Assessment of present status of LPG systems and its market potential in Bangladesh

An Analysis of potentials and barriers of LPG systems for domestic cooking

May, 2005

Submitted by

Syed A.F.M Sajedul Huq

Senior Renewable Energy Specialist/

Project Manager

In house consultant of GTZ- PURE

House 10C, Road 90, Gulshan-2,

Dhaka-1212, Bangladesh

Contents

1.     Introduction ………………………………………………………..   4

2.    Energy scenario in Bangladesh ……………………………………   4

3.    LPG as a fuel for cooking and others and its suitability …………..   4

3.1       Liquefied Petroleum Gas (LPG) …………………………………   4

3.2    Benefit and suitability of LPG as a fuel for cooking and other ….   5

       3.2.1 Availability ………………………………………………...   5

         3.2.2 Control and Portability …………………………………….   5

         3.2.3: Environment friendliness …………………………………    5

       3.2.4 Less hazardous to health …………………………………..    6

         3.2.5 Better energy management ………………………………..    6

4.     Present demand and production scenario of LPG ………….....    6

4.1       LPG Demand ……………………………………………………     6

4.2       Production and Import of LPG ……………………………….....     7

5.     Present cost of LPG cooking system/ fuel and other traditional fuels ……………………………………………………………….     9

5.1       From the consumer point of view ……………………………...       9

5.2       From the LPG supplier’s point of view ………………………..       9

6.     Marketing of LPG system ……………………………………..       9

6.1    Marketing by BPC and the private company …………………...       9

6.1.1      Boshundhara LP Gas Limited ………………………….     10

6.1.2      Summit United Petroleum Co. Ltd. ……………………      11

6.2    Marketing strategy currently followed by private companies …       11    

7.     Transportation of LPG ………………………………………...     11

8.     Barriers to the use of LPG and elimination of barriers ……..     12

8.1       Barriers …………………………………………………………..     12

8.2       Removal of barriers ………………………………………………   12

9.     Previous Studies in the field of LPG …………………………..   13

9.1       LPG Study Update by RTM Engineering Limited ………………   13

9.2       Analysis of the RTM Engineering study …………………………   14

10.      Recommendations on the proposed study for rural and sub-urban LPG market potential ……………………………......   14

11.      Scope of work ………………………………………………...  14

12.      Tasks ……………………………………………………….....  15

13.      Conclusion ……………………………………………………. 16

Assessment of present status of LPG systems and its market potential in Bangladesh

1. Introduction:

Households are remaining a major sharer among the different users of energy in Bangladesh. The demand is mainly for cooking. Considering lion share of populace living in the rural areas, this demand has quite an important impact on the overall energy scenario of the country. Presently biomass is used in most of the traditional stoves of household. The rate of use of biomass for cooking and others has crossed the sustainable limit. As an alternative to kerosene stoves and biomass fuel, Liquefied Petroleum Gas (LPG) is in use in Bangladesh for quite a number of years. Despite very high demand for LPG the use of LPG system for cooking in Bangladesh has not achieved expected growth rate. Recent directives from the Prime Ministerial level for diffusion of LPG systems for cooking has drawn attention of the interested stake holders in this sector.

2. Energy scenario in Bangladesh:

Per capita energy consumption in Bangladesh is one of lowest in the world. There is a big scarcity of energy and power all over the country. Sector like agriculture, industry are suffering from high losses due to the scarcity of power. Again the distribution of energy to the different geographical locations of the country is not uniformly proportionate. All the gas reserves found are located on the east side of the country which is divided by major north-south  rivers (Padma, Meghna, Jamuna). The difficulty and associated high capital cost of river crossing deprived the inhabitants in the western zone of uniform distribution of energy. Also the rural areas of the country are deprived of energy supply due to the lack of further network of energy distribution. With the rapid growth of domestic and irrigation consumer under Rural Electric Co-operatives (PBSs) power demand is rising with such rapidity that the present supply of energy and power can not cope up with.

National Energy Policy (NEP) has addressed this issue with due importance and emphasis has been given on harnessing and extending use of new and renewable sources of energies to ease out the energy crises in the country. 

3. LPG  as a fuel for cooking and others and its suitability:

3.1 Liquefied Petroleum Gas (LPG):

LPG is a derivative of two large energy industries, crude oil refinery (40%) and natural gas processing (60%). Normal component of LPG are Propane (C₃H₈) and Butane (C₄H₁₀). The mixture is available in a varied range of proportions. Normally the Butane-Propane ratio is 50:50. But for cooking fuel this proportion is changed to 70:30 ratios. Small concentration of other hydrocarbon may also be present. With moderate pressure LPG can be bottled in liquid form under sufficient low temperature. Bottles are normally steel cylinders with regulator to control pressure to suite the appliance that is being fueled. Odorless, colorless LPG is mixed up with foul-smelling additives so that the leakage is easily detected. LPG cook stoves are proven technology and are in commercial use for nearly 90 years.

3.2 Benefit and suitability of LPG as a fuel for cooking and other:

3.2.1 Availability:

Bangladesh is rich in natural gas. But the vast majority of its population is remaining at bay from its supply due to lack of infrastructure and development. Among many other energy alternatives LPG can offer as a clean, safe, and efficient source of energy. Moreover once the distribution and marketing network can be developed LPG cylinders can be made available quickly with out the need of expensive construction of distribution pipeline for supply of natural gas.  

In Bangladesh Chhatak gas field started production of gas in1959. Since then 22 gas fields are discovered and 13 are in production. In 1998 the first offshore gas production started in Sangu. Three national and two international companies are carrying out their gas production in 13 fields of the country.

3.2.2 Control and Portability:

LPG can be easily stored, transported, and used virtually in any place and therefore is portable. It does not deteriorate over long period of time and is the only fuel frequently used in remote locations principally because of its portability. LPG as a fuel can instantly be started in a system and required temperature is achieved readily. The flame temperature can be controlled even up to (+/-) 2 deg. Celsius.   

3.2.3: Environment friendliness:

LPG is a clean, efficient, and high calorific value fuel. It burns with complete combustion with low CO₂ emission and as such at a very low level of environment pollutant. LPG gives 14 times more heat than the same amount of wood, twice as much as kerosene, and twice that of electric heaters. Properly mixed LPG and air forms a combustible which produces virtually no soot, low CO, Hydrocarbons, and Nitrogen Oxides considered as the basic precursors of damage in the ozone layer. These chemicals are known as smog. Greenhouse gas emission from LPG is less than any other fossil fuel when calculated through the total fuel cycle. In the event of leakage LPG will immediately be vaporize and will not contaminate the aquifers or soil as do the most liquid fuels.   

The rate of biomass consumption in Bangladesh has crossed the sustainable limit and considered as environment degrading. As a result, use of improved stoves and LPG systems are being encouraged as efficient and environment benign systems for cooking.

3.2.4 Less hazardous to health:

The present alternative that is the use of biomass for cooking is drudgery, time consuming (collection of fire woods), and forest resource depleting. The smoke and soot produced in such system are highly health hazardous especially for women and children. In a recent study in India it has been revealed that these women are inhaling pollutants as many as twenty cigarettes per day. Another study in Bangladesh by World Bank estimates 1.6 million deaths per year as a result of pollutants of biomass fuels used indoors. So the global impression of outdoor pollutants pointed as the major killer is now faces strong question when the household cooking with biomass fuel in Asia and Africa are taken into account. The deadly gases emitted from conventional stoves increases the risk of acute respiratory infections, leading to bronchitis and even cancer. Sinusitis, coughing and headaches are also common to these type stove users.

One option of getting out of the deadly pollutants is to switch over to LPG. Cooking with LPG systems reduces the unhygienic condition, saves time for collecting fire woods and cooking. This allows for free time or opportunity for additional income generating activity of women.

3.2.5 Better energy management:

In rural areas where electricity is available, the residential consumers are using electric cookers mostly by passing their meters and incurring substantial amount of system loss on the electricity distribution system. Dissemination of use of LPG systems will release this authorized/ unauthorized load on electricity and will contribute towards energy savings. Release of biomass use will reduce price and increase the availability of fire woods to those who can not afford LPG systems.

4. Present demand and production scenario of LPG:

4.1 LPG Demand:

The demand for LPG systems was so long suppressed and subject to uncertainty in regular supply, forced the intended and potential users to remain dependent on firewood, jute stick, coal, saw dust, cattle waste, and kerosene type of traditional cooking fuels. 

Out of about 27 million households only about 1.35 million households have so far natural got gas connection. The rest are using mainly biomass, cattle waste, kerosene and electricity. With the growing tendency of urbanization people are changing their traditional habit. Therefore, the demand for LPG systems for cooking is gradually increasing. High dependence on biomass for cooking caused scarcity and price hike of fire woods. Governmental and social resistances have also triggered the situation for switching over to alternative sources of energy. According to some study there is a market potential of 3 to 3.5 hundred thousand metric ton per annum against present supply of 60,000 to 70,000 metric tons of LPG in Bangladesh. According another study present demand of LPG is 1.66 lac metric tones. An in-between figure of 2 lac metric tones of demand can easily be assumed considering the unexplored hidden market of LPG. It is quite remarkable that BPC with in its initial 20 years established a market of 15,000 metric tones, whereas the commercial operation of Kailastilla and Union LP gas (Boshundhara) together marketed 10,000 metric tones in only one year in 2000. All the imports of private companies are being sold despite very high fluctuation of price in the international LPG market. The present demand is high but need of the day is to surface the hidden potential in a prudent professional manner. On the basis of the results of a recent study by a local farm on the demand and projected supply of LPG by public and private companies are demonstrated below:

In Metric ton

In addition to the household use of LPG, the popularity of its use is remarkably visible in tea stalls, restaurants, hostels etc. Many workshops and ship breaking industries are now a days using LPG instead of Acetylene. Three bottles of LPG is equivalent to four bottles of Acetylene. At the present rate the use of LPG has reduced the cost by 33%. There is prospect of use of LPG as a substitute of candle and hurricane/ cupi. This is possible when bottling in smaller container will be made available. There are efforts by companies to introduce LPG as auto fuel instead of CNG.

4.2 Production and Import of LPG:

Government owned plants in Chittagong and Kailastilla are annually producing some 23,000 metric tons of LPG and rest is met up by imports. LPG is marketed through three types of sources – refinery, natural gas fractionation and imports. Eastern Refinery Limited (ERL) is producing LPG as a by product during their refining operation of crude oil. Approximately about 1% of crude processed is available as LPG. With modern refineries this production can be four folds higher. Kailastilla in Sylhet is using natural gas fractionation method which is considered as popular due to high value addition of LPG.

Since Bangladesh Petroleum Corporation (BPC) introduced its pioneering marketing venture of LPG in 1979, the LPG usage has slowly grown until major expansion of market took place when Government decided to open the LPG marketing to the private sector. Import of LPG in private sector and arrangement of bottling is considered as an initiative to introduction of a new fuel for clean, hygienic kitchen, which is gradually replacing the use of biomass and kerosene. 

The following table shows the present annual LPG production and import by government and private sector initiatives.

* Total private import and bottling by six private companies is from 35,000 to 45,000 M.tones per annum.

5. Present cost of LPG cooking system/ fuel and other traditional fuels:

5.1 From the consumer point of view:

A LPG cooking system consists of LPG cylinder, stove, regulator and hosepipe. Current price of such a system with a double burner stove would cost in the range of 2,500 to 3,000 Taka. Refilling of a 12.5 kg cylinder with LPG would cost 430 Tk. from BPC and around 495 Tk. from a private company. On top it 15 Tk. for distributor and 15 Tk. for dealer would be added. With a monthly estimation of 1.3 cylinder of gas for urban use and 1 cylinder for rural use the present monthly LPG cost for cooking is around 600 to 680 Tk for urban and 460 to 525 Tk for rural areas.

The present cost of kerosene is Tk. 26/litre. Assuming 30 litres of kerosene in urban household kitchen the monthly expense would be 780 Tk. In rural low income households consumption can be 20 litres and that would cost 520 Tk. per month.    

5.2 From the LPG supplier’s point of view:

The private sector LPG business people have the opinion that they are facing competition from among themselves as well as from the government owned companies. According to their claim the price at which the government companies are selling LPG filled cylinders are not at market price. Again the present international market is showing unpredictable fluctuations with seasonal variations. To cope up with the situation they are supposed to adjust selling price, which they actually can not do mainly because of unaltered prices offered by the government owned companies. The private companies desire that the potential consumers should be assured of its stable supply at a dependable and genuine market price without any erratic and manipulated fluctuation. In the table below an indicative price of a cylinder of 12.5 kg LPG is presented with some assumption of existing costs.

6. Marketing of LPG system:

6.1 Marketing by BPC and the private company:

Bangladesh Petroleum Corporation (BPC) started its commercial production of LPG at Eastern Refinery Limited (ERL) in 1978-79. This LPG is bottled at the plant of LP Gas limited, Chittagong and marketed by three marketing company of BPC – Padma Oil Company Limited (POCL), Jamuna Oil Company Limited (JOCL), and Meghna Petroleum Limited (MPL). Another BPC bottling plant was installed in1998 in Sylhet for the LPG production from gas condensate out of the fractionation plant at Kailastilla. LPG marketing under BPC is channeled through dealers to the end users. They do not employ distributors.

Other private suppliers of LPG like Bashundhara, Totalgaz, Kleenheat, and Summit have their own distributors in different districts of the country. The distributors are given commission usually at the rate of 15 Taka per cylinder. The distributors again appoint dealers to sell the cylinders to the end domestic users. Normally the end users have to buy their cooking ancillary that is the cylinder, stove, regulator, and hosepipe. Once the cylinder is empty after use the consumers themselves go to the nearest shop where the dealers have their stocks, exchange their used up with a filled up cylinder and carry it to home. The dealers usually get a commission of 15 Taka per cylinder. By discussion with some importers and suppliers it has been found that individual companies have their own forecast of sales within their distribution zones and accordingly plan the quantity of import, storage, bottling, transport of the cylinder to the dealers.

6.1.1 Boshundhara LP Gas Limited:

Since its inception in 2002 as the first private company Bashundhara is importing, bottling and marketing LPG cylinders for household cooking throughout the country. It has got a network of 30 distributors under each of whom there are 30 to 40 dealers responsible for delivery of LPG cylinders. The number of dealer depends on the size of geographical area and the customer number under each distributor. Discussion with the AGM, marketing & sales revealed that there is almost similar density of customer demand for LPG gas all over the country excepting Chittagong hill tracts. He pointed out that the LPG systems are even popular in and around places where natural gas connections are currently available. There was initiative by the company to encourage the distributors to offer the initial investment of LPG systems as loan to the end user. But the experience of recovery was not pleasant. However, they opined that if MFIs/ NGOs are involved in distribution and recovery of micro credits, positive results could have been achieved. Considering the socio-economic-environmental benefits of LPG, the company suggest that, VAT on cylinder, distributor tax, and explosive license fee should be waived. They also have the opinion that since there is enormous misuse of natural gas in household connections for cooking all the NG connections should be stopped and the LPG cylinders should be introduced to curb the national misuse of NG. They also complained that the government owned BPC is supplying LPG at a rate which does not reflect the international market price of LPG and as such imposing undesirable competition.

6.1.2 Summit United Petroleum Co. Ltd.:

This company is in operation and has built up a network of 22 distributors covering metropolitan, semi-urban areas of 60 districts in 22 zones. Distributors, in turn, have appointed their dealers through whom the LPG cylinders are supplied to the consumers. The distributor and the dealer both get a commission at rate of 15 Tk/ cylinder. 400 to 500 cylinders can be carried by one truck to different districts. Executive Director of the company also expressed their concern about the distribution of LPG by BPC at a lower rate. He mentioned about the present high and unpredictable fluctuation of international price of LPG is contributing against smooth growth of LPG system in Bangladesh. Initial cost of cylinder, burner, regulator, and hose is about 2600 Tk. The ED said that NGO/ MFI credit approach can be tried but there will be insecurity of recovery. He mentioned about the seasonal price variation of LPG depending on which prices of LPG could be reduced in dull seasons. Last two years the LPG price per cylinder has increased from 350 to 550 Tk. This has got a negative impact on overall growth of use of LPG for cooking in Bangladesh. Their LPG cylinder weighs about 28 kg (12.5 kg gas, 15.5kg cylinder itself).  

6.2 Marketing strategy currently followed by private companies:

The private companies are trying to adhere to the following issues in general in order to run their business successfully.

·        Ensure an easiest and cheapest transportation and distribution network

·        Some companies are analyzing credit scheme for new connection, but often they are scared about recovery

·        Looking for new uses of LPG such as auto fuel, ship breaking industries, replacement of candle, hurricane/ cupi etc.

·        Gradually expand their market from main cities to district towns, sub-urban, rural areas

·        Educate the current users on efficient and safe use of LPG

·        Incentive plan for new connection

·        Ensure uninterrupted supply by keeping adequate stock at plant, distributor, and dealer level.

·        keep a long term purchase contract with the foreign supplier of LPG

·        use popular media for promotional activity

7. Transportation of LPG:

LPG is imported in bulk quantity from around the region in pressurized oceangoing tankers. LPG is then offloaded at private jetty of respective company and stored in a pressurized container. Cylinders are then filled up by automated filling facility. These cylinders are transported by specially designed trucks normally owned by the company. Some times local usual trucks are also used for land transportation up to the distributors premises. One local truck can approximately carry 300 cylinders (12.5 kg gas) at a time. Distributors purchases cylinders in bulk and distribute them to their respective dealers. Each distributor normally has 20 to 30 dealers under them. Customers exchange their empty cylinder with a filled up one from the dealer. Sometimes dealers deliver the cylinders to the end users home.

8. Barriers to the use of LPG and elimination of barriers:

8.1 Barriers:

While there is high demand for energy, it is interesting to note that there is not expected pace of growth of LPG system in Bangladesh. The following barriers may have attributed to this fact:

-                     The initial cost of LPG cylinder and stove, regulator and hosepipe is about 2500 Taka. This amount of initial investment found to be an extra financial burden for potential users of LPG systems. So affordability of consumers to pay the present monthly cost and the initial investment of LPG system is a major barrier.

-                     Unfamiliarity of the customers to accept this new product.

-                     Extra burden of carrying the cylinder to the changing station on monthly basis. The cylinders are quite heavy for carrying.

There might be some other reasons which need further investigations.

8.2 Removal of barriers:

·                    To ease out the burden of initial cost of cooking system that is cylinder, stove, regulator, and hosepipe etc. can be provided to the end user on a credit scheme. Operation and recovery of such credit can be handled by PBS, NGO or MFI. A portion of the initial cost (from 2500 to 3000 Tk) may be taken as down payment and thereafter equal installments can be charged to the consumers on monthly basis. However, the consumer must pay the monthly LPG filling cost.

·                    Awareness campaign and promotional activity may be carried out by PBS, NGOs or MFIs in coordination with prospective dealers and distributors. LPG cooking range can be demonstrated by visiting potential rural remote areas. Interaction with local people will open up the possibility of discussing the down side of the traditional cooking and the beneficial aspects of cooking with LPG system.

·                    The existing size of 12.5 kg LPG along with about 15 kg weight of the cylinder itself becomes difficult and expensive for carrying in the rural areas, especially when place of the dealer will be considerably long way away. Smaller size LPG cylinders are in use in many countries. Introduction of smaller size cylinders will result in reduction on one time payment for large cylinder as well as it will be easier for carrying. It is predicted that rural use of fuel energy is less than in urban users. Therefore, hopefully smaller size cylinders will better fit with the demand, affordability of rural people and ease of transportation.    

9. Previous Studies in the field of LPG:

Two studies so far undertaken, one by Canadian RTM Engineering in 1989, and the other one by Mertech International of USA in1998. The first study was conducted to update the previous feasibility study that was carried out in 1984.

9.1    LPG Study Update by RTM Engineering Limited:

The aim of the study was to increase the supply of LPG in order to provide an indigenous, cost effective substitute fuel for imported kerosene which was being used as fuel for cooking and industrial fuel. This project looked into the status of proven gas reserve, forecast of rate of LPG, and available networks of gas for LPG product delivery. It identified the demand of LPG for residential, commercial, and industrial fuel. Project defined the available options for large scale LPG production, transportation, and distribution. It also identified non-economic benefit of the options, beneficiaries, costs, risks, sensitivities, economic viability of these options.

During the study in 1989 about 18 major gas fields were in operation at Kailastilla, Titas, Bakhrabad, and Hobigonj. Another 18 were preparing for production. This study gave some idea about the cost components related with supply of LPG systems. It also pointed out some safety measures for such business. Study covered issues like ownership of the cylinders, periodic inspection of the cylinders. But the main focus of the study was on the production design, location of storage terminals, transportation of LPG (cylinder or bulk delivery), and size/ type/ capacity of tank lorry/ barge etc.

Their study included in-depth analysis of petroleum, natural gas, traditional fuels (fuel wood, cow dung, agricultural waste etc.) as used by the urban consumers for their cooking purposes. Cost comparison of different fuels, amount of fuel needed per household cooking were analyzed – also for urban consumers.

9.2 Analysis of the RTM Engineering study:

This study was very essential at the time. It emphasized mainly on review the status of gas reserve, large scale LPG production, economically viable location, transportation and storage of products, feasibility of LPG, and comparison of cost and quantity of other alternative fuels for household cooking. Regarding LPG for cooking the study only targeted the urban consumers. At the time of study it was very reasonable to first look at the urban users. They selected Dhaka, Chittagong, Sylhet, Comilla, Barisal, Khulna, and North Bengal zone for their study. All are either administrative divisions or big cities. Because of their interest in urban areas they conducted commercial consumer survey as well. The study tried to provide micro detail of fuel use by households and commercial cooking establishments in urban location and use the information to develop as a whole an estimate of national and regional LPG market potential. The survey estimated a 1995 market potential of 563 thousand tones of LPG. This is now proved to be optimistic.

10.  Recommendations on the proposed study for rural and sub-urban LPG market potential:

1.            A short term (2 months) study/ survey can be conducted to update potential market of LPG.

2.            Since the RTM Engineering conducted their study on LPG production and market survey for urban consumers, the proposed survey may be more pin pointed to rural and sub-urban consumers.

3.            This survey will open up broader marketing strategy which is commensurate with the present governmental initiative.

4.            This will most likely contribute to uniform distribution of energy for unprivileged demographic location and people.

5.            Find out the some other barriers (if any) for expected growth of LPG market and give solution for elimination of the barriers. From consumers point of view there may be some barriers. Also the activities and difficulties Faced by the dealers and distributors should also be investigated in depth.

6.            Reveal and suggest ways and means for controlling biomass depletion.

7.            Analyze and find out activities needed for reducing undesirable use of electricity and release dependence on kerosene.

11. Scope of work:

The LPG system for house cooking is available in Bangladesh already. But the expected rate of growth is not visible yet. There is a need to conduct a study/ survey to investigate the present LPG use by different category of consumers, barriers for market penetration, assess a market demand, and design a delivery mechanism for LPG system with a view to propose a strategy and set priorities to develop a rural and sub-urban LPG market. Scope of the study shall focus on the following issues:

·        Compilation of policies/ strategies of the government and its relevant authorities on LPG systems

·        Assessment of present LPG market in Bangladesh in general and in the rural/ sub-urban areas in particular (LPG supply, LPG application, price at different stages of supply etc.)

·        Identification of barriers for LPG use and recommendations for elimination of these barriers

·        Development of a sustainable delivery mechanism of LPG system

·        Investigate into the present financial obligations of the importers of LPG

·        Analyze the price difference between private and government owned companies of LPG system

·        Assessment of the acceptability, affordability and popularity of LPG system by sub-urban and rural mass.

12. Tasks:

The following tasks will be required to be accomplished for purpose of the study/ survey:

·                    Compile and review the policy and strategy of the government and its relevant authorities related to LPG

·                    Collect information on current LPG consumers, production and import, marketing strategies, cost/ price, tax/ VAT/ duty, security deposit etc. at various stages of supply

·                    Identify barriers for diffusion of LPG cooking systems in rural remote and sub-urban areas of the country

·                    Design a delivery mechanism of LPG system which will accelerate it’s use

·                    Investigate if there is any financial discriminations between the private and government owned companies

·                    Inquire about the willingness and affordability of the rural remote consumers and put forward recommendation  

13. Conclusion:

The ongoing GTZ- REB project ”Promotion of the Use of Renewable Energies (PURE)” can provide support for conducting a study/ survey with a view to develop a strategic plan and set priorities for dissemination of the  use of LPG cooking systems in Bangladesh specially in rural areas. This study/ survey shall also provide support for developing a marketing strategy/ business plan for implementing LPG dissemination activity by some NGOs/ MFIs or by any other private company.

(Syed A.F.M Sajedul Huq)

Senior Renewable Energy Specialist/ Project Manager                                                                         GTZ-PURE.