Shell to support Govt on a sound regulatory framework

The newly appointed Sri Lankan Country Chairman and MD of Shell Gas Dr. Mahesha Ranasoma spoke of issues and plans of Shell Sri Lanka in an exclusive interview with Sunday Observer.

Dr. Ranasoma is the first Sri Lankan to be appointed to this position and here are the excerpts of the interview.

Dr. Mahesha Ranasoma

Q: What is the market share of Shell Gas in Sri Lanka?

A: Our market share is nearly eighty per cent.

Q: Could you give an overview of the operations in Sri Lanka?

A: Shell Gas Lanka Limited is a Joint Venture with the Government of Sri Lanka with the Government owning 49%.

Its core business is LPG marketing to domestic household customers as well as commercial and industrial customers such as restaurants and heavy industries. Our marketing activities revolve around our strengths in supply and distribution activities.

Currently all our LPG is imported and use state-of-the-art LPG Terminal facility to store LPG.

The LPG import Terminal is operated by Shell Terminal Lanka Limited, which is fully owned by Shell.

The LPG is distributed from this storage terminal to our central filling plant in Mabima as well as directly through LPG road tankers to industrial customers in bulk. We have an islandwide distributor and points of sale network that brings the bottled LPG in the filling plant to the consumer.

We have more than one million domestic LPG customers served through a network of over 2,000 points of sales.

We operate to highest international LPG safety standards and have proven our strength to be the reliable and safe LPG supplier.

Q: What are your plans to increase market share?

A: I would rephrase the question to "what are our plans to increase the market" rather than " increase market share". Market share is an outcome of the level of competition in the market and at this time there are only two players.

As for growing the market, there is significant opportunity given that current penetration of LPG usage, specially for domestic cooking is very low, around 25% to 30%. The vast majority of the non-LPG using households are depending on firewood and kerosene.

The majority of households who have not yet switched to LPG offers a significant market opportunity. This includes new market territories that are now in the North and the East of the country.

There are three key elements to consider in growth planning.

Firstly, creating greater awareness of comparative benefits of LPG versus other domestic energy sources, secondly, expanding the distribution network to cater to the growing demand and making investment decisions to capture the growth.

I believe that more of raising awareness regarding benefits of LPG is needed and it will have a positive impact enabling growth of the LPG market in the country.

LPG stored in a cylinder gives the household more than one month of cooking energy and depending on consumption patterns, this period can extend to over three months. The space requirement to store the LPG cylinder that provides cooking energy for over a month period is very small compared to storing, for instance, firewood for the same period.

The LPG flame is very controllable and is a cleaner source of energy that burns fully with a blue flame unlike the yellow flame of kerosene or firewood.

Switching to LPG is also creating a lifestyle change as time spent in gathering, storing and cleaning associated with firewood is all saved to use for alternative purposes including income generating activities.

One of the main concerns about LPG is its price and affordability.

If we understand that a 12.5 Kg LPG domestic cylinder could be used for, say, 6 weeks what one pays for 6 weeks of reliable cooking energy is for the family. For a family of four, using LPG to cook at least two meals per day, the energy cost of meal per day per person is less than Rs. 5. This is based on prevailing Shell Gas domestic cylinder selling prices as of today. Compared to daily expenses in a household, one must then ask if this the value and many benefits derived out of using LPG for domestic use is worth the cost or not.

In addition to raising awareness on LPG benefits and understanding the value versus cost, increasing accessibility to purchase LPG via improving our distribution network is another key element to grow the market.

The most critical element that follows awareness raising and improving our distribution network is investment in new cylinders.

So far, we have made significant investments to inject cylinders into the market, but we are increasingly faced with the dilemma of protecting our existing cylinders from unscrupulous parties operating in the market who steal our cylinders and, either cross fill or deface and re-brand with alternative colours and re-issue to the market as counterfeits.

This is causing heavy losses and we losing significant numbers of cylinders daily due to such acts by unscrupulous parties operating in the market.

On the one hand there is a potential market growth opportunity, and on the other hand, we are facing the dilemma of loss of cylinders. Laws as well as enforcement of laws governing these criminal acts including violations of our intellectual property rights must come urgently into force to act firmly against these unscrupulous parties who steal our cylinders and cross-fill/re-brand them.

We have to simultaneously fight to protect our cylinders, protect our customers from being exposed to counterfeits whilst growing the market and continuously adding value to our loyal customers.

Q: How is the competition?

A: As you are aware, there are only two players in the LPG market in the country today.

In my previous assignment in Vietnam, the level of competition was far greater than in Sri Lanka with around 70 to 80 players in the market.

I think, what we need to ask is, why there is no competition in the market and why haven't more players entered the market since it was opened to competition nearly a decade ago.

There is a lack of a proper regulatory framework for the LPG industry and legalised safety standards. There is no independent LPG industry Regulator.

This needs to be resolved and resolved urgently and the Government must step up its role to set up a proper Regulatory Framework and create an even playing field for the LPG industry.

Such an environment with "rules of the game" well defined, LPG international safety standards legalised, intellectually property assets well protected with free and open market competition, will surely attract more competition into the market and will immensely benefit consumers as well as the industry itself.

Q: Any price increases in the near future?

A: Both Shell Gas and Laugfs have separate pricing formula agreements with the Consumer Affairs Authority (CAA) who is currently the body controlling domestic LPG prices in view of domestic LPG being listed under the Consumer Affairs Act as an essential item.

The pricing formula is a very simple cost based formula which takes into account the costs.

The major cost elements in the formula are the product cost and the shipping costs when LPG is imported. For locally produced LPG from the CPC the shipping cost and Port levies do not apply and therefore is cheaper.

This product as mentioned before, is exclusively given to Laugfs and Shell imports 100% of its requirements.

The pricing formula works with a two month, lag. In keeping with this formula, Shell Gas submit price revision applications to the CAA every two months.

As the CAA is now examining the price revision application, it is not appropriate to comment on the outcome at this time.

Q: What are your plans for the future?

A: We will continue to add value to our LPG customers, both domestic as well as Industrial/Commercial by meeting their energy needs as a trusted energy partner. We will leverage the investments and re-investments in LPG logistics as well as a large pool of cylinders to provide reliable supply of LPG through the widest LPG distribution network across the country.

We are also working out to expand our presence in the Northern and Eastern provinces, which were not freely accessible in the past.

Whilst we continue to improve our marketing offers to the consumers. We will continue to work with the Government and the relevant institutions including the CAA to address the current concerns and issues affecting the LPG industry in the country, and support their efforts to bring in a sound Regulatory Framework. SG