By Festus William AMOYAW
The Liquefied Petroleum Gas (LPG) downstream sub sector is similar to the other petroleum products downstream with the same regulator, the National Petroleum Authority (NPA). The LPG subsector unlike the others is solely controlled by Ghanaians and is the only sector of the economy of Ghana with such a distinct feature.
The root of the industry can be traced to the building of the Tema Oil Refinery (TOR) and the production of petroleum products including LPG. The industry has four main actors in the value chain. These are Bulk Oil Distribution and Export companies (BIDECs), Transporters, LPG Marketing Companies and Dealers (operators of the LPG Refill stations together called the Petroleum Service Providers (PSPs).
It is estimated that the sector employs over 10,000 persons across the value chain. The sub-sector has led to the development of a market for cylinder manufacturing and the sale of accessories such as stoves, regulators, hoses etc.
In the year 1990, LPG was introduced in Accra. As part of the policy the government gave out cylinders for free and the Bulk Road Vehicles (BRVs) were moving from one neighbourhood to the other to refill the cylinders for the consumers. The objective was to encourage consumers to switch from fossil fuel-based products like firewood and charcoal to a cleaner option.
The hazards of using fossil-based cooking fuel include Indoor Air Pollution leading to health-related issues, degradation of the forests and effect of the greenhouse gases such as CO2 on the environment etc.
The country’s desire to improve the uptake of LPG by the populace has not been lost. Even though the achievement of 50percent has been moved severally in the past and there is a push to achieve same in 2030. Compared to traditional fossil fuels like firewood and charcoal, LPG offers benefits such as ease of use, portability, and environmental friendliness.
In the last three decades, the LPG sector has changed from the initial distribution model in neighborhoods to the development of LPG refill stations across the country. According to the records, there are about 750 LPG retail outlets (some breakdown: Greater Accra -188; Ashanti – 111; Central 83 and the least is North East region -1) compared to 4,767 fuel retail outlets. The change in policy meant consumers acquire cylinders from the open market, visit the stations and fill the cylinders for their use.
Within the period some other changes in policy such as the removal of subsidies and the application of taxes and levies increased the price of the product. Meanwhile, countries such as Cote D’Ivoire and Morocco still continue to operate a subsidy policy to improve the access and use of LPG.
Another contributing factor in the price of LPG is the deregulation of the downstream petroleum sector which opened up the sector to new entrants as well as the setting of prices devoid of government interventions. The evolution of the sector has left in its tracks some sectoral challenges that have made the industry worse for most of the players leading to some going under or bedeviled with high debts.
In 2015, the NPA had licensed 97 LPGMC but by 2023 the number had declined to 72. Most of those businesses go out of business due to indebtedness to the Ghana Revenue Authority (GRA), NPA or their bankers and operational issues. Currently, only about 44 LPGMCs are actively trading on a consistent basis primarily due to the factors mentioned earlier.
A notable factor when it comes to the challenges in the sector is safety. Two incidents of gas explosions in Kumasi and Accra led to a total ban on the development of new LPG refill stations. Between 2021 and 2022, about 185 new fuel outlets came on stream and none for the LPG sector. That aspect of the sector has become stagnant and it has a ripple effect on the growth of LPGMCs and the inability to achieve the goal of 50percent penetration in 2030.
Below are some of the challenges and opportunities in the LPG sub-sector of Ghana that requires considerable attention by all stakeholders to sustain the growth and achievement of the goal set by the government
- LPG Pricing
Pricing emerges as the most influential decision-making point for consumers of LPG. The setting of the price of LPG has been left to market forces just like other petroleum products. The price of LPG has mostly moved with the price on the international market of the product.
The BIDEC that imports the product into the country factors in all the variables to set the ex-refinery price at which LPGMC purchases and then sells to the LPG retail outlets. The sector has suffered some slowdowns in growth in 2021 and 2022 in relation to the price escalation. Additionally, if prices of LPG reach a level that customers find unacceptable or unaffordable, they are likely to explore alternative energy options that are more cost-effective.
Fig 2: Trend of Ex-pump price from 2020 to April 2024
Inflation and most importantly the exchange rate (devaluation of the Ghana Cedi), and the rising cost of crude oil on the international market have significantly driven the price upwards. In the last nine years (2015 – 2023) the price per kg of LPG has increased by about four-fold (GH¢3.5 in 2015 and GH¢12.63 in 2023). This consistent trend underscores the elasticity of the LPG product, influenced by the availability of alternative energy sources such as firewood, which consumers may opt for when faced with high LPG prices.
- Low margins and lack of differentiation
The petroleum sector in Ghana operates with low margins between the LPGMC and the dealer. Due to the critical nature of the product to the economy, most of the parameters setting the price are heavily regulated and controlled. Prior to the deregulations, margins for LPGMCs and Dealers (refill stations) the key players to the last mile were determined by the regulator. At the onset of deregulation, the margins were left to be decided by the LPGMCs.
However, the competition among 96 LPGMCs serving about 750 refill stations has led to some kind of “margin wars” among them. The LPGMCs are not able to expand the refill stations served or under sponsorship due to the embargo on establishing new stations. For the dealers, the volumes have stagnated as more of their customer base either moved to other locations or are buying less LPG for their use. The consequence of these factors is the unprofitable nature of the current state of the sector.
Macro-economic factors such as inflation, exchange rate and the general increase in the cost of doing business are impacting the industry heavily and most businesses are at the blink of collapse. The players in the sector are skeptical about increasing the margins for the reason it will increase the pump price and effectively affect the demand for the product but the players are struggling to stay afloat.
The cost of operations at the LPGMC and Dealers have all increased in the last few years with no commensurate increase in revenue levels. The lack of progress in the margins for the sector is a serious threat to most of the players’ survival in the midst of the new changes coming into the sector.
- No additions to refill stations
The aftermath of the explosion at the LPG station in 2017 at Accra led to the government placing an embargo on the development of new LPG Refill stations. The policy has stifled a sector that is already struggling due to some of the factors enumerated earlier. The population of the country is estimated at 33.5 million. There are about 750 refill stations across the country. Some of these stations do not have any means of expansion because there is no extra land as they are surrounded by buildings.
The developments in many cities are outpacing the establishment of LPG refill stations meaning LPG customers must travel longer distances to get the product. The distances between residential areas and refill stations are a disincentive for many customers which has a direct effect on the national consumption hence the lack of growth. The business is heavily dependent on volumes due to the fixed nature of most cost lines.
The inability to increase volumes through the development of new stations is causing more operational inefficiencies across the value chain, increasing the overall cost of operations. The average volume per metric ton per year for the 72 LPGMCs is about 4,409 as of the end of 2023, for the refill stations that’s 437. In Morocco, the average sale per year of a Distributor is 2,500 metric tons.
- High cost of operations
The LPG sub-sector has felt the weight of inflation – a significant concern spanning various industries. The consequent surge in prices, driven by the escalating cost of operations for LPGMCs and Refill stations and transportation expenses, has posed a daunting task for the players: maintaining competitiveness while ensuring affordability for their customers. In the last couple of years, many of the players have struggled to contain the increasingly high cost of operations. Each refill station has to contend with different government agencies to remain operational.
Some of the agencies are the Fire Service, Metropolitan, Municipal and District Assemblies, NPA, Ghana Atomic Energy Commission, Ghana Standard Authority, GRA and others. Each of these agencies by virtue of the law has some charges that operators must pay each year to renew their certificates as per the regulations. The regulator, NPA has various sanctions and fines applicable to an LPGMC or Refill stations that fail the standards. In recent times all the MMDAs have increased the annual operating permits for LPG Refill stations and in some instances as much as six-fold.
For example, a refill station that in 2022 was required to pay GH¢500 as an operating permit and is currently paying GH¢3,000 with no commensurate improvement in margins. Other variables that the refill stations must contend with are high utility bills (all the operations are dependent on electricity), salaries, repair and maintenance costs etc.
Bringing all these together shows a sector that is on the verge of collapse because there is no room for profitability. Most dealers are hanging on to the business due to a lack of options. Even the cost of decommissioning an LPG Refill station is so prohibitive none of the dealers are considering it. A lot of the LPGMCs and Dealers are heavily indebted to financial institutions and the high-interest regime is contributing to the downward trend of the sector.
- Introduction of Cylinder Recirculation Model (CRM)
The Government’s agenda to increase the access of LPG in the country to 50percent by 2023 is on course. Also, the issues of safety and siting of refill stations raised by stakeholders, the NPA has introduced the Cylinder Recirculation Model (CRM). The Cylinder Recirculation Model is a distribution system which allows consumers to bring empty cylinders to an agreed point in exchange for a filled cylinder whilst the empty bottle is transported to a bottling plant to be refilled and returned to the exchange point for pick up by other consumers.
The model seeks to remove the barrier of owning a cylinder. The cost of acquiring an LPG cylinder and other accessories is a major pain point for a lot of consumers and preventing them from using the product as cooking fuel. Again, the cost of developing refill stations has become huge. To develop refill stations to the standards required by the NPA and other bodies, an entrepreneur requires about GH¢2.5 million which is not easy to come by even if all factors are favourable. Under CRM the consumer does not own the cylinders but the Bottling Plants.
The existing owners of cylinders will exchange them for filled ones from the Bottling Plants through their partners. Any subsequent transaction will be done as an exchange of an empty for a filled one. The CRM has been promoted as the ideal situation and has operated in many countries such as Brazil, India, Cote d’Ivoire, Cape Verde and others. Some of the benefits of the CRM includes: Safety Enhancement, Environmental Impact; Creation of more employment; Structured market and investor confidence in the LPG Sector
The policy comes at a time when the existing refill stations are facing some challenges. The NPA has proposed a 5-year transition plan to gradually phase out some of the LPG Refill stations with the rest operating solely for auto. The sector players are still grappling with the policy and the consequences of their future especially when there is no clear compensation plan. As indicated earlier this is the only sector that is operated by Ghanaians. Will the introduction of the CRM make it better for the consumer and the operators or worse? Time will tell as the NPA continue to engage with the sector players to define a clear path for the industry.
In conclusion, despite the importance of the Ghanaian businesses in the sector, the players are struggling with minimal interventions from the stakeholders especially the government. LPG should be considered a critical component in achieving the following Sustainable Development Goals (SDGs) – Good Health and Wellbeing (3); Gender Equality(5); Affordable Clean Energy (7); Decent Work and Economic Growth (8); Industry, Innovation and Infrastructure (9); Sustainable Communities and Cities (11) and Climate Action (13).
Government must reconsider the subsidy policy especially in the introduction of the Cylinder Recirculation model (CRM) so as to ensure there is a massive switch by consumers from owning cylinders to the exchange system. The players in the sector must also review their strategic choices and consider some Mergers and Acquisitions to improve operational efficiency and make the sector attractive for local and foreign investors.
Furthermore, despite the growing importance of digital technologies, many LPGMCs have fallen behind in developing any digital capabilities. However, there are solutions out there to stay ahead of the curve. One option is the integration of Telemetry, a smart meter technology. Telemetry enables real-time data collection and remote monitoring of LPG tanks, providing valuable insights for digital solutions in the industry. Utilizing this technology, LPGMCs can improve inventory management, optimize the supply chain, and enhance operational efficiency.
The LPG industry is undergoing a transformative phase, presenting a unique mix of challenges and opportunities for the players. To drive sustainable growth and stay ahead of the competition, it is crucial for the companies to embrace a proactive mindset. By strategically making choices such as CRM versus Auto for the future, using the power of data analytics for optimization, identifying high-potential markets and customers, and embracing eco-friendly solutions. LPG players can pave the way for success in this dynamic landscape and lead the way toward a sustainable and thriving future.
>>>the writer is General Manager and Head of Management, Xpress Gas Limited
