Liquid Petroleum Gas


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Liquefied Petroleum Gas (LPG)

E-Brief: Online Only issued 2 February 2001

Mike Roarty, Analysis and Policy
Ann Rann, Information/E-link
Science, Technology, Environment and Resources Group

Introduction

Liquefied Petroleum Gas (LPG) is predominantly a mixture of hydrocarbon gases (mainly propane (C3H8) and butane (C4H10)). These gases can occur either individually or in combination. Under pressure, these gases liquefy, hence the term liquefied petroleum gas. LPG can occur naturally with other hydrocarbons such as wet natural gas in oil and gasfields, or it can be extracted at oil refineries during the production of other petroleum products. LPG is used as a fuel source for commerce/industry and domestic use, in particular, industrial, space and water heating. LPG is also used as an automotive fuel, commonly known as autogas. (BP Australia - LPG: About LPG, Shell Gas (LPG) / Welcome.)

World prices of LPG in general move in line with crude oil prices, although as with most commodities it does have its own supply and demand parameters, which is a critical determinant of price. Most worldwide producers use a set Saudi Aramco Contract Price (Saudi CP) as a world marker price upon which exports and domestic sales to wholesalers (marketers) are negotiated. The reason for this is that there are few other world quoted prices and Saudi Arabia is the world's largest producer of LPG. World market prices of crude oil and LPG have increased substantially over 1999 and 2000. Higher crude oil prices have resulted from the decision by OPEC and a number other major world producers in March 1999 to reduce production of crude oil (and associated LPG production) after an extended period of low prices. (Global Statistics World LP Gas Association)

Australian LPG production and trade

Australia produced 4,367 megalitres (ML) of naturally occurring LPG and 1,674.4 ML of refinery produced LPG in 1999–2000. In the same year, Australia exported 2,858.9 ML and imported 518.9 ML of LPG.

Australian sales of LPG in 1999–2000, amounted to 3,603.6 ML of which 1,902.9 ML was for automotive use. Whilst, it is apparent that Australia is more than self sufficient in LPG supplies, Australia is also a substantial exporter of LPG and also an importer.

(BP Australia - LPG: Trends;
ALPGA - LP Gas Supply and Demand Australia
)

World market prices

There has been a trend for world LPG price increases to occur with the approach of the Northern Hemisphere winter and decrease to some extent during the Northern Hemisphere autumn and summer (see Figure 1), in line with fluctuating demand. However, it is noteworthy that there appears to be a trend over the longer term for gradually rising LPG prices. This partially reflects the steadily increasing world demand for LPG, particularly in Asia. In countries such as China and India, demand for LPG has increased significantly in recent years. Also, in Australia, LPG consumption has increased from less than 100 ML in 1975 to around 3,600 ML in 1999–00.

Whilst Australia is presently around 85 to 90 per cent self sufficient with crude oil and fully self sufficient with LPG supplies, Australia, as part of the global trading environment both exports and imports a whole suite of petroleum products from crude oil to LPG. Trade flows are determined on commercial bases. For example, some Asian markets are a lot closer to the North West Shelf production areas than are the refineries on the east coast of Australia. The Australian crude oil and LPG markets were fully deregulated in 1988 and 1991 respectively and as such use world market prices for pricing purposes. If prices in Australia were set below international prices, then all the crude oil and LPG produced in Australia could be exported to take advantage of the higher world prices. This could lead to a situation where Australia could experience shortages in crude oil and LPG supplies. Finally, if producers were forced to sell their crude oil and LPG in Australia at lower than international prices, then there would be less incentive to explore Australian territory for new resources.

The Saudi Contract Price (CP) is quoted in $US/tonne. The Saudi CP has risen from $US133/tonne in February 1999 to $US295 a tonne as at the beginning of September 2000. During the same time the price of crude oil has risen from around $US10/barrel to US$33/barrel. Depreciation of the $A against the $US tends to exacerbate the price rises as it leads to higher prices in Australian dollars. During this same time that the Saudi CP has increased, the Australian dollar has depreciated against the US dollar from 0.6396 in February 1999 to 0.5433 in September 2000 and as at 10 November was 0.5276. Hence, the rise in the Saudi CP and the depreciation of the Australian dollar against the United States dollar has resulted in the equivalent Australian price increasing from 10.56 cents a litre to 27.7 cents a litre, almost a three fold increase in this same period. The final retail pump price has added substantial components for distribution and marketing costs and retail/wholesale margins.

Source: Caltex Australia (Petrol Pricing: The Plain Facts - [Pricing] - Caltex Australia)

Recent Movements in Wholesale and Retail LPG Prices in Australia

The major oil companies (Mobil Oil Australia Pty Ltd, Caltex, BP, and Shell,) all produce and market LPG in Australia under various brand names, for example Shell markets Gogas, Caltex markets Vitalgas and a number of distributers market Kleenheat (Wesfarmers). Vitalgas is a joint venture between Boral and Caltex. A number of other companies including Elgas and Wesfarmers Kleenheat Gas also market LPG for industrial and other domestic uses. Retail prices include margins for distribution and retailing.

The Australian Competition and Consumer Commission (ACCC) monitors LPG prices in major capital cities, using the commercial services of Informed Sources Limited. The monitoring of LPG prices is much less extensive than that undertaken for petrol and diesel prices, which include a hundred, designated 'hot spots' including regional centres.

Average LPG retail prices in major metropolitan centres rose around 10% from August 1999 to June 2000, largely because of increases in world benchmark prices. Increases in rural and regional Australia, have been even more marked. There has been a large increase in prices since July 1, as LPG has incurred the full impact of the GST. With petrol and diesel, the petroleum product excise was reduced by 6.7 cents a litre prior to the introduction of the GST. As there was no excise on LPG, the GST was applied in full.

According to the ACCC, market volumes greatly influence price levels, for instance country centres which retail lower volumes can and do pay considerably higher prices. This pricing arrangement (much higher prices in regional areas) has attracted considerable attention from many commentators including members of the various Parliaments in Australia and there has never really been satisfactory answers provided. It is easy to understand in economic terms that higher prices are attached to lower volume sales but are the higher prices being charged in country areas excessive? ie above what may be required to compensate for lower volumes and distribution costs. Auto LPG prices are adjusted according to levels of local competition. For example, auto LPG users in Melbourne have in the past benefited from lower average prices in Australia, which according to commentators, resulted from Melbourne's close proximity to major supply sources (naturally produced LPG from Bass Strait (BHP - Producing Assets) and refinery produced LPG from the Shell Geelong and Mobil Altona refineries). However, the September 2000 data indicates considerably higher prices in Melbourne, probably as a result of a truck blockade in Victoria in September, which resulted in fuel supply disruptions.

An important point to take into consideration on pricing is that as auto LPG in Australia attracts no government excise (with resultant lower absolute prices), upward movements in world marker prices are more fully reflected in final retail prices in percentage term movements, in comparison to petrol and diesel prices.

City and Country and Prices

The ACCC have published up to date LPG price movements in their Report on the movement in fuel prices in the September Quarter 2000 (See the Report attached to the ACCC Media Release, 20 October 2000: Fuel Prices in September Quarter http://www.accc.gov.au/media/mediar.htm).

Table 1 shows average weekly prices for LPG from June through to September together with average prices in both the major capital cities and country areas for this same period. For the week ending 29 September, average country prices at 57.5 cents a litre were 9 cents a litre above average capital cities prices at 48.5 cents per litre. The data shows that increases for the three divisions, that is the five major metropolitan cities, all capitals, including Hobart, Canberra and Darwin and all country shows that average increases over the September quarter were 5.9, 5.3 and 5 cents per litre respectively.
(Mobil Petrol Prices - Answers to your questions)

Table 1. Average weekly prices for LPG in September

Note: Figures in bold represent the change compared with the week ended 30 June*

Location
Week ending
30 June

Week
ending
1 Sept

Week
ending
8 Sept

Week
ending
15 Sept

Week
ending
22 Sept

Week
ending
29 Sept

                       
Sydney 41.4 47.1 5.7 46.9 5.5 45.7 4.3 46.6 5.2 46.1 4.7
Canberra 45.8 49.1 3.3 48.9 3.1 48.9 3.1 48.9 3.1 48.9 3.1
NSW country 50.5 54.9 4.4 55.1 4.6 55.2 4.7 55.2 4.7 55.2 4.7
                       
Melbourne 38.1 41.9 3.8 42.1 4.1 43.6 5.5 42.2 4.2 47.5 9.5
Vic country 44.1 49.2 5.1 49.0 4.9 49.3 5.2 49.2 5.1 49.7 5.6
                       
Brisbane 42.7 46.4 3.7 47.9 5.2 48.4 5.7 48.1 5.4 47.9 5.2
Qld country 53.2 58.0 4.8 58.2 5.0 58.2 5.0 58.2 5.0 58.1 4.9
                       
Adelaide 38.6 42.0 3.4 44.4 5.9 42.5 3.9 44.4 5.8 45.5 6.9
SA country 46.0 49.7 3.7 49.5 3.5 49.2 3.2 50.1 4.1 50.5 4.5
                       
Darwin 50.0 53.9 3.9 54.9 4.9 54.9 4.9 55.8 5.8 54.9 4.9
NT Country 62.2 67.8 5.6 67.9 5.7 68.1 5.9 67.8 5.6 67.9 5.7
                       
Hobart 53.8 59.6 5.8 59.5 5.7 59.6 5.8 59.4 5.6 57.9 4.1
Tas country 53.4 58.8 5.4 58.8 5.4 58.8 5.4 58.8 5.4 58.0 4.6
                       
Perth 39.0 44.8 5.8 44.7 5.7 44.7 5.6 43.8 4.8 42.1 3.1
WA country 57.9 61.7 3.8 62.6 4.7 62.9 5.0 62.9 5.0 62.9 5.0
                       
Five major metro cities** 40.0 44.4 4.5 45.2 5.3 45.0 5.0 45.0 5.1 45.8 5.9
                       
All capitals 43.3 47.7 4.4 48.3 5.0 48.1 4.9 48.3 5.0 48.5 5.3
                       
All country 52.5 57.2 4.7 57.3 4.8 57.4 4.9 57.5 5.0 57.5 5.0

* There may be a small variation in these figures due to rounding.
** Sydney, Melbourne, Brisbane, Adelaide and Perth.
Based on data supplied by Informed Sources Pty Ltd.

Source: ACCC, Report on the movement in fuel prices in the September Quarter 2000, p 23.

Measures to Encourage the Use of LPG

In the Commonwealth Budget 2000-2001, an appropriation of $75 million over four years, beginning 1 July 2000, was made to support conversions of commercial vehicles to CNG or LPG that have a Gross Vehicle Mass (GVM) equal to or greater than 3.5 tonnes, and for buses that have a GVM equal to or greater than 3.5 tonnes. (The Commonwealth's Environment Expenditure - Compressed Natural Gas and Liquid Petroleum Gas Vehicle Conversion.)

Also, the Diesel Fuel and Alternative Grants Scheme (DFAGS), commenced in July 2000, will maintain existing price relativities between diesel and a range of alternative fuels (including LPG) by allowing transport operators that are eligible for the diesel fuel grant to also be eligible for alternative fuel grants.
(Diesel And Alternative Fuels Grants Scheme Act 1999:
Diesel and Alternative Fuels Grants Scheme Bill 1999 (Bills Digest 34 1999-2000);
Diesel and Alternative Fuels Grants Scheme Amendment Bill 2000 (Bills Digest 191 1999-2000)
)

 

 

 

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