Distribution and Pricing Innovation in LPG for

Penetration in Rural India

MPOL PROJECT

Submitted By:

Amit Patel (20091005)

Hardik Shroff (20091014)

Manish Choudhary (20091023)

Raghunath P. (20091032)

Ronak Sacheti (20091041)

Contents

1.Introduction............................................................................................................................3

2.LPG VALUE CHAIN...................................................................................................................4

3.LPG market in INDIA:...............................................................................................................5

4.Various Product marketed in LPG...................................................................................... ....6

5.Market penetration:................................................................................................................8

6.LPG penetration: Issues in rural areas....................................................................................9

Consumer Vs Distributor growth rate in India.....................................................................10

7.Initiatives by the PSU’s..........................................................................................................14

8.Initiative by the Government of India...................................................................................15

9.Innovation in price:...............................................................................................................17

10.Innovation in distribution...................................................................................................20

11.Threat from Substitutes......................................................................................................21

12.References...........................................................................................................................23

2
 Introduction

For people in rural areas as well in cities, energy is life. Modern energy life services are
paramount for rural development and improved quality of life in developing countries. In
much of the world, rural energy supply is limited to small amounts from the inefficient
energy sources, as most rural areas are poor and poorly served. Small improvements in
energy access, properly targeted and applied, can radically transform a rural household, a
small enterprise, or remote community. Here comes the role of LPG in improving the quality
and standard of living for rural areas.

There is so much pressure on introduction of LPG why it is so; the following are the reasons
which makes LPG better than other domestic fuels:

 It burns cleanly
 No smoke or residual particulate matter, according to the study of WHO 2006 smoke
from indoor cooking fires kills 1.6 million every year, more people than malaria, and
almost as many as unsafe water and sanitation. WHO have highlighted LPG as the
cost effective solution for reducing pollution from cooking fuel.
 Relatively low pollutant emissions as it emits low green house gases( GHG’s)
 Helps fight deforestation by substituting “ traditional fuels”
 Frees woman and girls from drudgery of searching of firewood

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4
LPG VALUE CHAIN

5
 LPG market in INDIA:

In India LPG was first introduced as domestic fuel in the year 1960. Initially the LPG
marketing commenced in 1960 by Burmah shell in Mumbai. In 1965 public sector Oil
Company, Indian Oil commenced operation of LPG marketing in 1965 at Kolkatta and Patna.

The points which make LPG unique in INDIA are as follows:

 Second largest packed LPG market in the world’s

 LPG cylinders, home delivered to more than 108 million households
 Customer population increasing by 6 million each year
 9382 distributors of LPG across India
 190 bottling plants setup evenly across India
 For better affordability product is subsidized
 For better logistics by packing near to the market, bottling plants even at remotest
corners: At Leh highest altitude, At Andaman’s etc.

In India consumption has grown very rapidly, consumer strength grew from 20M to 100m in
a decade. Simultaneously sales jumped from 1241TMT in 1985 to 11400TMt in 2008.
Currently around 50% of the Indian population is served with such sales. Since more or less
urban areas are covered, growth is poised towards rural areas

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Till September, 1993 LPG was being marketed in the country by the Public
Sector Oil Marketing Companies (OMCs) only. Since LPG was under short supply, OMCs
were importing the product to meet the requirements. However, inadequate
import infrastructure coupled with limited allocation of Foreign Exchange at official rates
made it difficult for OMCs to import LPG and meet 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). Under PMS, parallel marketers (private
companies) were allowed to import and market LPG in the country to packed and bulk
consumers in both domestic and non-domestic (commercial and industrial) sectors. Since
then, parallel marketers have been importing and marketing LPG under PMS.

Since domestic LPG marketed by OMCs is subsidized, parallel marketers could

not make significant impact in this sector, however, they are able to compete
with OMCs in non- domestic commercial/industrial sectors (about 85-90% of the sales of
parallel marketers are in these sectors)

Various Product marketed in LPG

The LPG market is segmented according to the purpose of the use of LPG as a fuel. There are
mainly three segments, domestic (89.2% of business), non domestic (commercial and
industrial including bulk-9%) and Auto LPG (for transportation-1.8%). In the industrial
category, there are bulk users too, who are served in 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. Accordingly the weight of the cylinder varies
(standard weights), as the usage depends on the type of consumer and to lessen the
transportation cost.

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Weight of cylinder according to segment:

 Domestic LPG
o Packed product in 14.2Kg, & 5kg cylinders, home delivered through
distributors

• Non Domestic LPG

– Commercial
• Packed product 19Kg delivered supply through distributors.
– Industrial
• Packed product 35Kg and 47.5 Kg delivered supply through distributors.
• Industry Bulk: Delivered to Storage Tanks of Customers- Business Associates
to garner Customers
• Auto LPG:
– Through Retail Outlets along with MS/Diesel and/or stand alone outlets

Share of products
Auto LPG
2%
Non Domestic
9%
Domestic
Non Domestic
Auto LPG

Domestic
89%

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 Market penetration:

In India population is around 110 million of that 72% live in rural areas while rest 28% live in
urban areas. Due to high per capita income in urban areas the market penetration of LPG in
such area is as high as 87%. Now considering the rural areas which largely depend upon
firewood and kerosene as common domestic fuel, the market penetration of LPG for such
area is as low as 13%. Therefore an affordable alternative is a necessity of the rural masses.

One can clearly visualize the market opportunity that lies in rural sector. But if one has to
give a thought that despite the reforms by the government in allowing parallel marketing
companies to enter into the market still the potential of rural market is not explored to a
substantial level. What can be the reasons for such discrepancies that exist between urban
and rural market in terms of LPG usage.

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 LPG penetration: Issues in rural areas

 Low per capita income: Most of the rural households use natural biomass or
kerosene. Due to low per capita income they can’t afford LPG refills which cost
around Rs 335 per 14.2 kg cylinder. Moreover kerosene is available at a subsidized
rate therefore consumer living in rural areas has no incentive to buy LPG so far as
price is concerned.

The below chart shows that kerosene and firewood is still have dominant share in rural areas

Share of various fuels in rural market

Coal
1%
Crop residue
Others 8%
1%
Kerosene
Cowdung cake
10% LPG
Firewood Firewood
10% Cowdung cake
Kerosene
53% Others
Coal
Crop residue

LPG
17%

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  Adequate supply and accessibility: LPG marketing companies generally finds difficult
to appoint a dealer for distributing LPG in rural areas also the company itself feels
reluctant to open their own distribution centre due to economic infeasibility. Since
only 17% of the rural population is using LPG neither the individual dealer nor the
company finds the project viable for setting up distribution centre over there. For any
dealership to be profitable the refill of the LPG cylinder should be sufficient enough
to provide for fixed cost, variable cost and adequate return on the capital employed,
which is generally missing in most parts of rural areas. Moreover dealers face
unfavourable economies of scale and the complementary infrastructure like roads
and repair service.

Consumer Vs Distributor growth rate in India

30.00

25.00

20.00

15.00 consumer growth rate

distributor growth rate

10.00

5.00

0.00

Supply issues:
I. Present supply shortage: LPG is in short supply even at the present requirement.
Growing domestic consumption would lead to an ever-increasing imbalance.
II. Competing demands: There are likely to be further problems of supply if LPG is used
increasingly for automobile fuelling – both because of four wheelers (private vehicles
and taxis) being converted and due to mandatory norms requiring the use of LPG, as
in the case of three-wheelers (auto-rickshaws).

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 III. Indigenous production: The costs of new production infrastructure -- refinery
capacity and gas fractionation, and bottling units – are already high (as indicated in
Section 3.1) and would be difficult to recover with the current price structure.
IV. Imports: More importantly, the Asia Pacific region will have a sizeable deficit in the
supply of LPG that would have to be met by importing from the middle-eastern
countries, any interruption in the Arab Gulf region may lead to disruption in physical
supplies and price risks.
Distribution/delivery issues:
I. Infrastructure: The existing infrastructure at Indian ports for LPG is inadequate to
meet present demand. Also, over 75 per cent of indigenous LPG production is from
the western region, and half the LPG import infrastructure is also located there. Due
to inadequate import facilities on the east coast, inland movement is required and
the costs are substantial. Internationally, pipelines are the preferred mode of
transport, but in India only around 32% of such transport is through pipelines. Due to
non availability of tank-wagons, 30% of oil product movement is undertaken by road,
which is not only hazardous and polluting but also involves 15 to 20 times the specific
energy use as through pipelines and 5 times the energy use by rail.
II. Consumer problems: Currently, vast (rural) areas of the country are located far from
distribution centres, so that users have to pay for the extra costs of cylinder supply.
Moreover, for small and remote markets, refills often take more than a week, so that
for those without a second cylinder there are gaps in fuel supply, requiring a standby
fuel also. (And, signing up for a second cylinder obviously increases the deposit cost,
precluding lower income households from investing).
III. Distributor problems: For LPG dealers considering rural markets, the small number of
purchasers and low rate of consumption (and refills) lead to poor economies of scale,
that, along with poor road infrastructure make it difficult to establish commercially
viable distribution networks.
IV. Safety: LPG delivery (as in the case of other pressurised or gaseous fuels) involves
cylinder management; this necessitates more careful transport than kerosene or
firewood that in turn imposes additional requirements on prospective dealers.

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 Lack of awareness: Rural households perceive LPG to be unsafe. They generally feel
that food made from LPG is not as tasty and healthy had it been made from coal or
kerosene chulas. They are not aware of the short term ill- effects of using dirty fuels;
cook in open streets, assuming pollution to diffuse. This lack of awareness has made
many LPG marketing companies’ think of programme that will change the mindset
about such perception.
 Lack of promotional activities by companies : The PSUs are not interested in doing
promotional activities to promote LPG in rural market. Neither the PSUs nor the
distributor/dealers have sales force for pushing the product in the market. There are
few or minimum strategies or efforts by PSUs to advertise about LPG in rural India
and they don’t send their sales force to rural areas to increase the sales of the
company. Hence, people in rural areas who have economical capability to use LPG
are not being reached and educated about the benefits of LPG.
 Black Marketing: Even though subsidies for refills are provided for domestic
connections, domestic cylinders are often diverted to running vehicles. The average
use calculated on the basis of the total quantity of LPG in some areas, divided by the
number of domestic connections works out to over 200kg per connection per year;
this is too high for cooking and indicates an obvious diversion to other uses. This
arbitrage incentive is due to the fact, that domestic cylinders are priced low and
hence commercial enterprises have a tendency to acquire those at a premium,
though lesser than the designated commercial LPG product.
The selling price of domestic cylinders is less as compared to the commercial cylinder
selling price which is fixed on the actual Import parity price. There is a wide
difference between the domestic and commercial rates. Due to this most of the
supply intended to go to domestic consumers are transferred to commercial
consumers which results in shortage for above said consumer base

13
  High upfront costs: Not only the refill cost is high but also the initial payment
towards deposit and installation. Considering the current upfront cost and refill
payment the average poor person having LPG connection spends around 20% of its
income on LPG, which in case of average urban middle class household is only 4-5%.
Due to such high cost they tend to switch to the cheaper source of alternative fuels.
The below diagram shows how prosperity increases with the use of more efficient
fuels.

To avoid such problems government and PSU’s have made initiatives for increasing the
demand for LPG in rural areas

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 Initiatives by the PSU’s

Indian Oil Corporation limited (IOCL):

On 16th august national companies including Indian Oil Corporation launched Five kg cooking
gas cylinders in 12 states for which consumers have to pay Rs 90 per refill. The cylinders
would be available at a security deposit of Rs 350 with distributor’s commission of Rs 8 per
cylinder. A customer also gets a further discount of Rs 4.5 per cylinder on direct delivery
from distributor on cash and carry basis.

The scheme was implemented on the basis that poor people who could not afford 14.2 kg
cylinder upfront as well as refill cost will now be able to buy 5 kg cylinder whose upfront as
well as refill cost is low thus switching them from traditional fuels to LPG.

Hindustan Petroleum Corporation limited (HPCL):

HPCL now has a scheme called rasoi ghar (kitchen) for communal use of LPG stoves in
villages. Individual households would not have to invest on stoves or pay a connection
deposit, as with personal connections, but would have only to pay for the use of the fuel and
the facility, on the basis of the duration of usage. In order to identify all the factors that can
influence the effective operation of HPCL’s rasoi ghar and to develop a viable model, a pilot
project was taken up at village Agwan, Tal Palghar, in Thane district (Maharashtra state).
Accordingly, the idea of a community kitchen was mooted to the panchayat of the village.
The pilot project was commissioned on 17.8.2002.

The model involves the panchayat donating a small room accessible to the socially and
economically backward classes, HPCL contributing gas stoves, LPG cylinders and cooking
utensils and a woman from Self-help group (SHG) being appointed as a caretaker. Women
bring in their raw material and take back cooked food paying a small fee of Rs 2. The money
collected is used to buy refilled cylinder and pay honorarium to the caretaker. Thus the
model is economically viable.

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The main motive of doing such an activity is to create awareness about LPG. This will not
only teach them the benefits of LPG but also the limitations of traditional fuels.

Bharat Petroleum Corporation limited (BPCL):

In order to reach far-flung rural customers, BPCL had introduced the Rural Mobile Vehicle
(RMV), in 2002 in the state of Andhra Pradesh. BPCL introduced 20 RMVs during the year
2002-03. Each vehicle costs about Rs 40 lakh and helped in distribution and filling of
cylinders in villages. This mobile filling unit is designed to cater to the requirements of LPG in
rural markets where the customers have to depend on distributors located at far off places
for refill supplies. It also operates as a mobile LPG distributorship of BPCL, through which
prospective customers can get new connections immediately at company prescribed rates.
Thereby solving the problem of accessibility.

Initiative by the Government of India

After the success of “Deepam” programme in Andhra Pradesh, The Minister of Petroleum and
Natural Gas has launched scheme called “Rajiv Gandhi Gramin LPG Vitrak (RGGLV)” on
October 16, 2009. The Scheme aims at setting up small size LPG distribution agencies in
order to increase rural penetration and to cover remote as well as low potential areas for all
the locations having potential of average monthly sale of 600 cylinders (refill sales) per
month of 14.2 kg and 1,800 customers considering monthly per capita consumption of 5 Kg.

RGGLV is initially being launched in 8 states covering over 1200 locations where the reach of
LPG is very low.  The Scheme will also provide new employment opportunities for the rural
population leading to overall economic prosperity.

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Salient features of the scheme are:

 Size of the agency: The agencies under the RGGLV will be of small size requiring
lesser finance/infrastructure. These agencies would be viable with monthly refill sales
of 600 against 2,500 at present.
 The agencies would penetrate deeper into the rural areas where regular
distributorships become unviable due to the scale of operation and investment. 
RGGLV distributors may be viable for around 1,500 customers in the cluster of
villages being served.
 Cylinders will be sold on cash and carry basis
 These agencies will be self operated: The distributorship himself will manage the
agency, with the help of his family member and one or two employees. Owner has
option for part time job
 Age limit for the distributor is being kept as between 21 and 45 years leading to new
employment opportunities for the rural youth.
 Under this scheme, all agencies will be in the joint name of husband and wife.  This
will be a step towards empowerment of rural womenfolk.
 The likely capital expenditure for setting up of a new RGGLV distributorship will be
about Rs. 3.21 lakh with land measuring 20 meter X 24 meter being owned by the
candidate being an essential requirement.
 The distributor will be able to recover the capital expenditure by the time 1,800 new
LPG connections are released. The indicative net income of the distributor would be
about Rs. 7,500 per month.
 An important feature of the scheme is that no interviews would be conducted and
selection of the distributors would be by draw of lots from amongst all candidates
who have secured more than 80% marks on the criteria of financial capability and
educational qualifications.

Besides the above mentioned initiatives taken by both PSU’s to solve the problem of 3A’s i.e.
affordability, accessibility and awareness; innovation in terms of price, distribution and
awareness can to a large extent reduce such problems.

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 Innovation in price:

The main issues to be addressed before formulating a pricing strategy are as follows;

 Upfront cost which includes deposit, regulator and installation

 Beneficiaries of the subsidies on refilling fees

To address the above mentioned problems 4 strategies for rural areas can be formed, which
are as follows:

1. Initial upfront cost to be borne by the government for rural areas only and refilling is
subsidised for rural consumers only using Smart card system
2. Using micro financing option for initial upfront cost and refilling is subsidised for
rural consumers only and using smart card system
3. Direct cash transfer to woman household(initial cost +subsidised amount) and LPG
at prevalent market price
4. LPG coupons of worth initial cost for one time and subsidised amount coupons to
woman rural households

Strategy 1: Initial upfront cost to be borne by the government for rural areas only and
refilling is subsidised for rural consumers only and using Smart card system

The current upfront cost of the 14.2 kg cylinder which includes deposit and regulator is Rs
1400 for all of the India except 7 north-eastern states. The initial deposit is Rs 1250 and the
cost of the regulator is Rs 150. For the NE states the deposit is Rs 900 and the cost of the
regulator is Rs 100. For a 5 kg cylinder the initial cost all over India is Rs 350. Now
considering the per capita income of urban areas Rs 1400 one time refundable deposit for a
15 kg cylinder is nothing but for people living in rural areas, one month salary. So penetrate
into rural areas government should borne this cost. Exactly same was done in the initiative
“DEEPAM” launched by the Government of Andhra Pradesh.

Now coming to refilling part subsidised LPG should be available to rural residents only and
not to middle class urban residential. These households get a large part of the subsidy even
when they have the capacity to pay the market price for LPG and will use LPG even when the
price is raised.

18
Since providing universal subsidy through price below the cost misdirects the subsidy to the
relatively affluent, a strong case can be made for subsidizing LPG as a clean cooking fuel for
the poor .

This can happen with the use of Smart card system and UID platform. This system entitles a
household a fixed quantity of LPG at subsidized price beyond which the market price would be
charged thereby helping the minimum level users and restricting subsidy capture. One of the

shortcomings of doing this will involve poor getting cheap LPG cylinder- selling it to middle
class family at a little higher price and then burning firewood & dung to cook in his own
home. Therefore you need more than smart card mechanism to resolve the issue.

Strategy 2: Using micro financing option for initial upfront cost and refilling is subsidised
for rural consumers only and using smart card system

In the above mentioned strategy the initial cost is borne by the government which can have
a drastic impact on fiscal deficit so to cure this problem micro financing options can be used.
Salient features of this strategy are:

• Micro Credits thru Cooperative-Banks and Grameen Seva Sahkari Mandalis.

 Specially adopted micro credits for Rural LPG Connections –

1. Without any collateral security or guarantor

2. With minimum documentation
3. With long pay back periods
4. Monthly collection / as per the crop cycle

Strategy 3: Direct cash transfer to woman household (initial cost +subsidised amount) and
LPG at prevalent market price

Instead of subsidy, direct cash transfer to poor’s may be provided and everyone is charged
the market price. But then suppose a poor man given 100 Rs. to buy LPG, he may not buy it
and instead buy liquor and beat up his wife to collect firewood from jungle for cooking.

19
Thus, the argument for providing subsidy in kind rather than in cash rests on the problem of
intra-household distribution of expenditure where a woman’s needs may get a lower
priority, and on the merit good nature of LPG use. The intra-household distribution problem
can be addressed to some extent by transferring cash to the account of woman of the
household .
This schemes not only take care that urban middle class households doesn’t get subsidized
LPG but also take care that the subsidized amount makes LPG viable than all other
traditional fuels .
The main disadvantage of this strategy is that even if the cash is transferred to the woman
household in rural areas there is no guarantee of the purchase of LPG cylinder.

Strategy 4: LPG coupons of worth initial cost for one time and subsidised amount coupons
to woman rural households

To overcome the problem of direct cash transfer into rural women account, coupons can be
issued worth initial deposit and refilling fees. Also smart card system will have to be applied
to see that such coupons don’t get misused. The main advantage of using such system is that
the government need not have to provide subsidy in cash.

Along with methods such as introduction of 5 kg cylinder, RMV’s and community kitchen
model an appropriate strategy can be implemented considering the pros and the cons of
above listed strategy for better rural penetration.

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 Innovation in distribution

If LPG has to reach rural India, availability and accessibility are the two most important
parameters through which it can penetrate the Indian villages.

Strateg1: Introduction of sales force in the distribution channel between the

distributor/dealers and customer in rural market. The sales force will help to penetrate in
the villages and increase the visibility of the LPG in rural areas. Continuous approach to the
villagers and persistent attitude of sales force will make people understand the benefits of
using LPG and schemes offered to them by state/central governments.

Strategy2: Number of distributors/dealers should be increased in rural areas and they

should also be evaluated in terms of number of new connection in their area.

Strategy3: Concept of “milk run” should be used by PSUs in remote areas to increase the
frequency of delivery. Delivery method of mixed loads from different suppliers. Instead of
each of several (say 5) suppliers sending a vehicle every week to meet the weekly needs of a
customer, one vehicle visits each village on a daily basis and give up deliveries for respective
customers. This way, while still five vehicle loads are shipped every week, each vehicle load
delivers the full daily requirements of their respective customers.

Strategy4: Tie up with other product line companies for sharing of distribution
infrastructure.

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 Threat from Substitutes
Today, PNG is considered to be most eligible fuel to replace LPG. Few, properties of PNG
which are regarded as giving it an edge over LPG are follows:

I. PNG is Convenient
II. 24 hours uninterrupted gas supply
III. No changing or handling of gas cylinders
IV. No more last minute emergency
V. Make payments after you consume, through banks, drop boxes, ECS, Net, etc.
VI. PNG is economical, works out to be up to 10% cheaper than LPG,
VII. 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:

I. Natural Gas catches fire only when it forms a 5-15% mixture with air whereas LPG
catches fire when it forms 2% or above mixture with air.
II. Our supply designs, executions and operations are being done as Per International
best Practices.

PNG is Clean:

I. Being a gaseous fuel, very clean compared to any other fuel with more than 94%
combustible particles.
II. Burns with a flame always hence, no blackening of vessels.
III. Sulphur content less than 10 PPM.
IV. Most preferred fuel in vehicles in Mumbai today.

22
PNG is versatile:

I. 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.

Given the above situation and challenges it is very difficult to predict about the future
scenario but LPG is must for rural India if the government wants to raise the living standard
of Indian villages.

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 References
MoP&NG, 2003a. Annual report for the year 2002-03, available at
www.petroleum.nic.in/annrep2003.pdf
MoP&NG, 2003b. “Availability, Demand and Security of Supply of Autofuels”,
Chapter 7 of Auto Fuel Policy Report, Petroleum Planning & Analysis Cell
(PPAC), Ministry of Petroleum and Natural Gas, Government of India, available
at www.petroleum.nic.in/ch_7.pdf
MoP&NG, 2003c. Petroleum Statistics, Petroleum Planning & Analysis Cell
(PPAC), Ministry of Petroleum and Natural Gas, Government of India, available
at www.petroleum.nic.in/Petstat.pdf

Business Line (Bureau report, New Delhi), 2004b. “Minister to lay foundation
stone for LPG cavern storage project”, Business Line, Bangalore, 19th February
2004, p.5.

CMIE, 2003. Energy, Centre for Monitoring Indian Economy, May 2003,
Mumbai

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