Home >industry >energy >Oil marketing firms see huge opportunity in small LPG cylinders
Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Oil marketing firms see huge opportunity in small LPG cylinders

Cylinders in the 5kg segment qualify as free trade LPGthey are not subsidised by the government, unlike the commonly used 14.2kg domestic cylinders

Indian oil marketing companies (OMCs), both public and private, have identified a big opportunity in marketing small cylinders of liquid petroleum gas (LPG), in view of growing demand from migratory populations as well as a government push to increase penetration of LPG.

Among the first to take the plunge is Reliance Industries Ltd (RIL) which last month announced that it planned to launch small-capacity cylinders.

RIL, which has tested and developed a 4kg cylinder, told analysts in a presentation on 15 July that it planned to begin selling the product in August under the Reliance Gas brand.

State-run OMCs Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are also keen on small-capacity cylinders.

OMCs see promise of growth in the segment which stands to benefit non-permanent residents such as students, IT professionals, BPO employees—who can afford to pay a higher price for LPG but do not have access to cooking gas connections in the absence of proper address proof. Besides, the smaller cylinders are convenient for households in rural areas that cannot afford a regular domestic LPG connection.

The government allowed the sale of 5kg LPG cylinders in 2013 with or without domestic pressure regulators through retail outlets of oil marketing companies. Subsequently, sale of these cylinders was extended to LPG distributorship points and kirana and general stores, and can be picked up at the consumer’s convenience.

Cylinders in the 5kg segment qualify as free trade LPG (FTL), which means that they are not subsidised by the government, unlike the commonly used 14.2-kg domestic cylinders. The larger capacity cylinders are sold at market price to consumers who have the option of receiving a government subsidy in their bank accounts.

A 5kg LPG cylinder costs 840 on first purchase. Of this 800 is the cost of the cylinder. Subsequent refills cost 244.50 per cylinder. The cost of a regular LPG connection includes a security deposit and the cost of a stove which add up to around 3,500. A refill comes for 447.23 in Mumbai and 423.09 in Delhi.

Customers can buy 5kg cylinders by merely providing proof of identity. At the time of the first sale, the cylinders are sold at non-domestic rates with or without domestic pressure regulators at 1,000 plus applicable taxes for the cylinder and 250 plus applicable taxes for the regulator.

As of April 2016, there were 2.87 lakh LPG customers in the 5kg LPG segment, against 20.15 crore customers in the 14.2kg segment. In 2015-16, while the industry added 2 crore new customers in the 14.2kg segment, only 7,600 customers were added in the 5kg segment.

BPCL, which sells its products under the brand Bharat Gas, sees a “very promising" market and is currently firming up plans to enter the small cylinder segment. “The 5kg LPG segment is what we find attractive going forward. We will shortly be launching a marketing plan to go full hog in this segment," said a company official on condition of anonymity. An email sent to BPCL last week remains unanswered.

“The government is presently taking all steps to increase the penetration of LPG. With the trend of falling prices, LPG has found increased acceptability as fuel for both domestic and commercial applications. The demand for LPG is increasing. So going by this trend the demand for 5kg (cylinders) is likely to increase," said an IOCL spokesperson in an e-mailed response. IOCL sells LPG under the brand name Indane.

HPCL, which sells gas under the brand HP Gas, is targeting areas with higher proportions of migratory populations such as metro cities and suburban areas around big cities and hilly and difficult terrains. The company plans to enrol 3.5 lakh customers in 2016-17 in the 5kg segment.

“Cylinders are being marketed through regular distributors, petrol pumps and kirana stores," said an HPCL spokesperson in an e-mailed response.

“There is already high penetration of LPG in metros and other urban cities, while potential is high in rural and semi-urban cities as many households continue to use kerosene, wood and dung cake," said K. Ravichandran, senior vice president and co-head-corporate ratings at ICRA Ltd.

Ravichandran said the overal LPG retail market has been growing at 7-8% in the recent past. Within that, the growth in 5-kg cylinders should be high as the base itself is minuscule.

“It may be realistic to expect growth upwards of 25% per annum for such a category as the potential is immense," he added.

The three state-run OMCs are planning to lay a 1,450km pipeline to service central India, added the BPCL official quoted above.

The pipeline, to be built at a cost of about 5,000 crore under a joint venture in the next 3-4 years, would emerge at either the Kandla or Mundra ports in Gujarat, and run via Bhopal, Kanpur and Lucknow to terminate at Gorakhpur in Uttar Pradesh.

The pipeline would be important from an infrastructure development standpoint as most of the LPG in the country is transported by road, which is not only expensive but also unsafe.

“The proposed pipeline will transport 2.5-3 million tonnes per annum of imported LPG. It will help us meet demand in low LPG penetration areas such as Meghalaya, Assam, Jharkhand and Bihar, among others," said an HPCL official said on the condition of anonymity.

OMCs are also investing in setting up LPG import facilities and additional bottling plans.

HPCL will spend 1,500 crore on setting up an LPG import facility (for which it is scouting for land) and 7-10 bottling units. BPCL, too, is building an LPG import terminal at West Bengal’s Haldia for 800 crore. The company has acquired 35 acres for the purpose and plans to complete the project in three years.

“We have a prominent presence in the western and southern regions but not the eastern region. Bihar, north-east, Jharkhand, eastern Uttar Pradesh and West Bengal are where we need to build a market. Our import terminal at Haldia will help us meet demand in the eastern region," added the BPCL official.

“An import facility is required at the east coast. If the infrastructure is well placed, the investment required could be less," said the HPCL official quoted above.

“An import facility is required on the east coast. If the infrastructure is well placed, the investment required could be less," said the HPCL official quoted above.

IOCL is already begun construction of an LPG import facility at Paradip in Odisha for 690 crore.

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperLivemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout