except under specific conditions with prior notice to OGRA.
   • Conversion of vehicles to LPG and establishment of LPG refuelling stations must meet prescribed codes and standards.
   • Use of domestic or commercial cylinders in automobiles and refilling these at refuelling stations is prohibited.
6. LPG Pricing:
   • OGRA will regulate and notify prices for indigenous LPG, including producers’ prices, margins for marketing and distribution companies, and consumer prices.
   • The Government may impose a Petroleum Levy on local LPG producers and subsidize imported LPG to equalize prices for domestic supplies.
   • Tariffs for LPG Air-Mix supplies to domestic and commercial consumers will be set by the Government.
   • Maximum prices will be regulated at all supply chain levels, but sellers may charge below the maximum price.
7. Import and Export of LPG:
   • Licensed entities can import LPG upon paying applicable duties and taxes. Exports of surplus LPG are allowed with MPNR approval, considering local demand.
8. General Provisions:
   • All LPG licensees must provide required data to MPNR and OGRA.
   • OGRA will report policy implementation status to MPNR quarterly.
   • The Federal Government may issue instructions to OGRA for policy implementation.
   • OGRA will register all existing and future LPG distributors.
   • Marketing companies must ensure compliance with safety standards and price regulations at distributors’ premises.
   • Local LPG producers must dedicate 10% of their production to LPG Air-Mix plants and marketing companies for exclusive distribution in specified areas.
   • Public Sector Companies’ Air-Mix Plants will be operated by these companies or third-party operators.
   • Indigenous LPG production will primarily supply domestic and commercial consumers, with other sectors using imported LPG.

Applicability and Effect

• The policy is effective immediately and supersedes all previous instructions, orders, and policies on the covered matters.
• OGRA will amend its rules and license terms to implement this policy.

Conclusion

The LPG (Production & Distribution) Policy, 2016, aims to stabilize LPG prices and ensure consistent supply for domestic consumers. By prioritizing safety, regulating prices, and ensuring a transparent licensing process, the policy seeks to foster a sustainable and equitable LPG market in Pakistan. For more information and expert legal advice on navigating the complexities of this policy, please contact Josh and Mak International.