I. Introduction The discovery of Liquefied Petroleum Gas contributed a huge change in the way of living of people all over the world. It is very useful in cooking and also in transportation as a substitute for crude oil. It always helps to know how LPG usage can also cause some disadvantages. The disadvantage of using LPG has something to do with storage and safety. In storage of LPG, you require secure tanks and cylinders and the gas has to be kept pressurized. Since Liquefied Petroleum Gas is highly inflammable it’s prone to fire accidents. This can also be observed by the number of cases LPG cylinders have exploded and resulted in serious damages to lives and property. II. Background and Historical Account of the Industry A. History/ Discovery 1910 Dr. Walter Snelling, of the U.S. Bureau of Mines examine gasoline to find out why did it evaporated so fast and discovered propane, butane, and other light hydrocarbons are evaporating gases. He built a still that could split the gasoline into its liquid and gaseous components and sold his invention to Frank Phillips, the founder of Phillips Petroleum Company. 1
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I. Introduction
The discovery of Liquefied Petroleum Gas contributed a huge change in the
way of living of people all over the world. It is very useful in cooking and also in
transportation as a substitute for crude oil.
It always helps to know how LPG usage can also cause some
disadvantages. The disadvantage of using LPG has something to do with storage
and safety. In storage of LPG, you require secure tanks and cylinders and the
gas has to be kept pressurized. Since Liquefied Petroleum Gas is highly
inflammable it’s prone to fire accidents. This can also be observed by the number
of cases LPG cylinders have exploded and resulted in serious damages to lives
and property.
II. Background and Historical Account of the Industry
A. History/ Discovery
1910
Dr. Walter Snelling, of the U.S. Bureau of Mines examine
gasoline to find out why did it evaporated so fast and discovered
propane, butane, and other light hydrocarbons are evaporating gases.
He built a still that could split the gasoline into its liquid and gaseous
components and sold his invention to Frank Phillips, the founder of
Phillips Petroleum Company.
1912
Propane gas was used for cooking food in the home.
1913
The first car powered by propane gas was ran.
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1915
Liquefied Petroleum Gas has been used as a transportation
fuel, mainly in heavy trucks and forklift vehicles, and was used around
the world for more than 60 years.
1920
Liquefied Petroleum Gas was sold commercially
1987
The World LP Gas Association was established and its goal is
to be the authoritative voice of the global LP Gas industry representing
the full LP Gas value chain. Its aim is to add value to the sector
through driving premium demand for LP Gas, while also promoting
compliance to good business and safety practices.
B. History in the Philippines Setting
1940
Shell products, including Shellane LPG were being sold to more
areas in the Philippines through installations and depots set up in
strategic points throughout the country.
1954
Caltex established the first oil refinery in Bauan, Batangas.
1960
Stanvac established an oil refinery, with the construction of what
is now the biggest oil refinery in the country, the Bataan Refining
Corporation.
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1962
A local player, Filoil Refinery, began its operations.
1971
Republic Act 6173 was passed creating the Oil Industry
Commission (OIC) which was tasked to regulate the oil industry and to
ensure the adequate supply of petroleum products at reasonable
prices.
1972
Presidential Decree 87 or Oil Exploration and Development Act
of 1972 was signed creating a Petroleum Board. Presidential Decree
334 created the Philippine National Oil Company.
1973
The government created a new body, the Philippines National Oil
Corporation (PNOC) with the intention of developing a full-range of
petroleum-related operations, including refining, marketing, shipping,
transporting, and storage. One month later, PNOC launched its refining
and marketing wing when it acquired Esso Philippines--marking the
end of Esso's involvement in the country--and the refining and
marketing operations of Filoil. Esso Philippines was then renamed as
Petrophil Corporation and later as Petron Corporation.
1975
The Energy Conservation Movement was launched through the
issuance of Batas Pambansa '76 which enabled the DOE to implement
energy conservation programs.
1977
Presidential Decree 1206 created the DOE with its two line
bureaus: Bureau of Energy Development and Bureau of Energy
Utilization.
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1979
The commercial production of the country's first oil-field, Nido,
started at the rate of 40,000 barrels per day.
1982
Masinloc, the country's third oil field started commercial
production.
1984
President Ferdinand Marcos created the Oil Price Stabilization
Fund (OPSF) as a buffer fund to stabilize oil prices. When world oil
prices were lower than the corresponding fixed pump prices, the firms
contributed to the fund.
1989
Occidental Petroleum discovered the Camago-1 gas field.
1990
Republic Act 6957 authorized the financing, construction, operation
and maintenance of infrastructure projects by the private sector though
the BOT scheme. The West Linapacan oil field was discovered.
1995
Liquigaz started to operate.
1996
Republic Act 8184 or the Oil Tax Restructuring Bill was signed to
restructure the excise taxes on petroleum products.
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1997
The launching of the "Window of Opportunity" which is a special
package for foreign and local investors in petroleum exploration and
development in the country.
1998
The implementation of Republic Act 8479 or the downstream oil
industry act of 1998. O-Ilaw project was launched, aimed at electrifying
100 percent of all barangays in the country by 2006.
1999
Passage of Republic Act 8749 or the Philippine Clean Air Act of
1999 wherein DOE will be one of the implementing agencies.
2000
The establishment of a "Corridor of Focus", an investment package
under the "Window of Opportunity" which is composed of more
prospective areas near the Malampaya gas infrastructure or the path of
the future Trans-ASEAN Gas Pipeline.
2000
The Liquefied Petroleum Gas Industry Association, Inc. ( LPGIA ) is
the only industry association from the Philippines which is a member of
the World LPG Association, the global voice for the LPG industry with
150 members from 90 countries, and which was given Consultative
Status with the UNESCO.
2002
The full commercial operation of the Malampaya natural gas
downstream oil sector. The Joint Congressional Power Commission
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(JCPC) endorsed to President Arroyo the implementing rules and
regulations (IRRs) of the Republic Act No. 9136 or Electric Power
Industry Reform Act (EPIRA). The 1,500 MW Ilijan natural gas project
went on full commercial operation.
2009
A bill had been passed in the House of Representatives with that
would have the effect of closing down the establishments of
independent LPG players and hand back control of the LPG sector to
the oil majors. LPGMA and its allied group, LPGRA, lobbied hard in
the Senate to oppose the passage of the law. Congress has now
adjourned without the LPG bill being approved. It will not be surprising
if the bill will resurrect in the next Congress.
B. Personalities Involved and Significant E vents and Major
Breakthroughs in its Operation
In 1972 Presidential Decree 87 or Oil Exploration and
Development Act of 1972 was signed creating a Petroleum Board.
Presidential Decree 334 created the Philippine National Oil
Company during the administration of Ferdinand Marcos.
In 1977 the Presidential Decree 1206 created the DOE with its two
line bureaus: Bureau of Energy Development and Bureau of Energy
Utilization during the administration of Ferdinand Marcos
In 1984, then President Ferdinand Marcos created the Oil
Price Stabilization Fund (OPSF) as a barrier fund to stabilize oil
prices. When world oil prices were lower than the corresponding fixed
pump prices, the firms contributed to the fund. When the opposite
happens, the firms drew from the fund.
When Corazon Aquino took over as President, she created the
Energy Regulatory Board (ERB) through Executive Order (EO) 172.
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The ERB basically took over the functions of the OPSF. Most
importantly, the ERB was tasked with setting the prices of petroleum
products. It was also during her term that the Department of Energy
(DOE) was created through RA 7638. The Act was important for
mandating the DOE to provide for an environment of free market and
to institute, with the President’s approval, the deregulation of the oil
industry.
As part of its general thrust of opening the Philippine economy
to market forces, the Ramos administration passed into law on
March 28, 1996, RA 8180, “An Act Deregulating the Downstream
Oil Industry.” It took effect on April 16, 1996. The major effect of this
Act was allowing oil firms to set their own prices. Unfortunately, the
Asian crisis caused the peso to depreciate from P28:US$1 to
P40:US$1. Naturally, the oil companies increased their pump prices,
since the Philippines imports practically all of its crude oil
requirements.
Under Arroyo Administration the Senate bill no. 264 was
approved and introduced by Senator Osmena III an Act Rationalizing
the Manufacturer, Repair, Requalification, Sale and Distribution of
Liquefied Petroleum Gas (LPG) Cylinders, providing penalties for
violation thereof and for other purposes.
III. Performance of the Industry
A. Number of Players/Competitors in the Industry and Market Share
As of 2011, based on the data from the Department of Energy,
there is a total of 8 LPG manufacturers in the Philippines and these
are: Petron, Petronas, Liquigaz, Eastern, Seaoil, Prycegas, Total Pet.
and Shell.
The top three LPG players based on the market share from the
Department of Energy was Petron got the biggest market share with a
39.50 percent share, followed by Liquigaz with a share of 26.40
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percent. Next was Shell with a share of 16.50 percent and lastly
17.60 percent came from the other players in the industry.
Figure 1 - Market Share (Department of Energy)
The top three players in the industry as of 2011
B. Types of Product/ Service produced (Downstream Oil Industry)
Liquefied Petroleum Gas (LPG)
Refilling of LPG cylinders
Premium
Regular
Kerosene/AV Turbo
Diesel
Fuel Oil
Others
8
39.50%
26.40%
16.50%
17.60%
Top Industry as of 2011
PetronLiquigazShellOther Players
C. Type of Competition (to identify the market structure)
Assumption Characteristics Market Structure
# of Sellers Few
Oligopoly
Conditions of Entry Difficult
Product Differentiation None to Substantial
Seller’s influence on
price
Very influential
Buyer’s influence on
price
None
Extent of strategic
behavior
Very extensive
# of buyer Many
D. Degree of Competition among the players
Liquefied Petroleum Gas (LPG) is an Oligopoly type of market
because there are only 8 companies that can supply in the whole
industry, which are Petron, Liquigaz, Prycegas, Isla LPG and
Petronas. The entry in this kind of business is difficult because new
entrants need a lot of capital, documents etc. to be able to operate.
The entry in this kind of business is difficult because economies of
scale. There are many buyers in this kind of industry because people
usually people need LPG to cook food and now it is widely used in
cars such as in taxi’s as a substitute to the use of crude oil and also
because it is much cheaper. The seller’s has the influence on the
price because the players are few and can set price but must take in
to consideration what is the price decision of the competitors.
Strategic behavior is very extensive because companies need to
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strategize what to do in a specific situation and then pursuing tactics
that maximize their gains and minimize losses. The influence of buyer
towards this industry is none because the world market dictates the
price.
E. Pricing Behavior used by the players for revenue generation
The chief cause of oil price increases was the effect of
increases in the international price of oil specifically in the world price
of Dubai crude, since the researchers found out that Philippines
import basically all oil product requirements. Any changes that will
occur in the international oil price will give huge impact especially in
price.
Generally, oil companies appear to elevate prices at the same
time because of the nature of the product which is homogenous, also
competition is involved and market share is the focal point because
the companies wants a high profit, revenue and capital. This is an
indication that market forces are working. When products are
homogenous, when market share is the focal point, then the
competition is in full swing, people should expect that oil company’s
prices will look as if to rise and fall at the same time.
The pricing strategy for LPG is price matching strategy, in
which a firm publicizes a price and a promise to equally lower the
price offered by a competitor. Since the prices of LPG offered by the
companies in the market is almost the same as it goes down or as it
goes up, some of the companies find ways to lower their prices
because competition is involve in the industry, the companies do this
to gain a high percentage of the market share and to increase number
of new consumers and also to maintain customer loyalty. The players
in the industry can merely adjust the price into a least amount in order
to be performing same as with other competitors, this allowed the
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firms to set their own price. Since LPG is a homogenous product, it
can be distinguished as a differentiated product based on the brand,
patent, etc.
Figure 2- Price of Liquefied Petroleum Gas (Department of Energy)
The price of LPG goes up from 20.92 in 2009 to 31.33 in 2012
F. Production and cost behavior (to identify the economies of scale
and productive use of its inputs to production)
The industry’s production primarily requires a plant which
must have innovated facilities, a great number of workers and