Distribution & Retailing Of LPG In India

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LPG in India, Commercial, Supply Chain, Policy aspect.

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Distribution & Retailing Of LPG In India

  1. 1. 2009SCHOOL OF PETROLEUM MANAGEMENTGANDHINAGARGROUP 1DISTRIBUTION AND RETAILING OF LPG IN INDIA
  2. 2. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 AcknowledgementWe would especially like to thank Mr. Shaleen Sood (Asst. Manager Sales, Ahmedabad; BPCL)for helping us understand the complete supply chain of the LPG business. The variousinformation provided by him helped in making an exhaustive report. The report quality has alsobeen enhanced because of sharing of his practical experience.We would also like to thank Mr. Rajendra Pandey (Dealer, Priya Gas Agency) for giving usdetailed knowledge about the distribution and retailing of LPG. His sharing of knowledge helpedus to understand the LPG business from a dealer’s point of view.We are also grateful to Mrs. Parul Sharma and Mrs. Minali Parikh (BPCL, LPG Customers) forsharing their viewpoint related to customer service and support, and perception regardingdifferent brands.The timely help from our lecturer, Mr. Prasoon Aggarwal, for giving us the right contact personin BPCL, is thankfully acknowledged.At last we would like to thank our lecturer, Mr. Ramendra Singh, for giving us detailedknowledge related to marketing tactics used by the OMCs. This helped us greatly in the pre-preparation for the project. 2 Introduction | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  3. 3. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 Executive SummaryThis project deals with the LPG business in India. The focus is pertaining to the retailing anddistribution of LPG. We start with the basics of LPG, its constituents and how it is produced.Following to it the demand supply scenario and the major players in the business in India havebeen discussed. The supply chain of the LPG business, starting right from procuring, storage,retailing and distribution processes have been explained in details. Next comes the marketing ofLPG, which had unique characteristics because of the fact the product cannot be seen either bythe producer neither the consumer. Therefore it is important from the company’s point of view tocreate a perception in the minds of the consumer that of reliability and safety.The market segment consists of Domestic, Commercial and Industrial segment and themarketing as well as the pricing policies varies accordingly. One of the biggest challenges of thebusiness of LPG is the diversion of the cylinders from the Domestic segment to the Commercialand Industrial segment. It is in the interest of the company to orient the distributor andconsumers according to the regulations of the business. The motivation arises from thesubsidized price of Domestic LPG, which is not the case in Commercial and Industrial segment.Finally, the competitive environment of the business has been analyzed. The intra Oil MarketingCompany’s competition, as well as the competition between Oil Marketing Companies andParallel Marketing Companies has been explained. Again, the threat from one of the most potentsubstitute of LPG, Piped Natural Gas has been analyzed. Though LPG is a more efficient fuelthan Natural gas (higher calorific value), but the advantages in case of Natural gas outweighs theLPG by some amount. Until the infrastructure for distribution of Natural gas is present,Liquefied Petroleum Gas will continue to be in existence, though to make this business viable theabolition of the subsidy regime needs to be implemented. 3 Introduction | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  4. 4. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009Contents1. Introduction ............................................................................................................................... 52. LPG in India – Overview ........................................................................................................ 6 Demand Supply Scenario ..................................................................................................................... 6 Major Players ...................................................................................................................................... 63. Understanding LPG Supply Chain ...................................................................................... 7 Procurement ....................................................................................................................................... 7 Storage ................................................................................................................................................ 7 Distribution and Retailing .................................................................................................................... 74. LPG Marketing .......................................................................................................................... 9 Market Segments .............................................................................................................................. 10 Brand Positioning .............................................................................................................................. 10 Internal Marketing............................................................................................................................. 11 Customer Retention Techniques ........................................................................................................ 125. Challenges of LPG Business ................................................................................................ 136. LPG Programs in India .......................................................................................................... 16 Deepam LPG scheme ......................................................................................................................... 16 Rajiv Gandhi Gramin LPG Vitrak ......................................................................................................... 177. Competitive Environment .................................................................................................. 19 Business Rivalries............................................................................................................................... 19 Inter OMC competition .................................................................................................................. 19 OMC-PMC competition .................................................................................................................. 19 Threat from Substitutes ..................................................................................................................... 208. Conclusion ................................................................................................................................ 21Exhibits .............................................................................................................................................. 22 4 Introduction | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  5. 5. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 1. IntroductionLPG i.e. Liquefied Petroleum Gas is a mixture of Propane and Butane and with tertiary gases. InIndia, distribution of LPG began with Burma Shell Corporation in 1955. It started as analternative to the then popular fuels of India, Coal, Kerosene, wood and Dried Dung Cake. Asper its prices, it was not feasible even to the then middle class to shift to LPG. So, governmentpromoted LPG by providing subsidy during connection and later on base of per unit of gas.Government Policy acted as a spark to the fuel. No sooner, there was a long list of applicationsfor registration of connection. Oil companies had not planned for such demand in terms ofcylinders, gas and distribution points. Slowly, mass production of gas cylinders started in Indiawith rising imports of LPG from middle-east countries and that lead to easing the supply demandgap.LPG in itself is largely a mixture of Propane and Butane with a high calorific value of 50,350kJ/kg and 49, 510 kJ/kg. This differentiation leads to difference in LPG supplied to Industrialand Domestic Sector. Industrial is 70% propane and 30% butane whereas for domestic the valuesreverse as 30% propane and 70% butane. This value varies with season as well; in winter, it’smore propane and in summers, it’s more of butane.In India, LPG finds is prime usage in Domestic sector with 92.3% consumption in households.3.4% in commercial sector and 2.4% as Auto LPG and 1.9% in Industry. In 2001, 17.5% of thehouseholds using LPG used it as their primary cooking fuel though the share of firewood asprimary fuel was 52% and 10% each on Crop Residue and Cow dung Cake.Currently, the LPG business is fragmented in two parts: Industrial & Commercial LPG andsubsidized Domestic LPG. Both businesses run on base of understanding & regulation. Industrial& Commercial LPG is a more competitive business segment than the Domestic LPG as it hascompetition between OMCs and PMCs together. In Domestic LPG, only OMCs operate andcompetition is largely limited by dividing boundaries of area for distribution of LPG. 5 Introduction | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  6. 6. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 2. LPG in India – OverviewDemand Supply ScenarioLPG in India is largely a regulated market. Pricing and allocation of Distribution joints isdecided by corresponding bodies. Demand for LPG in the Year 2007-08 was 10178 TMTcorresponding to supply level of 11, 278 MMTPA. This supply consisted of 55% from PSUOMCs, 25% from Essar & RIL and remaining 20% from imports. In the year 2004-2008,demand stood at 90-95% of Supply. On January 1, 2007 there were 181 bottling plants acrossIndia 49% owned by IOCL, 27% by BPCL & NRL and 23% by HPCL. Bottling plants had acapacity of bottling 8987 MMTPA as on April1, 2009. There were 9366 distributors of LPG onthe same date with 73% presence in urban area and 12.5% each in Urban/Rural and Rural area.Demand for LPG is growing at a rate of 6% per annum whereas supply is not constant and gap isfilled by imports.The LPG being distributed is in 4 cylinder sizes. Domestic Cylinder: 5 kg & 14.2 kg,Commercial Cylinder: 19 kg and Industrial Cylinder 35 kg. LPG for Domestic customers issupplied at a subsidized rate and for industrial & commercial rate is market determined. Thisdifference in pricing scheme often lead to black marketing but companies are now a days vigilantenough to inhibit this practice. HPCL as a pioneer is including GPS device in its cylinders torestrain the fraudulent practice.Major PlayersIn India, share of LPG retailing largely depends on the LPG producing capacity of its refineries.IOCL has the highest number of refineries and largest capacity for producing LPG. It leads themarket with 49% share, 27% by BPCL & NRL, and 23% by HPCL. In the PMCs, major playersare RIL and Essar. These two companies generate 90-95% of their revenue from the Commercialand Industrial segment. The combined LPG producing capacity of RIL & Essar is 3% of the totalindigenous LPG production capacity of India. 6 LPG in India – Overview | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  7. 7. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 3. Understanding LPG Supply ChainProcurementIn India, LPG is either imported from outside or is produced as a by-product in the refineries andpetrochemical plants. Imported LPG arrives at the country’s ports by help of LPG tanker ships.StorageFrom both, the ports and the refineries, LPG is brought to the large storage facilities with the useof pipelines. Here the LPG is stored under highly refrigerated and pressurised condition. Pipeline Pipeline Oil RefineryDistribution and RetailingFrom the storage facilities, LPG is directly distributed to bulk industrial purchasers via large bulkroad tankers. For the domestic customers, LPG is distributed in packed form through dealers.Dealer holds the stock of filled cylinders. When the customer’s LPG cylinder is emptied, it isreplaced by the local operating dealer at the customer’s location itself. The dealer recovers thecost of transporting cylinders from commission on a per refill basis. A group of dealers in agiven area receive the filled cylinders from the designated bottling plant. A dealer sends theempty cylinders to the required bottling stations via truck. These bottling plants take back theempty cylinders and load the truck with the filled ones. The filled cylinders are then sent back to 7 Understanding LPG Supply Chain | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  8. 8. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009the dealer. The various bottling plants in turn receive the LPG from storage facilities with the useof tankers. The tankers are dedicated to transporting LPG, and hence, the company pays thetransporters for both delivery and return trips to the storage facilities. Tanker Cylinder Distribution Tanker Storage Facility LPG Supply Chain Bottling Plant Dealer Location 8 Understanding LPG Supply Chain | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  9. 9. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 4. LPG MarketingTill September, 1993 LPG was being marketed in the country by the Public Sector Oil MarketingCompanies (OMCs) only. Since LPG was under short supply, OMCs were importing the productto meet the requirements. However, inadequate import infrastructure coupled with limitedallocation of Foreign Exchange at official rates made it difficult for OMCs to import LPG andmeet the full demand. In order to overcome this difficulty, Government issued a notification,dated 3rd August, 1993 introducing the concept of Parallel Marketing Scheme (PMS). UnderPMS, parallel marketers (private companies) were allowed to import and market LPG in thecountry to packed and bulk consumers in both domestic and non-domestic (commercial andindustrial) sectors. Since then, parallel marketers have been importing and marketing LPG underPMS.Following are the details of LPG Sales by OMCs and parallel marketers till 2003-04:-OMCs sales (Fig. in TMT)Year Domestic Non-Domestic Total Packed Bulk2001-02 7,040 171 99 7,3102002-03 7,737 208 198 8,1432003-04 8,789 105 181 9,075PMS Sales Year TMT 2001-02 178 2002-03 208 2003-04 216Since domestic LPG marketed by OMCs is subsidized, parallel marketers could not makesignificant impact in this sector, however, they are able to compete with OMCs in non- domestic 9 LPG Marketing | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  10. 10. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009commercial/industrial sectors (about 85-90% of the sales of parallel marketers are in thesesectors). Exhibit 01 shows the number of consumers of LPG till April, 2008 state-wise andExhibit 02 shows the growth in LPG marketing in India.Market SegmentsThe LPG market is segmented according to the purpose of the use of LPG as a fuel, i.e. fordomestic (90% of business), commercial and industrial use (rest 10%). Accordingly the weightof the cylinder varies (standard weights), as the usage depends on the type of consumer and tolessen the transportation cost. In the industrial category, there are bulk users too, who are servedin bullets (huge tanks). The subsidized price of LPG is provided only for the domestic segment,and the commercial and industrial rates are as per the market decided prices.Brand PositioningOne of the important features is that neither the business persons nor the consumers are able tosee the product, therefore building the perception of trust and importance in the minds of theconsumers makes a difference. Deliverability assurance and Safety measures is one of the keyfeatures of the company providing the service.As mentioned before that LPG business is mostly self-propelled. Demand, in absence of anyother substitute fuel as of now, implies that it overshoots the Supply. Thus some direct marketingmeasures are implemented in the form of pamphlets and stuff and some customer awarenessprogrammes in mass media. 10 LPG Marketing | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  11. 11. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009Internal MarketingThough the LPG business is ruled by the domestic clients, the subsidy regime doesn’t allow thecompanies to eke out profit from this division. Industry and commercial segment provides therevenues but not enough to compensate for the losses made in the domestic segment. Thus, theLPG SBU is a loss making unit.Internal marketing is important to orient the distributors, who are the interface between theconsumers and the company, to act in accordance with ethics and see that there is no diversion ofcylinders. This arbitrage incentive is due to the fact, that domestic cylinders are priced low andhence commercial enterprises have a tendency to acquire those at a premium, though lesser thanthe designated commercial LPG product.The steps taken by the Government of India/OMCs (oil marketing companies) to preventdiversion of domestic cylinders are as under. Exhibit 03 depicts the penalties that have beenimposed in case of any breach of law. The supplies made are adequate to meet the genuine domestic needs of domestic customers. Necessary steps are taken to augment the supplies to the distributors arising out of unusual circumstances or development of events. • Customer contacts are done for customers with high consumption levels to confirm genuineness of refill supplies made. Refill audits are being conducted at distributorship of oil companies to find out possible diversion of domestic cylinders for non-domestic use. • Press releases are issued periodically against misuse of domestic cylinders for commercial purposes. Customer awareness campaigns are conducted periodically. Banners are displayed and also pamphlets are distributed periodically to bring awareness in public. 11 LPG Marketing | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  12. 12. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009Customer Retention TechniquesThe LPG business is mostly self propelled and doesn’t need much marketing measures. In thedomestic category, the distributor represents the company and mostly the consumer chooses thatdistributor which is closest to his/her locality. Though there are a few factors which improve theservice level of the business: Booking through telephone or net Prompt and assured delivery Behavioural patterns shown by the delivery people Safety and Authenticity (seal) of LPG cylindersAgain, few OMCs started taking measures to improve consumer satisfaction by providing homedelivery service of household goods by collaborating with Haldiram’s and other retail goodsproviders. The commission is shared amongst the distributor and the company in the ratio of70:30.For the industrial and consumers the reliability of providing the LPG cylinders in normal as wellas emergency times is of utmost priority, as the opportunity cost is huge in industry. Anotherimportant aspect is the price of LPG, as the prices charged by the company is not regulated andhence can be tinkered with. 12 LPG Marketing | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  13. 13. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 5. Challenges of LPG BusinessSupply & accessibilityIn order to meet the increasing demand of LPG by domestic as well as auto fueling sectors thecountry needs additional L PG production capacity, adequate transportation (pipelines & railtank wagons), and distribution network.During the calendar year 2008, the actual sale of LPG was 11820 TMT against the totalindigenous LPG availability of 9228 TMT. The shortfall was made up by importing LPG to thetune of 2759 TMT. For the year 2009, Total LPG imports of 3112 TMT have been plannedagainst the projected demand of 12570 TMT at a growth of 6%.Supply of reliable cylindersAnother challenge pertaining to LPG distribution is assuring the reliable supply of refillcylinders. For small and remote markets, refills may be delivered once a week or once everyother week. For those users that do not keep a second cylinder, this could mean going withoutfuel for as long as two weeks. Signing up for two cylinders to avoid running out of cooking fuelwould further increase the start-up cost of LPG service. Again, this infrequent delivery of refillcylinders serves as a disincentive against switching entirely to LPG.Cylinder managementAs we know that LPG has to be stored under pressure, metal cylinders are required. To cover thecost of cylinder manufacture, an initial deposit fee is required. The combination of the start-upcost and the cash outlay at each refill (which typically cannot be broken up into smallerinstallments) presents a serious barrier to the uptake and regular use of LPG by low-incomehouseholds.Import challengesThe LPG import requirement during the year 2009 is estimated to be about 4.7 MMT. Thestretched import capacity of the industry at present is about 414 TMT/month which equals toapproximately 5.0 MMTpa. International factors such as seasonal variations, changes ininternational politics cause the problems. 13 Challenges of LPG Business | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  14. 14. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009Diversion of LPG cylindersThe reason for diversion of domestic cylinders by distributors is because the domestic LPG issubsidized. The selling price of domestic cylinders is less as compared to the commercialcylinder selling price which is fixed on the actual Import parity price. There is a wide differencebetween the domestic and commercial rates. Due to this most of the supply intended to go todomestic consumers are transferred to commercial consumers which results in shortage for abovesaid consumer base.AffordabilityThe economically disadvantaged face the problems of high first costs of LPG (connection andequipment), and the lumpiness of relatively high refilling bills, and loans are difficult to servicewithout financial returns from the investment.On comparing the fuel rates for different fuels, we see that the expenditure occurred for usingLPG is much more costly as compare to others. For example LPG stoves are required to bedesigned to operate at 60 percent efficiency or higher, field measurements show efficienciesconsiderably lower than the design specifications. If we assume 50 percent stove efficiency forLPG, 35 percent for kerosene in wick stoves, and 40 percent for kerosene in high-pressure stoves(where kerosene is gasified before combustion).a 14.2 kg cylinder of LPG is equivalent to 21litres of kerosene as liquid and 19 litres gasified kerosene. Expressed in rupees per mega-joule(MJ) of energy delivered, LPG is more expensive than kerosene for low income grouppopulation.Pricing policiesThese are a challenge, particularly because of the subsidies already offered. The subsidies do notreach most of the poor as they are not yet users of LPG, there is diversion of subsidized LPGfrom domestic to other uses, and there is also a heavy burden on the central exchequer.As per the Subsidy Scheme notified by the Government, OMCs are only allowed to marketsubsidized domestic LPG. The present total subsidy on domestic LPG marketed by OMCs isRs.7.94 per Kg (Rs.112.77 per 14.2 Kg cylinder). Of this, Government is paying Rs.2.86 per Kg(Rs. 40.65 per 14.2Kg cylinder) and Oil Companies are incurring loss of the balance Rs.5.08 perKg (Rs.72.12 per 14.2Kg cylinder). Out of the loss incurred on domestic LPG sales, as per the 14 Challenges of LPG Business | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  15. 15. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009subsidy sharing mechanism, ONGC, GAIL and OIL are sharing 1/3rd and the rest is borne byOMCs. If producers like RIL, ONGC, GAIL and OIL are to be allowed to market subsidizeddomestic LPG, they would have to follow price regulation and bear losses. Again, LPGproducers, especially private producers, may not be interested in selling subsidized domesticLPG under the subsidy scheme. It also possesses a challenge for the government to ensure thesupply of subsidized product to domestic consumers & prevent its diversion to non domesticpurposes. 15 Challenges of LPG Business | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  16. 16. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 6. LPG Programs in IndiaDeepam LPG schemeAn important scheme implemented for the expansion of domestic LPG use has been the DeepamLPG scheme in the state of Andhra Pradesh. This project was launched on the 9th July 1999 forthe distribution of domestic connections to women of below the poverty line (BPL) 41 familiesin the rural areas of the state. Each connection was accompanied by a one-off subsidy to theextent of the initial cost, to overcome the barrier to fuel switching. It was meant to reducedependence on firewood, reduce the drudgery of collection of/cooking on firewood, reducepollution and improve the health of women. Salient features of this scheme are: The scheme was administered by the State government Departments of Rural Development and Civil Supplies and distributed through OMCs. The High Court directed that the scheme be confined only to “white cardholders” (i.e. those below Rs 11,000/year/family). The Department of Rural Development identified the beneficiaries; a target of 1.154 million spread over 22 districts was indicated. Later, the numbers were increased so that by 2002 about 1.724 beneficiaries (including some of the urban poor) were listed. The lists were given to the LPG dealers of the oil companies, who were also expected to ensure training of the allotted in the use of LPG stoves. The Department of Civil Supplies provided a one-time deposit of Rs 1,000/connection towards the cylinder and regulator. Results in terms of the number of connections allotted: till March 2002, 88% of the urban target and 91% of the rural target had been met (NIRD, 2002).Learnings from Deepam Scheme The scheme was not very efficacious, because although all white-card holders participated, over 80% of non-white card-holders in the region also did. The retention rate was down to 85% in less than three years because of cylinders having been given away to relatives and being lent to civil servants in local areas (NIRD, 2002). Factors affecting the refill rate were: distance from distribution points, and the season i.e., there is higher demand during the monsoons. 16 LPG Programs in India | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  17. 17. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 Participants’ perceived advantages of LPG were: timesaving, social status, cleaner environment, and help during the monsoons. LPG was found useful chiefly during the rainy season because of more employment (implying more cash available for refuelling), more labour demand and moisture making collection and preservation of biomass difficult. The scheme itself was considered attractive because of the initial fee waiver. However, the perceived disadvantages were: implementation bottlenecks, reduction in kerosene quota (in municipal areas), high refill costs of refills, and unwanted envy of non-beneficiaries. Implementation bottlenecks within the scheme that contributed to dissatisfaction included: limited choice, inability of suppliers to supply stoves and accessories on time, co-ordination problems at the local level for the supply arrangements, and irregularities with beneficiaries also having to incur Rs 5 – 30 extra, per cylinder, for collection/delivery. Suggestions from local self help groups (SHGs) for improvement include: credit for refills and reduction in cylinder size.Rajiv Gandhi Gramin LPG VitrakMinistry of Petroleum & Natural Gas has formulated a scheme, namely, Rajiv Gandhi GraminLPG Vitrak Yojna, which is going to be launched very soon. This envisages the increase in LPGpopulation coverage from 50% to almost 75% by 2015. The scheme is primarily to reach LPG invillages, so that dependence on conventional fuels like wood, coal etc. is reduced. This will notonly help in conservation of forests but will also have positive impact on environment as well ason the health of our rural womenfolk.This Scheme would be implemented by the Oil Marketing Companies (OMCs) namely IndianOil Corporation Limited (IOC), Bharat Petroleum Corporation Limited (BPCL) and HindustanPetroleum Corporation Limited (HPCL) in addition to their Marketing Plan for setting up regularLPG distributorships. Identification of locations would be finalized by the OMCs based on thepresent penetration/coverage, minimum refill/sale potential for sustaining the RGGLV.According to the program, the program will be sustainable for cluster of villages having about4000 families and consumption of 7 kg per month, out of which half may go for LPG. Contrary 17 LPG Programs in India | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  18. 18. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009to 2500 cylinders, GLV will be set up with the potential of 1000 cylinders. The net income forthe proprietor expected is Rs 7664/- per month. The selection of the candidate will be done bydraw system. RGGLV will be setup by OMC who have its bottling plant nearest to the identifiedcluster of villages. 18 LPG Programs in India | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  19. 19. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 7. Competitive EnvironmentBusiness RivalriesThere are mainly two categories of competitions existing in Indian LPG industry. They are asfollows: 1. Inter OMC competition 2. Inter OMC-PMC competitionInter OMC competitionOMC’s is India is seen as the facilitator to the nation’s development. Hence, apart from churningprofit for sustainable existence and growth, it has to operate in accordance with the nation’sinterest. That’s why OMC’s are regulated such that to avoid unwanted friction among themselvesand concentrate their whole energy to nation’s cause. So, there exists a special type ofcompetition among the OMC’s of India.In domestic segment, OMC has to sell its product at a price decided by the government. So, thereexists no scope of price war, which leaves the OMCs to compete on market share. But, to avoidunwanted friction and hence deadweight loss to the society, the regulatory body, MOPMG triesto maintain the optimum number of dealers in an area. In order to that the number of dealershipsof a company is decided by the committee in accordance to their market share and presence inthe region. Hence, chances of competition for market share in domestic segment are also verylimited.Though, in industrial segment, with lack of price regulation and hence better scope for marginthere is an intense competition in the form of: 1. Price 2. Service 3. Promptness in delivery 4. Hours of catering or working hoursOMC-PMC competitionPMC, due to subsidized price prevailing in the domestic segment has not shown any interest tocompete with the OMCs. But, in industrial segment it is giving OMCs run for their money. 19 Competitive Environment | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  20. 20. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009Threat from SubstitutesToday, PNG is considered to be most eligible fuel to replace LPG. Few, properties of PNGwhich are regarded as giving it an edge over LPG are follows: PNG is Convenient 24 hours uninterrupted gas supply No changing or handling of gas cylinders No more last minute emergency Make payments after you consume, through banks, drop boxes, ECS, Net, etc. PNG is economical, works out to be up to 10% cheaper than LPG, 14.2 kg. LPG is equivalent to 18 units of Natural Gas shown in your meter. At present, price of LPG is Rs. 255/- you consume Gas costing Rs. 205/- only, saving Rs. 50/- (approx.) every time.PNG is Safe:Natural Gas catches fire only when it forms a 5-15% mixture with air whereas LPG catches firewhen it forms 2% or above mixture with air. Our supply designs, executions and operations are being done as Per International best Practices.PNG is Clean: Being a gaseous fuel, very clean compared to any other fuel with more than 94%. Combustible particles. Burns with a flame always hence, no blackening of vessels. Sulphur content less than 10 PPM. Most preferred fuel in vehicles in Mumbai today. Contribution for a cleaner society.PNG is versatile Apart from cooking, other appliances like geyser, air conditioner, vehicles etc. can be used on Natural Gas. However, please do not attempt to alter/modify the existing installation yourself or through any unauthorized person. 20 Competitive Environment | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  21. 21. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 8. ConclusionWe have seen the contrast between the different market segments prevailing in Indian LPGindustry. To be more precise, we saw how the domestic segment is quite different from itscounterpart industrial and bulk segment, be it the implications of subsidy, demands of users orthe interference from the government. Further, we studied the supply and logistic involved inLPG distribution and how the number of agencies in a region are optimized to reduce the deadweight loss to the society. We had also focused on the marketing strategy which we found to bedifficult or at least peculiar, due to the fact that customer couldn’t see the product which makes itby large homogenous.Lastly, we dealt with the scope of growth for LPG in Indian market and threat from its close andworthy substitute; PNG. 21 Conclusion | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  22. 22. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 Exhibits State-wise and Company-wise LPG Domestic Consumers (As on 1.4.2008) (000 Number)State / UT As on 1.4.2008 Total as on 1.4.2007 IOCL/AOD HPCL BPCL Total (Col.2-5)1 2 4 5 6 7StatesAndhra Pradesh 4090 4427 2290 10806 10342Arunachal Pradesh 123 0 0 123 116Assam 1834 24 61 1919 1813Bihar 1688 315 370 2373 2254Chhattisgarh 558 327 169 1054 987Delhi 2656 551 908 4115 4011Goa 9 244 146 399 391Gujarat 2980 1073 1217 5270 5067Haryana 1621 583 1053 3257 3088Himachal Pradesh 1039 141 71 1252 1179Jammu & Kashmir 390 824 143 1358 1327Jharkhand 812 162 129 1103 1026Karnataka 2375 1835 1361 5571 5225Kerala 3021 751 1584 5357 5046Madhya Pradesh 2194 1078 840 4112 3875Maharashtra 1519 5346 6008 12873 12415Manipur 218 0 0 218 206Meghalaya 109 0 0 109 101Mizoram 188 0 0 188 181Nagaland 140 0 0 140 129Orissa 558 624 276 1458 1395Punjab 2663 882 1097 4642 4406Rajasthan 1791 1032 1250 4073 3861Sikkim 114 0 0 114 109Tamil Nadu 6183 1079 2595 9856 8798Tripura 256 0 0 256 238Uttar Pradesh 6202 1361 2687 10250 9688Uttaranchal 1247 71 183 1501 1428West Bengal 3447 969 704 5120 4807Union TerritoriesAndaman & Nicobar 53 0 0 53 51Chandigarh 206 66 46 318 313Dadra & Nagar Haveli 0 30 0 30 30Daman & Diu 0 26 16 42 40Lakshadweep 3 0 0 3 2.6Puducherry 115 91 47 253 230Grand Total 50397 23912 25252 99562 94180Source. Public Sector Undertakings. Exhibit: 01 22 Exhibits | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR
  23. 23. DISTRIBUTION AND RETAILING OF LPG IN INDIA September 12, 2009 Growth in LPG Marketing in India Item Unit Growth in LPG Marketing 2005-06 2006-07 2007-08 2008-09 (P)Indigenous Production TMT 7717 8454 6743 7008Imports - PSUs TMT 2450 1968 2156 1937Imports - Pvt. TMT 433 321 676 409Consumption - PSUs TMT 9976 10530 11482 11775Customer Enrolment Lakhs 44.9 53.9 64.9 53.2Year-End PositionLPG Customers - PSUs* Lakhs 886 949 1018 1068LPG Distributors - PSUs Nos. 9270 9363 9365 9366LPG Markets Nos. 4288 4359 4393 4420Bottling Capacity TMTPA 8122 8448 8697 8967(P) Provisional* Domestic And Non-DomesticSource: Oil Companies Exhibit: 02 Details of Provisions of Control Order/MDG/DA to Contain Diversion of Domestic LPG for Unintended PurposesMarketing Discipline Guidelines (MDG) 2001 has been implemented which imposes heavypenalty including termination of distributors found indulging in diversion. Specific provision forthis under MDG is mentioned below: Irregularity Penal Action 1st instance 2nd instance 3rd instanceDiversion of Fine of Rs 20,000 and Fine of Rs 50,000 and Terminationdomestic cylinder recovery of differential in recovery of differential into non-domestic retail selling price of 14.2 retail selling price of 14.2 kguse kg cylinder and 19 kg cylinder and 19 kg cylinder cylinder on per on per cylinder basis. cylinder basis. Exhibit: 03 23 Exhibits | SCHOOL OF PETROLEUM MANAGEMENT GANDHINAGAR

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