LPG Marketing & Distribution Business

Pre-Feasibility Study

LLPPGG MMaarrkkeettiinngg && DDiissttrriibbuuttiioonn BBuussiinneessss(((SSSMMMEEEDDDAAA DDDOOOCCCUUUMMMEEENNNTTT)))

Small and Medium Enterprise Development AuthorityGovernment of Pakistan

www.smeda.org.pk

HEAD OFFICE

6th Floor L.D.A Plaza, Egerton Road Lahore. Pakistan 54000Tel: (042) 111-111-456, Fax: (042) 6304926-7

[email protected]

REGIONAL OFFICE PUNJAB

REGIONAL OFFICE SINDH

REGIONAL OFFICE NWFP

REGIONAL OFFICE BALOCHISTAN

6th Floor L.D.A Plaza, Egerton Road Lahore.

Pakistan 54000Tel: (042) 111-111-456, Fax:

(042) [email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


November 2007

Pre-Feasibility Study LPG Marketing & Distribution Business

Page 1 of 32

PREF-25/November, 2007/Rev1

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject

matter and provide a general idea and information on the said area. All the material

included in this document is based on data/information gathered from various sources

and is based on certain assumptions. Although, due care and diligence has been taken to

compile this document, the contained information may vary due to any change in any

of the concerned factors, and the actual results may differ substantially from the

presented information. SMEDA does not assume any liability for any financial or other

loss resulting from this memorandum in consequence of undertaking this activity.

Therefore, the content of this memorandum should not be relied upon for making any

decision, investment or otherwise. The prospective user of this memorandum is

encouraged to carry out his/her own due diligence and gather any information he/she

considers necessary for making an informed decision.

The content of the information memorandum does not bind SMEDA in any legal or

other form.

DOCUMENT CONTROL

Document No. PREF-25

Revision 1

Prepared by SMEDA-Sindh

Approved by Provincial Chief - Sindh

Issue Date November, 2007

Issued by Library Officer


Page 2 of 32


11.. PPRROOJJEECCTT PPRROOFFIILLEE

11..11 OOPPPPOORRTTUUNNIITTYY RRAATTIIOONNAALLEE

Currently out of 25 million households in Pakistan, 4.3 million are connected to natural gas network and the rest are relying on LPG and conventional fuels like coal, firewood, kerosene, dung cake etc, which indicate the strong demand for Liquefied Petroleum Gas (LPG) sector.

Liquefied Petroleum Gas (LPG) is used as fuel for cooking and heating in the northern Pakistan particularly in Punjab. It is also used as fuel in vehicles particularly taxi and rickshaws. More than 30,000 rickshaws and taxis in Karachi and other parts of the country are run on LPG. The demand of LPG in Karachi is consistent throughout the year and increases during winters in Punjab and Northern Pakistan.

Although demand of LPG is persistent throughout the year, supply of LPG from producers (or extractors) to distributors and marketing companies has been limited due to maintenance and overhauling shutdowns, which often creates shortages. Besides that, LPG producers are also limited in numbers and LPG marketing companies need to have a quota of gas to be allocated by the producer. This factor makes LPG business vulnerable in the hands of LPG producers.

LPG (Liquefied Petroleum Gas) is the generic name for commercial propane and commercial butane. These are hydrocarbon products produced by the oil and gas industries. Commercial Propane predominantly consists of hydrocarbons containing three carbon atoms, mainly propane (C3H8). Commercial Butane predominantly consists of hydrocarbons containing four carbon atoms, mainly n- and iso - butanes (C4H10).

They have the special property of becoming liquid at atmospheric temperature if moderately compressed, and reverting to gases when the pressure is sufficiently reduced. Advantage is taken of this property to transport and store these products in the liquid state, in which they are roughly 250 times as dense as they are when gases.

11..22 PPRROOJJEECCTT BBRRIIEEFF

LPG production is a capital intensive business and requires huge investment depending upon the technology and methodology employed for the extraction and processing of LPG. However, LPG Marketing and distribution needs comparatively less investment and can be considered by the Small and Medium scale investors. The proposed project envisages setting up of a LPG marketing and distributing company which is generally known as LPG bottling plant business.

LPG marketing and distribution business will setup a bottling plant with storage tanks and filling dispensers. The business facility will hold a certain quantity of LPG quota,


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allocated by one of the LPG producer and this allocated LPG will be supplied to the marketing company through Bowzer (gas supplying trucks). The company will store this LPG in its storage facility from where, supply to the sub-distributors will be made. Sub-distributors will bring their cylinders and get them filled against payment.

11..33 MMAARRKKEETT EENNTTRRYY TTIIMMIINNGG

There is no specific time for the entry in LPG marketing. After allocation of quota from the producer, a marketing company can start its operations immediately as demand is persistent in urban and rural markets.

11..44 PPRROOPPOOSSEEDD BBUUSSIINNEESSSS LLEEGGAALL SSTTAATTUUSS

The legal status of business tends to play an important role in any setup; the proposed LPG Marketing and Distribution business is assumed to operate on as a private limited company. It is mandatory for an oil or gas company to register as a private limited company.

11..55 PPRROOPPOOSSEEDD LLPPGG BBOOTTTTLLIINNGG//DDIISSTTRRIIBBUUTTIIOONN PPLLAANNTT CCAAPPAACCIITTYY

The capacity of the proposed LPG storage and distribution facilities would be around 80 M. Ton, whereas, filling capacity would be about 5 ton per day (based on 8 hours shift).

11..66 PPRROOJJEECCTT CCOOSSTT

Total project cost of the LPG Marketing & Distribution business would beapproximately Rs. 48.92 million. Out of this, capital cost of the project is around Rs. 47million and remaining will be the working capital.

11..77 PPRROOJJEECCTT IINNVVEESSTTMMEENNTT

A total of Rs. 48.92 million will be required to setup and operate the proposed LPG Marketing and Distribution business.

11..88 RREECCOOMMMMEENNDDEEDD PPRROOJJEECCTT PPAARRAAMMEETTEERRSS

Capacity Human Resource Technology/Machinery LocationStorage Capacity: 80 ton

Cylinder Filling capacity: 5 ton per day

21Local and Imported

Machinery (German and France)

Port Qasim, Karachi

Financial Summary

Project Cost IRR NPV (Rs) Payback Period Cost of Capital (WACC)Rs. 48.92 million 28% 22.8 4 Years and 6 months 17.5%


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11..99 PPRROOPPOOSSEEDD LLOOCCAATTIIOONN

Location for setting up a LPG distribution plant has imperial implications on fixed costs, operational costs and procedures. The proposed LPG plant can be established at Port Qasim, Karachi in Sindh, and Multan Road in Punjab. These locations have basic infrastructure and facilities required for LPG bottling and distribution plant, however for the purpose of this pre-feasibility study Port Qasim industrial area has been assumed.

11..1100 KKEEYY SSUUCCCCEESSSS FFAACCTTOORR && PPRRAACCTTIICCAALL TTIIPPSS

Following are the key success factors in LPG business:

LPG quota allocation: Most of the existing plants with fully operational facilities are out of work because of delays in their quota allocation by the LPG producers.

Dealing with the sub-distributors: Sub-distributors play important role in the successful operations of a LPG Marketing company because they distribute gas among agency holders who further sale it to the retailers.

Survival during the critical period when cheap Irani LPG is available in the market: In such circumstances when cheap Iranian gas is available, a LPG marketing and distribution company may face a situation where it would be forced to lift its quota as per agreement from the producer at a higher cost and sell it at lower price.

22.. SSEECCTTOORR && IINNDDUUSSTTRRYY AANNAALLYYSSIISS

LPG is a derivative of two large energy industries: natural gas processing and crude oilrefining. When natural gas is extracted from the earth, it is a mixture of several gases and liquids. Methane, which is sold by gas utilities as “natural gas” constitutes about 90 percent of this mixture. Of the remaining 10 percent, 5 percent is propane and 5 percent is other gases such as butane and ethane. Before natural gas can be transported or used, the LP Gases (which are slightly heavier than methane, the major component of natural gas) are separated out. Depending on the “wetness” of a producing gas field, gas liquids generally contain 1%-3% of the unprocessed gas stream. Some LP Gases are also trapped in crude oil. In order to stabilise the crude oil for pipeline or tanker distribution, these “associated” or “natural gases” are further processed into LP Gas. Worldwide, gas processing is a source of approximately 60% of LP Gas produced.

In crude oil refining, the LP Gases are the first products produced on the way to making the heavier fuels such as diesel, jet fuel, fuel oil, and gasoline. Roughly 3% of a typical barrel of crude oil is refined into LP Gas although as much as 40% of a barrel could be converted into LP Gas. Worldwide, crude oil refining is the source for the other 40% of


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LP Gas supplies although the ratio between gas processing and refining varies among regions.

LP Gas production from these sources is a natural derivative. That means production of LP Gas is assured since the primary motive for gas processors and refiners is to produce fuels other than LP Gas but first the LP Gases are produced. Although tied to the production of natural gas and crude oil, LP Gas has its own distinct marketing advantages and can perform nearly every fuel function of the primary fuels from which it is derived.

22..11 SSEECCTTOORR CCHHAARRAACCTTEERRIISSTTIICCSS AANNDD OOVVEERRVVIIEEWW

LP Gas can be transported, stored, and used virtually anywhere in the world. It does not require a fixed network and does not deteriorate over time. LP Gas is very clean burning and has lower greenhouse gas emissions than any other fossil fuel when measured on a total fuel cycle. Originating mainly from natural gas production, it is also non-toxic and will not contaminate soil or aquifers in the event of a leak.

LP Gas is cost-effective, since a high proportion of its energy content is converted into heat. LP Gas can be up to five times more efficient than traditional fuels, resulting in less energy wastage and better use of energy resources. LP Gas is a multi-purpose energy. There are more than a thousand applications, from cooking, heating, air conditioning and transportation, to cigarette lighters and even the Olympic torch.

IINNVVEESSTTMMEENNTT OOPPPPOORRTTUUNNIITTYY IINN TTHHIISS SSEECCTTOORR

The Government has focused on this sector and has approved “LPG production and distribution policy 2006”. This policy aims at increasing LPG supplies, streamlining its distribution at affordable prices, especially to LPG starved areas of the country and promoting healthy competition or growth of LPG market while ensuring minimum safety standards across the Liquefied Petroleum Gas supply chain. To achieve this goal, issues regarding LPG production, LPG licensing, safety standards, pricing, distribution in under developed areas and import of LPG have been addressed in this policy.

Prior to the announcement of the above policy, there has been a shortage of LPG particularly during winter when most of the oil refineries shutdown their LPG production operations for annual maintenance. Most of the refineries had a practice to close LPG production at the same time which resulted in severe shortage leading to a consequential increase in price. In order to avoid such situations, now it is mandatory for the oil refineries to announce a schedule of maintenance ensuring a certain level of LPG supply to the market.

Besides the oil refineries who produce LPG as a by product, some of the specialized projects i.e. JJVL (Jamshoro Joint Venture Limited) are focusing on producing only LPG which would help in consistent supply of LPG to the marketing and distribution companies. It is expected that second facility of JJVL will commence its operations shortly.


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LLPPGG LLIICCEENNSSIINNGG

Any company willing to distribute and market Oil and Gas needs to obtain a license from OGRA. Additionally, license from Explosive department is also required for the proposed LPG marketing and distribution business. OGRA (Oil & Gas Regulatory Authority) issues provisional licenses to technically and financially sound applicants/ parties for construction of works commensurate with their work program, for a period of one year. OGRA inducts reputable third party inspectors to check/monitor compliance with the terms and conditions of licenses.

The licenses can be cancelled in case of non-compliance with licensing terms and conditions.

Pre-Qualification for LPG License1

Following requirements are required to be fulfilled for obtaining a license:

Application on the prescribed proforma in triplicate

Pay Order / Bank Draft of Rs.100,000/- in favour of Oil & Gas RegulatoryAuthority, as License fee (Payable at Islamabad).

Proof of registration of the Company (Company incorporation certificate).

Memorandum and Articles of Association.

Attested copies of ID cards of all Directors.

Location of the tentative / proposed site.

Financial Competence Certificate issued by a Bank (original and stamped).

Last three years’ Audited Reports (not applicable for new companies).

Minimum Work Program:

o Number of storage tanks and capacity of storage tanks.

o Bottling facility capacity.

o Quantity of LPG to be distributed per day or per month.

o Identification of areas where distribution / marketing of LPG is planned.

1 Oil & Gas Regulatory Authority


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22..22 SSEECCTTOORR CCHHAARRAACCTTEERRIISSTTIICCSS

22..22..11 PPRROODDUUCCTTIIOONN22

The following table presents production data for the last two years for LPG, Petroleum and Diesel.

August July – AugustItem Quantity

2006 2005 2006-07 2005-06LPG ‘000 Liters 41,124 40,895 82,999 85,450Petroleum ‘000 Liters 2,097 1,998 4,518 4,209Diesel ‘000 Liters 276,888 324,691 596,176 709,773

It is evident from the table that LPG production which was around 40,895,000 liters during the month of August 2005, increased to 41,124,000 liters during August 2006 which suggests a substantial increase in production. According to last year during July and August LPG production was 85,450,000 liters, which decreased in during the same period in 2006-07 around 82,999,000 liters. It is expected that after commencement of operations of JJVL-II, the production will further increase which would help in maintaining demand and supply gap in future.

22..22..22 PPRROODDUUCCTT PPRRIICCIINNGG33

During the study of LPG industry, it was observed that product price for LPG are revised generally every 15 days and government launch its prices on fortnightly basis.Latest prices for the week as compared to last week are as under.

This is to advise that, in pursuance of the decision of Economic CoordinationCommittee (ECC) of Cabinet dated December 06, 2006, OGRA has determined themaximum base-stock Price of LPG, effective March 03, 2007 as Rs. 31,949.45 / .Ton,per attached computation sheet.

OIL AND GAS REGULATORY AUTHORITYMaximum Base-Stock Price of LPG

effective March 3, 2007FOB Saudi ARAMCO

Contract PricePropane Butane

(US $/ M. ton)(US $/ M.

ton)

February, 2007 A

526.00

526.00

2 Federal bereau of Statistics website ( http://www.statpak.gov.pk/depts/fbs/statistics/qim/qim.htm )

3 http://www.ogra.org.pk/cats_disp.php?cat=95


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Ratio B 40 60LPG price calculation = A x B 21,040.00 31,560.00Wt. Avg. price US $ /M. TON 526.00 Avg. US $ exchange rate for Feb. 07 Rs per US$ * 60.74

Maximum Base-Stock price of LPG Rs. /M. TON effective March 03, 2007 31,949.45

* Monthly average of the mean of the daily Bid and Offer of Weighted Average Exchange Rate quoted by the State Bank of Pakistan for February 2007, has been provisionally adopted pending clarification from the Federal Government, which has already been sought.

22..22..33 DDEEMMAANNDD

About 90% of auto rickshaw and taxi are fueled by LPG, whereas, majority of the rural population of Pakistan use LPG as cooking and house warming fuel at home. LPG prices move in a similar manner to petrol prices as its demand grows.

22..22..44 TTHHRREEAATTSS TTOO TTHHIISS IINNDDUUSSTTRRYY

LPG Distributors Association Pakistan said on November 11, 2006, that the sale of Liquefied Petroleum Gas (LPG) had dropped 30 percent due to unprecedented increase in its prices by producer and marketing companies for the past 7 months4.

The association said that the LPG domestic consumers had abandoned its use and turned to firewood while rickshaw owners and other transporters preferred petrol and diesel as LPG firms had been fleecing them by constantly raising LPG rates without any justification.

The LPG association chairman said that the price of a gas cylinder for domestic use in neighboring India was Rs 236 while it was Rs 650 to 700 in our country (during November and December 2006), which is reported to be self-sufficient.

22..22..55 EENNVVIIRROONNMMEENNTTAALL AANNDD PPRROOTTEECCTTIIOONNSS AASSPPEECCTTSS

LPG is much cleaner than diesel. The dirty black smoke that we see coming from diesel vehicles is particulates – a known cause of sickness and deaths. By replacing a diesel engine with an LPG powered equivalent, over 90 percent of this particulate matter can be eliminated.

LPG powered vehicles emit significantly fewer greenhouse gases and other pollutants than petrol-powered equivalents. LPG typically has around 20 per cent less ozone 4 Daily Times, Sunday, November 12, 2006.


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forming potential (a measure of the tendency to generate photochemical smog), between 10 and 15 per cent lower greenhouse gas emissions and only one fifth air toxics emissions.

5LPG delivers clear environmental benefits over diesel and petrol. Recent independent automotive tests submitted to the Department for Transport have shown that LPG emits:

120 times less particulate matter compared to diesel; less than half the NOs of petrol and less than one twentieth the NOs of diesel; and 17 per cent less CO2 compared to petrol and 2 per cent less CO2 compared

to diesel, on a well to wheel basis

LPG’s impact on the environment in the unlikely event of a spillage is minimal as propane is lighter than water. It therefore readily disperses without combustion and with no contamination of water courses or surrounding land – unlike petrol or diesel where spillage is a major environmental concern.

22..22..66 PPRROODDUUCCTT//PPRROOJJEECCTT SSTTAANNDDAARRDDSS AANNDD CCOOMMPPLLIIAANNCCEE IISSSSUUEESS

Rules and regulations which govern any explosive material also apply on LPG. Its transportation, storage, construction of storage facility, filling of cylinders and their transportation, etc. all need to be carried out according to the standards and specifications provided by the explosive department, government of Pakistan. For LPG business, a license will be required from explosive department of the concerned province. Details have been provided in the following lines.

22..22..77 RREEQQUUIIRREEMMEENNTTSS FFOORR GGRRAANNTT OOFF PPEERRMMAANNEENNTT LLIICCEENNSSEE UUNNDDEERR EEXXPPLLOOSSIIVVEESS

I) Formal application with attested photocopy of National Identity Card briefly stating the purpose of obtaining License and justification.

II) Application in the prescribed Form C, dully filled in and signed by the applicant.

III) Distance Form D, dully filled in against all columns there of as per schedule VI of the Explosives Rules 1940 and signed by the applicant.

IV) Original treasury receipt for the amount payable as per column 5 of schedule IV of the Explosives Rules, 1940 showing the amount paid under the following Head of Account in any branch of the National Bank or Government Treasury.

1200000-Receipts from Civil Administration & other Functions

5 http://www.lpg-mower.co.uk/lpg-groundscare-the-advantages.htm


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1260000-Economic Services Receipts

1264000-Industrial and Mineral Resources

1264100-Industiral and Mineral Resources Industrial Safety Explosives Department

V) No objection certificate along with the signed plan from the District Authority concerned to the effect that the Authority has No objection to the grant of license to the application for possession/sale of Explosives. No objection certificate if not submitted by the applicant will be obtained by the Department from the District Authority after receipt of other complete particulars from the applicant.

VI) Six copies of plan duly signed by the applicant and drawn to scale on durable paper showing full constructional details of the proposed LPG storage site, and site with full surroundings and important land marks to facilitate its location. The distances maintained around the proposed LPG storage site shall be marked clearly.

VII) Documents showing the extent of possession/ownership of land for maintaining required safety distances from the explosives storage magazine.

VIII) Present consumption of explosives in the area and nature of work requiring use of explosives.

IX) Expected market potential in 5 years from now with full justification.

X) Complete details of the present consumers of explosives in the area giving their names, complete postal addresses, nearest Police station(s), approximate daily consumption of explosives by each consumer stating their nature of work requiring explosives.

XI) Details of other explosives magazine(s) 6 existing if any within a radius of 50 KM from the site of proposed magazine.

XII) Any proof/certificate showing competence and experience of the applicant or his authorized worker/agent/employee/supervisor in the handling of explosives.

XIII) Details of vehicle to be used for transport of explosives from source of supply to the storage magazine and the approximate distance in between.

XIV) Undertaking by the applicant to the effect he will observe strictly all the requirements of Explosives Rules 1940 and submit Fortnightly Reports on the three prescribed Forms B-I, B-II, and B-III regarding purchase, use etc. of Explosives.

6 LPG or other explosive storage site(s)


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XV) Certificate to the effect that guard over the magazine7 will be provided 24 hours by the license.

An LPG tank after ten years shall be examined for re-qualification. Re-qualification is a procedure by which a cylinder is inspected and retested to determine its acceptability for continuous service. This method determines if a tank is condemned (a cylinder that does not pass the required tests and can not be repaired), or, repairable. A tank shall be repaired for cuts, corrosion or dents five years after the time of re-qualification. Repair is defined as the removal and replacement of parts or attachments of LPG cylinders and other corrective measures.

A condemned cylinder, as the standard specifies, is a scrap and should be destroyed either by cutting diagonally, or crushing the cylinder or any part so that it can no longer be used.

Consumers are enjoined to make sure that the embossed markings of the brand name or name of the owner is printed on the cylinder.

To ensure safety throughout the LPG supply chain, LPG storage tanks, cylinders bowzers, and distribution outlets of the licensees should meet the minimum safety standards as laid down in applicable Rules.

Decanting of LPG from cylinder to cylinder is prohibited and OGRA can cancel licenses of the LPG marketing companies involved in this activity directly or indirectly.

22..22..88 SSPPEECCIIFFIICCAATTIIOONNSS FFOORR TTEEMMPPOORRAARRYY SSTTOORRAAGGEE OOFF EEXXPPLLOOSSIIVVEESS

Following detailed guidelines have been provided by the explosive department of the government for the companies dealing in explosive materials. It is mandatory for the LPG businesses to comply with the following.

1. A temporary storage may be in above ground strong wooden or Bamboo Cabin or preferably a damp proof pit.

2. The height of a cabin or depth of a pit shall not be less than 6 feet.

3. There shall be no uncovered iron or steel in the construction of cabins.

4. For above ground cabin it is necessary to have an earthen mound or screen wall in between the Explosives cabin and the cabin containing detonators.

5. The floor of the temporary storage shall be covered with wooden planks.

6. Main explosives and detonators shall be stored in separate cabins or pits at least 10 feet apart.



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7. The explosives shall be covered with tarpaulins awaning so as to protect against sun and rain and the margin of a pit shall be so raised as not to allow rainwater to drain inside it.

8. Shelves, benches and fitting shall be of wood or bamboo free from iron nails and grit.

9. The capacity of a pit or a cabin per 16 sq.ft. of the base area with 30% more area as working space.

10.At least 6 feet high barbed-wire fencing shall be provided all round at a distance of not less than 30 feet from the storage cabins/pits. Other safety distance shall be maintained as per Schedule VI of the Explosives Rules, 1940.

22..22..99 CCOONNDDIITTIIOONNSS FFOORR TTRRAANNSSPPOORRTT OOFF CCOOMMMMEERRCCIIAALL EEXXPPLLOOSSIIVVEESS IINN AA VVAANN BBYY RROOAADD88

1. The vehicle shall be in perfect serviceable condition in all respects.

2. The words DANGER and EXPLOSIVES shall be written conspicuously in Red color on three sides of the vehicle so as to be clearly visible from a distance and electric lamp with siren shall preferably be fixed on the vehicle for use in emergency.

3. There shall be no naked iron or steel in the interior of vehicle and no footwear with exposed iron or steel shall be worn by attendants on the vehicle.

4. The interior of vehicle shall be kept thoroughly clean from grit, oil rag, waste and other combustible material at all times.

5. All electric cables must be heavily sheeted. No junction boxes, switches, fuses, lamp fittings or other electrical appliances or cable joints shall be allowed within the cargo compartment.

6. A quick action cut-off valve shall be fitted to the fuel pipe in an accessible position.

7. The driver shall not be under the age of 21 years and the attendant shall not be under the age of 18 years. The driver shall hold heavy duty driving licence.

8. Persons incharge of the vehicle must be experienced in the handling of explosives.

9. All persons engaged in loading, unloading or conveying explosives shall observe all necessary precautions for the prevention of accidents by fire or explosion and no unauthorized person shall be allowed to have an access to the vehicle.

10. No person shall smoke while driving, attending to or working on the vehicle and no matches or sources or fire of heat, smoking material shall be carried on the vehicle.

8 Website of Explosive Department Sindh


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11. Every consignment of explosives for transportation shall be accompanied by a license in Form C and a pass issued by licenses in Form H and attested photo-copies of these documents shall be sent to the Chief Inspector of Explosives, Karachi and to the Inspector of Explosives and District Magistrate in whose jurisdiction the magazine9 in situated.

12. Loading and unloading shall NOT be done in the vehicle while its engine is running or its fuel tank is being filled.

13. Explosives in excess of the authorized limit shall NOT be carried on the vehicle.

14. Damaged packages shall NOT be loaded in the vehicle.

15. Explosives shall NOT be carried in the Driver s Cabin under any circumstances.

16. Detonators or other explosives containing their own means of ignition and Fire works shall NOT be loaded together or with any other explosives and must be transported separately.

17. All packages must be well secured and effectively protected against weather and the risk of pilferage or sabotage.

18. All packages must be appropriately labeled as to the nature of Explosives.

19. If loading, unloading takes place in wet weather, adequate stops shall be taken to keep the packages of Explosives dry.

20. The loading or unloading of explosives when once begun shall be proceeded with all due vigilance until the same has been completed.

21. No extra fuel shall be carried during conveyance other than in the fuel tank of the vehicle.

22. Vehicle shall not be taken to any garage or repair station while carrying explosives and condition of types, breaks and explosives shall be checked after short breaks during journey.

23. Efficient locking arrangement shall be provided at all times.

24. Efficient chemical fire-extinguisher of adequate capacity shall be carried on the vehicle.

25. At least one person (attendant) shall accompany the driver and the vehicle containing explosives shall not be left unattended except when absolutely necessary.

26. Other vehicle with its engine running shall NOT as far as possible be allowed within fifty feet of the vehicle containing explosives.



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27. The vehicle shall NOT be driven at the speed more than 30 miles (50 Kilometers) an hour on smooth road.

28. Populated areas shall be avoided as far as possible and vehicle SHALL NOT be parked in any building during journey.

29. The vehicle shall NOT be driven in any street or public place within the limits of a municipality or cantonment except and in accordance with the conditions of a written permit granted by the District Authority.

30. Explosives shall be delivered to authorize consignee only.

31. In case of any emergency, one person shall warn other traffic and one person shall inform police, and the consignor or consignee, as may be convenient by the quickest possible means.

32. One copy of the drawing approved by the Department of Explosives shall always be kept with the driver of the vehicle for production on demand by an inspecting officer.

33.. MMAARRKKEETT IINNFFOORRMMAATTIIOONN

33..11 CCUURRRREENNTT MMAARRKKEETT

Currently there are 61 LPG marketing and distribution companies operating in Pakistan10. Based on the information provided by the existing players, about 50 of them are operating and rests are waiting for the allocation of LPG quota.

LPG’s use as fuel for cooking and household requirements is most common in the rural areas of Punjab and NWFP (with a daily demand of about 500 to 800 ton). In the southern region of the country, Karachi is the biggest consumer of LPG with an approximate daily demand of about 250 to 300 ton. These indicative figures are expressed by the LPG marketing company representatives and could vary based on specific market circumstances.

33..22 MMAARRKKEETT PPOOTTEENNTTIIAALL

Attraction for LPG among the commercial vehicle operators (particularly taxi and auto rickshaw) in Karachi and other large cities & its demand in the rural areas of Punjab which account for about 70% of the total demand makes the LPG sector an attractive business. Following comparison of different fuels and their respective benefit analysis gives a clear picture of the LPG attractiveness among the automotive users.

Petrol drive costs Rs. 5.25 per kilometer as against Rs. 1.75 for L.P.G and Rs. 1.25 for CNG. On an average mileage of 40 kilometers, an average driver using LPG makes a

10 Based on discussions with the existing players


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saving of Rs. 140 per day, and for a CNG operated vehicle, the saving is Rs 160 per day. This clearly suggests a cost benefit of LPG and CNG over petrol hence has a greater attraction for vehicle operators.

With a view to ensure adequate supplies of LPG in remote, rural and hilly areas of the country, and to halt deforestation, OGRA has ruled out a policy that all LPG marketing companies receiving LPG from sources in Punjab and NWFP will be obligated to supply at least 7% of their local LPG in Northern Areas, 7% in AJK and 6% in FATA. All LPG marketing companies receiving LPG from sources in Sindh and Balochistan will be obligated to supply at least 10% of their local LPG in Balochistan province.

33..33 LLOOCCAALL PPRROODDUUCCTTIIOONN OOFF LLPPGG1111::

At present, the following eight producers are producing around 1600 M. Tons of LPG per day in the country.

11 www.mpnr.gov.pk

S.No. Name of Producers Location/Phone No.

1 Pakistan Refinery Limited7-B, Korangi Industrial Zone, Korangi, Karachi. Ph: 021-5062005.

2 National Refinery Ltd. Karachi. Ph. No.021-5064981-86

3 Attock Refinery Limited Morgah, Rawalpindi. Ph.No.051-5487041.

4Pak-Arab Refinery Ltd (PARCO)

Korangi Creek Road, Karachi Ph. 021-5090100-13

5 Pakistan Petroleum Limited PIDC House, Dr.Ziauddin Ahmed Road, Ph. 021-5682562

6Oil & Gas Development Company Ltd.

OGDCL, Building, Jinnah Avenue, Islamabad Ph.No.051-9209701

7 Pakistan Oilfields Ltd. Morgah, Rawalpindi. Ph.No.051-5487589

8 Orient Petroleum Inc.Hayat Hall, Block No.2, Diplomatic Enclave No.1, G-5, Islamabad Ph. No. 051-2274261

9Jamshoro Joint Venture Limited

Associated House, House No. 8, Street No.37, F/7-1, Islamabad, Ph. No. 051/2652727-29


Page 16 of 32


33..33..11 LLPPGG PPRROODDUUCCEEDD1122

Following table provides LPG producers with their production sites and quantity of produce during 2006-07:

Producer Name of Field LPG Produced (M.Tons)OGDCL Dhakni 572

Dhodak 5,750Kunnar 1,104

Bobi 2,500

Sub Total 9,926POL Dhulian 287

Meyal 622Pariwali 1,854

Pindori 2,379

Turkwal 3Sub Total 5,145

OPI Ratana Mayal 62Naimat Basal 1,404

Siraj South 0

Umar 0

Sub Total 1,466PPL Adhi 2,133PRL 1,192PARCO 11,332NRL 1,481ARL 851JJVL. 13,438Grand Total 46,964Average/day 1,514

33..33..22 LLPPGG UUPPLLIIFFTTEEDD BBYY MMAARRKKEETTIINNGG CCOOMMPPAANNIIEESS1133

Data on LPG uplifted by the LPG marketing companies during past one year has been provided in the following table:

12 www.mpnr.gov.pk

13 www.mpnr.gov.pk


Page 17 of 32


Name of the Company LPG Uplifted (M. Tons)SHV Energy 4,972Fon Gas 3,350Wak Limited 3,219Shell Gas 2,786Pakistan State Oil 1,719Caltex 1,984Eirad Company Limited 2,112Lub Gas 4,466Pakistan Oil Fields Limited 6,079Mehran LPG 2,483Baluchistan Gas 836Cap Gas 625Sun Gas 607Petrosin Gas 385Muhammadi Gas 2,048Ravi Gas 1,216Aftab Traders 1,180Agha Gas 144Bolan Gas 184Pro Gas 1,122Gas Man 118Power Gas 283Links International 448Synergy Gas 717Baluchistan Minerals 148Cress LPG 686Noor LPG 454Petroleum Gas 424Tez Gas 656Soneri Gas 0Sam Gas 538Super Star 261AB Gas 222Golden Gas 500Wyne Gas 124TOTAL. 47,096


Page 18 of 32


44.. LLPPGG DDIISSTTRRIIBBUUTTIIOONN PPRROOCCEESSSS ((SSUUPPPPLLYY CCHHAAIINN))

Typical distribution process and supply chain of LPG has been illustrated in the following diagram:

LPG DISTRIBUTION PROCESS

Marketing and distribution companies uplift LPG from the production site using own/rented bowzers and store it at their storage site. In Karachi such sites are located at Port Qasim, Hub, Super Highway etc. Marketing/distribution companies which are also known as bottling companies fill gas cylinders with LPG and store them for distribution. Appointed Distributors/Sub-distributors bring their gas cylinders on their own vehicles on the marketing company site, get them filled (or exchange them with the filled cylinders), make payment and carry their cylinders on the distribution point. From their distribution points cylinders are supplied to the retailers or agents from where it is provided to the end user. In case of household or commercial use small capacity cylinders (normally 6 kg to 11.8 kg) are further filled and supplied to the users directly by the sub-distributor. This filling process also be carried out at marketing company site and sub-distributors uplift cylinders from the site and store them at their location, from where they are distributed among households and commercial users i.e. hotels etc.

44..11 PPRROODDUUCCTTIIOONN PPRROOCCEESSSS OOFF LLPPGG

There are three methods for the production of LPG: 1) Extracted from natural gas: 2) By product of Oil refining process: 3) Produced during Oil refining process.

However, it should be noted that from natural gas, LPG can only be extracted from the points where propane and butane is mixed with the natural gas in certain quantity. In the following lines production/extraction process of LPG from natural gas has been elaborated.

The patented AET Process LPG Recovery Unit technology utilizes non-cryogenic absorption to recover C2+ or C3+ natural gas liquids (LPG’s) from natural gas streams. The absorbed LPG’s in the rich solvent from the bottom of the LPG absorber

LPG ProductionCompany

LPG Marketing& Distribution

Company

LPG Distributor /Sub-

Distributor

LPG Retail Agent

LPG Retail SalesShop


Page 19 of 32


column are fractionated in the solvent regenerator column which separates LPG’s overhead and lean solvent produced at the bottom. After heat recuperation, the lean solvent is pre-saturated with absorber overhead gases. The chilled solvent flows in the top of the absorber column. The separated gas from the presaturator separator formsthe pipeline sales gas.

Depending upon the economics of ethane recovery, the operation of the AET LPG plant can be switched on-line from ethane plus recovery to propane plus recovery without affecting the propane recovery levels. The AET LPG plant uses lighter lean oils. For most applications, there are no solvent make-up requirements. AET can design retrofits for heavy lean oil facilities.

Production Process Flow Diagram

44..22 RRAAWW MMAATTEERRIIAALL RREEQQUUIIRREEMMEENNTT

The only raw material for the LPG marketing and distribution business would be LPG. For the proposed project, about 5 ton of LPG will be required as raw material on daily basis at initial stages of the project. The requirement of LPG would increase by 10% annually with an increase in supply with the same proportion.

44..33 TTEECCHHNNOOLLOOGGYY OOPPTTIIOONNSS

For a LPG storage and distribution plant, technology options are important while selecting filling equipment, storage tanks and filling pumps. For the proposed project following technology options have been assumed:


Page 20 of 32


Technology Company/SupplierGas filling dispensers French SiragaPumps German CE SterlingStorage Tanks Pakistani Descon Engineering

Contact addresses of the companies are given below:

Descon Headquarters Lahore18 km Ferozepur Road, Lahore, 53000 PakistanTel: (92 42) 5990034, 5805134 UAN : (92 42) 111-DES-CON Fax: (92 42) 5811005, 5811135 Email: [email protected]

Descon Karachi Office 9th Floor Business Avenue, 26-A Block-6, P.E.C.H.S, Main Shahrah-e-Faisal, Karachi,75400 - Pakistan Phone: +92.21.454.4481-4 Fax: +92.21.454.4480 E-mail: [email protected] Person: Murtuza Ali ([email protected])

Siraga France and CE Sterling Germany can be contacted using the following URLs

http://www.siraga.com/siraga/siraga-contacts.php?langue=uk

http://www.sterlingfluid.com/sterlingsites/group/index.htm

44..44 PPLLAANNTT AANNDD MMAACCHHIINNEERRYY RREEQQUUIIRREEMMEENNTT

Machinery required for the LPG distribution plant would include the following:

PLANT AND MACHINERY

(In Rs.)

S. No.

MachineRequired

No. of Units

Unit PriceTotal Cost(in Rupees)

Local/Imported

1 Storage Tank - 50 tonne 1 5,000,000 5,000,000 Local

2 Storage Tank - 30 tonne 1 3,000,000 3,000,000 Local

3 Filling Dispenser 4 500,000 2,000,000 Imported

4 Pumps 2 1,100,000 2,200,000 Imported

5 Cylinders (11.8 KG) 500 1,500 750,000 Local

6 Cylinders (45.4 KG) 500 3,800 1,900,000 Local

7 Support Structure - Piping & Valves 2,500,000 Local

8 Fire Fighting Equipment 2,500,000 Local

Total 19,850,000


Page 21 of 32


There are few local suppliers/ manufacturer of storage Tanks and other related machinery for LPG distribution setup. During the course of study for this pre-feasibility, we have contacted the following local manufacturer and fabricator of LPG distribution setup:

44..66 PPLLAANNTT AANNDD MMAACCHHIINNEERRYY MMAAIINNTTEENNAANNCCEE

All machines require routine cleaning and maintenance after every three months and an annual service which costs around 1% to 5% of the total cost depending upon the use of the machine and operator's skill. We have assumed an average of 3% of the initial plant and machinery cost as the annual maintenance cost.

55 LLAANNDD AANNDD BBUUIILLDDIINNGG RREEQQUUIIRREEMMEENNTT

55..11 SSIITTEE DDEEVVEELLOOPPMMEENNTT

LPG Plant is sophisticated and require fool proof system, because Liquefied Petroleum Gas is flammable and during site development, prescribed instructions for fire extinguishment systems must be complied with. Qualified Consultant Engineers shall be engaged for preparing structural drawings for LPG site.

55..22 LLAANNDD RREEQQUUIIRREEMMEENNTT FFOORR PPLLAANNTT

In order to comply with structural standards prescribed by the explosive department and provisioning for the future expansion in the storage capacity, a minimum of 2 Acre areawould be required for the proposed LPG setup.

55..33 BBUUIILLDDIINNGG CCOONNSSTTRRUUCCTTIIOONN CCOOSSTT

The LPG storage and distribution site can be divided into three areas:

1. Administration block/Office area2. LPG dispensing/filling area3. LPG supply taking area (Bowzer platform and supply area)

Administration block will consist of about 800 square feet area which will be used for accounts, administration and other official purposes. LPG dispensing/filling area will be used to fill cylinders. Four LPG dispensers will be installed at this place. It is estimated that around Rs. 3 million would be required for the site development and construction. Following table provides detailed breakup:

S.No. DetailsSize/Area (Sq. Ft.)

Civil Works /Construction Cost/Sq. Ft.

Total Construction

Cost

1 Boundary wall of the site 2,200,000

2Filling Area (plate form & Shade for Dispenser) 3,000 150 450,000

4 Office Area 800 500 400,000


Page 22 of 32


Total Construction Cost 3,028,000

As the plan and machinery to be installed on the site would be of permanent nature and would be immovable for a longer period, it has been assume that the plot will be purchased for the proposed business purpose. This will cost around Rs. 20 million.

66 HHUUMMAANN RREESSOOUURRCCEE RREEQQUUIIRREEMMEENNTT

A team of approximately 20 staff would need to be hired for establishing and running LPG marketing and distribution business. The following table presents details about the staff to be hired and their estimated payroll requirements.

Staff TitleNo of

PersonsIndividual

SalaryMonthly Salary

Annual Salary

Business Unit Manager/Owner 1

Plant Staff

Plant Incharge 1 60,000 60,000 720,000

Supervisor - Operations 1 25,000 25,000 300,000

Supervisor - Dispatch 1 18,000 18,000 216,000

Operators - Dispenser 3 8,000 24,000 288,000

Clerk / Gate Keeper 2 6,000 12,000 144,000

Technical Staff 1 10,000 10,000 120,000

Guard 2 6,000 12,000 144,000

Total Plant Staff 12 161,000 1,932,000

General Administration/ Marketing Staff

Marketing Manager 1 45,000 45,000 540,000

Accountant 1 10,000 10,000 120,000

Office Assistant 2 5,000 10,000 120,000

Guard 2 5,000 10,000 120,000

Driver 3 5,000 15,000 180,000

Total 9 90,000 1,080,000

TOTAL 21 251,000 3,012,000

66..11 EEXXPPEERRIIEENNCCEE

Dispatch Manager will be responsible for the collection, filling and dispatch of cylinders to and from the sub-distributors. As the operations at LPG bottling site will be of technical sort, it would need experienced staff for loading/unloading the product, maintaining of storage tanks and compliance with the safety standards which would be difficult if staff does not has relevant experience. It is proposed that staff with a minimum of 2 to 3 years of relevant experience should be hired. It is also recommended that the operations staff be provided with proper / regular training for handling of LPG.


Page 23 of 32


77 FFIINNAANNCCIIAALL AANNAALLYYSSIISS && KKEEYY AASSSSUUMMPPTTIIOONNSS

The project cost estimates for the proposed “LPG Marketing and distribution business” have been formulated on the basis of discussions with industry stakeholders and experts. The projections cover the cost of land, Plant, machinery and equipment including office equipment, fixtures etc. Specific assumptions relating to individual cost components are given as under.

77..11 LLAANNDD && BBUUIILLDDIINNGG

Land for setting up the proposed LPG Production & Distribution unit would be purchased which will cost around Rs. 20 million {for a 2 Acre Plot at industrial area of Port Qasim}.

For the site development, construction and renovation of office approximately Rs. 3 million will be required, which has been assumed to be depreciating at 10% per annum using diminishing balance method.

77..22 OOVVEERRAALLLL PPLLAANNTT && OOFFFFIICCEE RREENNOOVVAATTIIOONN

To renovate the Plant / office premises in Year 5 and Year 10 a cost would incur for which an amount equivalent to 5% of the total construction cost is estimated.

77..33 PPLLAANNTT && OOFFFFIICCEE FFUURRNNIITTUURREE

A lump sum provision of around Rs. 310,000 for purchase of furniture is assumed. This would include table, desk, chairs, air conditioner and office decoration articles etc. The breakup of these expenses is given below:

S. No. Item Number Cost Total Cost

1 Table & Chair for Owner (at Office) 1 20,000 20,000

2 Tables & Chairs (for operations staff) 2 20,000 40,000

3 Tables & Chairs (Office) - Other Senior Staff 4 20,000 80,000

4 Waiting Chairs (Office & Plant) 20 1,000 20,000

5 Curtains/AC & Interior Decoration for office 1 50,000 50,000

6 Curtains & Interior Decoration for Factory 1 50,000 50,000

7 Electrical Fittings & Lights - Office 1 30,000 30,000

8 Electrical Fittings & Lights - Factory 1 20,000 20,000

Total 310,000


Page 24 of 32


77..44 DDEEPPRREECCIIAATTIIOONN TTRREEAATTMMEENNTT

The treatment of depreciation would be on diminishing balance method at the rate of 10% per annum on the following. The method is also expected to provide accurate tax treatment.

1. Machinery & Equipment2. Land & Building Construction 3. Vehicles4. Furniture and Fixtures etc.

77..55 UUTTIILLIITTIIEESS

LPG Marketing and distribution business will be operated using electricity for plant operations. This would draw considerable amount of electricity. The cost of the utilities including electricity, diesel/fuel, telephone; and water is estimated to be around Rs. 1.35 million per annum. Breakup of the utilities expenses has been given below:

UtilityTotal Monthly

Cost (Rs.)

Total Annual

Cost (Rs.)

Annual %age

Increase

1. Electricity 75,000 900,000 5%2. Diesel for Vehicles 20,000 240,000 5%3. Water 2,500 30,000 5%4. Telephone 15,000 180,000 5%

Total 112,500 1,350,000

77..66 WWOORRKKIINNGG CCAAPPIITTAALL RREEQQUUIIRREEMMEENNTTSS

It is estimated that an additional amount of Rs. 2 million (approximately) will be required as cash in hand to meet the working capital requirements. These provisions have been estimated based on the following assumptions for the proposed business.

Description Amount in Rs.

First Three Months Salaries (Production staff) 483,000

First Three Months Utilities Charges 337,500

First Three Months Misc. Expenses 30,000

Bowzer Rent & Transportation 325,000

Raw Material 850,000

Total 2,025,500


Page 25 of 32


77..77 VVEEHHIICCLLEE FFOORR SSUUPPPPOORRTT

A loading vehicle would be required for providing services for the transportation of cylinders and staff traveling from different locations. For this purpose, a minimum of two vehicles have been proposed which will cost around Rs. 400,000/- each.

77..88 SSEELLLLIINNGG && DDIISSTTRRIIBBUUTTIIOONN EEXXPPEENNSSEESS

Although marketing, promotion and distribution activities are limited in the LPG business, for the purpose of this pre-feasibility, it has been assumed that the proposedLPG Marketing and Distribution business would work with the sub-distributors and may require direct supply to the key customers. The business may also need to give incentives to the marketing staff for the business development purpose. Besides that, advertising material would also need to be printed on periodical basis announcing incentives and facilities to the customers. These arrangements would raise a considerable cost to the business for which an amount equivalent to 1% of the annual sales has been assumed.

77..99 MMIISSCCEELLLLAANNEEOOUUSS EEXXPPEENNSSEESS

Miscellaneous expenses of running the business are assumed to be Rs. 10,000 per month. These expenses include various items like office stationery, daily consumables, traveling allowances etc. and are assumed to increase at a nominal rate of 10% per annum.

77..1100 BBOOWWZZEERR RREENNTT && TTRRAANNSSPPOORRTTAATTIIOONN EEXXPPEENNSSEESS

The business would have to bear the cost of LPG transportation from production site to the storage plant. For this purpose bowzers will be required to be hired on rental basis. It has been assumed that the per ton cost of LPG transportation will be between Rs. 700-900 depending on the prevalent market condition and availability of the bowzers. It is estimated that rental cost of a 30 ton bowzer will be around Rs. 25,000/.

77..1111 LLPPGG IINNVVEENNTTOORRYY

The proposed setup is assumed to maintain a minimum quantity of LPG to act as safety stock against any shortage from supplier and to meet regular market demand. For this purpose the storage facility will maintain 25 ton LPG at every point in time.

77..1122 RREEVVEENNUUEE PPRROOJJEECCTTIIOONNSS

LPG business is carried out on cash basis and no credit policy factually does exist. Therefore, no credit provisioning has been assumed, whereas, receivable period is also


Page 26 of 32


found to be almost zero. It has been assumed that the proposed business will initially sell 5 ton LPG per day which will grow by 10% annually. Besides that, a 10% increase in sales price has also been assumed on annual basis.

77..1133 AACCCCOOUUNNTTSS RREECCEEIIVVAABBLLEESS

Considering the industry norm, particular to the LPG Production & Distribution sector and all of its allied industries, it has been assumed that 100% of the sales will be on cash.

77..1144 FFIINNAANNCCIIAALL CCHHAARRGGEESS

It is assumed that long-term financing for 5 years will be obtained in order to finance the project investment cost. This leasing facility would be required at a rate of 15% (including 1% insurance premium) per annum with 60 monthly installments over a period of five years. The installments are assumed to be paid at the end of every month.

77..1155 TTAAXXAATTIIOONN

Tax rate used is that applicable on SMEs which is 20%.

77..1166 CCOOSSTT OOFF CCAAPPIITTAALL

The cost of capital is explained in the following table:

Particulars RateRequired return on equity 20%Cost of finance 15%Weighted Average Cost of Capital 17.5%

The weighted average cost of capital is based on the debt/equity ratio of 50:50.

77..1177 OOWWNNEERR’’SS WWIITTHHDDRRAAWWAALL

It is assumed that the owner will draw funds from the business once the desired profitability is reached from the start of operations. The amount would depend on business sustainability and availability of funds for future growth.

77..1188 AANNNNEEXXUURREESS

77..1188..11 SSUUMMMMAARRYY OOFF KKEEYY AASSSSUUMMPPTTIIOONNSS

77..1188..22 CCOOSSTT AANNDD RREEVVEENNUUEE SSHHEEEETT

77..1188..33 PPRROOJJEECCTTEEDD IINNCCOOMMEE SSTTAATTEEMMEENNTT

77..1188..44 PPRROOJJEECCTTEEDD BBAALLAANNCCEE SSHHEEEETT

77..1188..55 PPRROOJJEECCTTEEDD CCAASSHH FFLLOOWW SSTTAATTEEMMEENNTT


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