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Determining local LPG Prices

The wholesale price for Liquefied Petroleum Gas (LPG)—which has climbed by more than 75% between May 2020 and August 2021—is determined by the interplay of international market forces and the legislated formula, a representative from the country’s sole LPG importer informed The Reporter in recent exclusive interview.

National Gas Company Limited (NGC)’s Spokesperson Daniel Gutierrez underscored that there exists a legislated pricing methodology established under the National Liquefied Petroleum Gas Project Act, 2019 (the “Act” or “NGC Act”). Under this act, the fees associated with LPG’s import wholesale price are fixed, leaving no room for NGC to manipulate, Gutierrez emphasized.

The formula, which is detailed in the Act’s Schedule, speaks to the import wholesale price being comprised of the following: “landed cost”; “financing fee”; “regulatory fee”; “G&A fee”; and “O&M fee”. For its part, the “landed cost” is the aggregate of the “CIF (Buyer) Price”; “port dues”; “brokerage fees”; “port throughput fee”; and all applicable duties and taxes.

National Gas Company Limited (NGC) Spokesperson Daniel Gutierrez

The NGC representative stressed that the legislated formula only accounts for the “import wholesale” price at which NGC sells to the retailer; thereby, leaving the intermediate wholesale and retail price as something to be determined by a formula managed by the Belize Bureau of Standards (BBS)’s and the retailers. We will return to this point later in the article.  

International Prices and Mont Belvieu

For now, however, let’s keep the focus on the international prices. Gutierrez pointed to the role played by international market forces, which affect the purchase price of the commodity.

Still referencing the Act, the NGC spokesman elaborated on the fact that the CIF (Cost, Insurance, Freight) (Buyer) Price—which itself includes the FOB (Free on Board) (Supplier) Price—is influenced by the movement of international prices tracked on the Mont Belvieu index.

Actually, to be more precise, the NGC Act defines the FOB (Supplier) price as “the price in US dollars of LPG sourced from the Supplier by the Buyer at the Supplier’s dock stated in the form of Mont Belvieu (MB) +/- (X) where X is the variant from the quoted MB [Mont Belvieu] price on the date of the Supplier’s invoice.”

Now, for the purposes of clarity, there is a need to distinguish between the terms “Buyer”, “Supplier”, and “Developer” as used throughout the Act. Let’s start with the last one—Developer: simply put, this is the National Gas Company Limited (NGC).

The NGC does not directly purchase the LPG, but rather that function is put out to tender. After the tendering process is completed, the successful applicant is “contracted” by the NGC to become “The Buyer”, who in turn purchases the LPG from the Supplier. Therefore, the “Supplier” is defined simply as the “the entity from whom the Buyer sources the LPG.”

Where and at what price does the “Buyer” source the LPG? This is where the OPIS Mont Belvieu Index (or “MB index”) comes into play. According to the Act, MB signifies “the location specified in either spot or future contracts for delivery of propone in Mont Belvieu, Texas, United States of America.”

As the reader may recall, LPG or what is locally dubbed “butane gas” is a blend of propone and butane, with the former (propane) accounting for 70% of the blend in accordance with the standards set by the Belize Bureau of Standards (BBS). This is why LPG is usually described as having a 70-30 blend, which is considered to be the safest mixture to be used commercially or domestically.

Prices for local wholesale and retail LPG compared to international trends.

The MB index, therefore, serves as a salient foundational source for tracking the international price trends that influence local LPG prices. Most importantly, the data is freely accessible at multiple online sources, including the US Energy Information Administration (EIA).

The Reporter, using EIA data, took the time to average the MB prices for each month from September 2020 and September 2021. We also compared (in Belize dollars) those international prices to the BBS’s publicized prices for both local “import wholesale” and “retail” prices. Compared this way, it indeed becomes possible to visualize the correlation between the two. That is to say, as to be expected in a 100-percent-pass-through scenario, the increases on the international scene are reflected locally.

Between September 2020 and September 2021, the averaged MP propane prices (per gallon) have increased by more than 130 percent, climbing from about BZ$0.99 to BZ$2.37, respectively. This (again as an average) represents an absolute dollar-value difference of close to BZ$1.38 per gallon.  

Over that same period of time, the local import wholesale price increased by about 51 percent, increasing from last September’s BZ$2.67 per gallon to BZ$4.02 this month, an absolute dollar-value difference of about BZ$1.35

The Import Wholesale and the Retail Price

This brings us to the differential between the import wholesale and the retail prices. As shown in the table accompanying this article, there is a fixed $1.60 difference between the former and the latter (which is also illustrated by the shaded area in the accompanying graph).

Averaged MB Spot prices for Sept 2020 to 2021 compared to local wholesale and retail prices. The table also shows the difference between the local wholesale and retail prices.

As a result, the import wholesale price as of September 2021 was listed at BZ$4.02. Therefore, the retail price was estimated at BZ$5.62 per gallon—exactly a different of BZ$1.60 per gallon.

The NGC Act—and by extension NGC Limited—does not control the retail prices. At the same time, it becomes imperative to highlight that the law also states that “The Supplies Control Act shall not apply to the importation and wholesale by the Developer of LPG.” As a result, the final retail price remains within the remit of the Belize Bureau of Standards (BBS) while only the import wholesale prices are within the ambit of the NGC Act.

What’s causing international prices to climb?

Having outlined the relationship between the international prices (as tracked on the MB index) and the domestic prices, it became imperative to understand the driving forces behind these increases.

Returning to our interview with Gutierrez, he explained that the cost of LPG internationally is traditionally “cyclical” in nature. In the winter, due to its chemical properties, the demand for butane increases. Accordingly, the cost of butane increases and ultimately the cost of LPG increases. The same is true for propane, as it is used for winter heating in rural areas in the United States. However, in the spring, the total opposite historically occurs and ultimately the cost of LPG decreases.

However, while that cyclical trend was generally predictable, the demand- and supply-side shocks brought about by the ongoing COVID-19 pandemic has served to disrupt those longstanding patterns.

Gutierrez highlighted that since the onset of the pandemic, nations have had to mass produce medical-grade plastics to meet the ever-increasing demands for medical equipment such as syringes, intravenous (IV) bags, tubes, and a long list of other plastic-based medical supplies.

Without getting into all the science behind it, it is suffice to highlight that polyolefin plastics are petrochemicals, meaning that they are ultimately derived from natural gas or low-molecular weight constituents of petroleum—which includes propane and butane.

Therefore, as the demand for medical-grade plastics surged due to the ongoing pandemic, the heightened demand—coupled with a reduced supply due to lower activity among oil producers—has served to push up the global prices.

Under these conditions, Gutierrez explained that the NGC is not anticipating the international price of LPG to start declining anytime soon, especially as the introduction of the Delta variant now signals that there will likely be even more hospitalizations. This will further increase the demand for medical grade plastics.

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