Reasonable prices - LAUGFS
"This has nothing to do with LAUGFS Gas. We are eager to see competition but it is not a fair and level playing field."
Shell Gas Lanka Ltd (SGLL) said last week that the heavily subsidized pricing arrangement by the Ceylon Petroleum Corporation (CPC) to supply all its LPG produce to new entrant LAUGFS Lanka Gas (Pvt) Ltd was not in the long-term interest of local consumers. The company alleges that the price offered by CPC to the new player could enable the latter to make a high profit, even selling at Rs. 409 per cylinder. "This has nothing to do with LAUGFS Gas. We are eager to see competition but it is not a fair and level playing field," noted Roberto Moran, Country Chairman and Managing Director of SGLL at a media briefing. SGLL, which is the marketing arm of Shell's Sri Lanka operation, says while the CPC has offered heavily subsidized prices to a competitor, the company nor other parties were given a chance to make a competitive offer for CPC's produce.
Short notice
The LPG (liquid petroleum gas) produced by CPC is currently adequate to meet 10 percent of the country's total LPG demand with the balance 90 percent coming from imports, which up to now Shell controls. According to SGLL, it has been instrumental in increasing the market demand for LPG from 70,000 metric tonnes to 145,000 metric tonnes per year over the last five years due to the confidence customers had of an uninterrupted supply. In addition to these issues, Moran said Shell was given only three weeks notice by the CPC of a discontinuation of the 10 percent supply. The company notes that this short notice was inadequate to schedule its import supply and that it may now be forced to bring in additional shipments at possibly higher spot prices to meet its needs. Shell said that it had advised the CPC around Nove-mber last year that the company would stop purchasing CPC's produce due to uncertainty over purchasing rights. This was in the light of media reports that CPC would stop supplying Shell after the scheduled shutdown of its refinery in January 2001. Shell also formally declared an interest in competing in the tender for CPC's produce at prices on par with import prices. However the company continued to purchase CPC's LPG output when the refinery reopened in February, as there was no new competitor in the market. With no buyer, the CPC would have been forced to dispose of the gas as waste. Shell says SGLL suffered losses of Rs 60 million and the terminal company (Shell Terminal Lanka Pvt Ltd) losses of Rs 90 million, respectively, during January to August 2001.
" Shell enjoyed a price of around Rs. 12 per kg for CPC's supply for almost six years but they never passed this benefit to the consumer."
LAUGFS Gas, the new entrant to the domestic LPG gas market which was a Shell monopoly until recently, has promised benefits to consumers after clinching a deal with the CPC to exclusively purchase the latter's LPG output for a three-year period.
"We have been in the LPG business since the time the Ceylon Gas Co. was privatised and have sufficient knowledge of the business. We are confident of selling at a competitive price to the consumer and being a Sri Lankan company all our profits will remain here," W.K.H. Wegapitiya, Chairman LAUGFS Lanka Gas (Pvt) Ltd told The Sunday Times Business.
LAUGFS Gas had, prior to its entry, invested Rs. 300 million in a bottling plant and has agreed to maintain its introductory price of Rs. 409 per cylinder for the next three years. "When the authorities asked us whether we could reduce the price of gas by Rs. 50, we went one step further and offered a Rs. 100 reduction," he said, as the high-stakes battle for the LPG market got underway.
He said the company plans to set up an import terminal in Galle and import additional LPG and even sell this at the same price of Rs. 409. He conceded that the price offered to LAUGFS by CPC for its refinery production is Rs. 15 per kg.
"Shell enjoyed a price of around Rs. 12 per kg for CPC's supply for almost six years but they never passed this benefit to the consumer. We have agreed to buy at a higher price and are passing the benefit to the consumer. In the past few years the price of all essential items have been going up. We are the only people to have brought it (gas) down and by Rs. 100," he added.
Victimized
Wegapitiya noted that despite being the biggest bulk customer of Shell, his company had been victimized. "They wanted us on their side or fully eliminated from the picture. They have been discouraging our efforts. They tried to tame us. And because we didn't, they tried a dual pricing strategy."
As LAUGFS did not agree to sign Shell's purchase agreement beyond the monopoly period, LAUGFS was not given the eight percent discount offered to those who signed such an agreement.
Wegapitiya, responding to the prospects of Shell having to raise prices if it must buy in the world spot market, said that spot prices were now at an all-time low. "Shell could easily sell at Rs. 450 plus have a Rs. 100 profit even after paying for freight, terminal throughput, local handling, etc."
World market prices for LPG linked to Saudi Aramco's contracted prices for this region hit an all time low of US$ 230 per metric tonne last month which works out to Rs. 28 per kg after all import costs are added - compared to prices of around US$ 300 per metric tonne in April 2000 which then peaked to US$ 350 in November.
Auditor's report
The auditor's report of Shell Gas Lanka Ltd (SGLL) for 1999, a copy of which was obtained by The Sunday Times Business, shows that the company earned a net profit of Rs. 264 million in 1999 and Rs. 210 million in 1998. According to the report, Rs. 2.5 billion worth of LP Gas was purchased from Shell Gas Trading (Asia Pacific) Inc. in 1999 as part of a related-party transaction. This same transaction in 1998 amounted to Rs. 1.5 billion.
LAUGFS says its dealers and super-dealers could earn a commission of Rs. 20 and Rs. 30 per cylinder, respectively. Shell offers its dealers and distributors Rs. 13 and Rs. 15 respectively.
While LAUGFS' price of Rs. 409 is a flat rate across Sri Lanka, Shell's price varies starting with Rs. 509 in Colombo. Both parties are said to be buying their cylinders from the same overseas supplier. The deposit on a new cylinder for Shell and LAUGFS is Rs. 2,500 and Rs. 1,950, respectively.
