FACT SHEET Liquified Petroleum Gas

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PETROLEUM TOPIC FACT SHEET Liquified Petroleum Gas

(January 2002)

What is LPG? Automotive LPG may be propane or a mixture of propane and butane, while bottled gas used for domestic purposes (such as cooking and heating) consists solely of propane. For safety reasons, automotive LPG cannot be used for domestic purposes. There are now over 3,500 automotive LPG retailers across Australia. The location of many automotive LPG retailers may be found at the Australian Liquefied Petroleum Gas Association Ltd (ALPGA) website at www.alpga.asn.au. How much LPG is produced in Australia? During 2000 Australia produced 3.3 million tonnes of LPG. Approximately 78 per cent (2.6 million tonnes) of Australia's LPG was sourced directly from underground reservoirs, generally as an associated product of crude oil and natural gas production. This is known as naturally occurring LPG. The remaining 22 per cent (0.7 million tonnes) of Australia's LPG production is extracted from crude oil during the refining process at eight refineries located near Australia's major mainland cities. LPG is produced when crude oil is heated and when reformers produce petrol. It is likely that refinery production of LPG will rise as the market share of higher octane petrol increases. More LPG is produced by refinery reformers as the octane requirement of petrol produced increases. Australia's naturally occurring LPG is sourced predominantly from Bass Strait (offshore Victoria), the North West Shelf (offshore Western Australia) and the Cooper-Eromanga Basin (in central Australia). The major companies involved in naturally occurring LPG production in Australia are Esso, BHP Billiton, Woodside and Santos whilst the companies involved in refinery production of LPG are Mobil, Shell, BP and Caltex. What is the level of Australian demand for LPG? LPG accounts for about 2 per cent of Australia's energy needs. Total Australian sales of LPG during 2000 was 2.3 million tonnes (consisting of 1.9 million tonnes locally produced and 0.4 million tonnes imported). Approximately 60 per cent of Australian LPG sales were for automotive use with the balance used for domestic purposes. The ALPGA has estimated that LPG has the third largest transport fuel market share, other than petrol and diesel, and estimate LPG will account for 8 per cent of all road transport usage by 2010. How much LPG does Australia export and import? Australia trades in LPG on world markets. During 2000 Australia exported 1.4 million tonnes of LPG (ie: around 43 per cent of total production) mainly from Western Australia, with the largest markets being Japan and China. During the same period, Australia also imported 0.4m tonnes of LPG (ie: around 17 per cent of total consumption), mainly from Saudi Arabia. There is a shortage of propane in the eastern states and imports are therefore necessary. Autogas demand exceeds refinery autogas production in the

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FACT SHEET Liquified Petroleum Gas

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Eastern States. New South Wales and Queensland are heavily dependent on imported LPG. However, propane alone cannot be economically shipped from Western Australia to the eastern states. It is more cost effective for Western Australian production of both propane and butane to be exported, with propane specific cargoes being imported to meet demand in New South Wales and Queensland. Propane and butane are separately produced and stored, then exported from the North West Shelf in separate tanks on single shipments (a normal world market situation). The eastern states require only propane and have bulk delivery and storage facilities for propane only. This situation underlies why it is more cost effective for North West Shelf LPG producers to ship their products for export than to sell it to markets in the eastern states. What factors determine Australian LPG prices? LPG prices in Australia are closely linked to international prices because: Australian LPG producers have the option of exporting their product at world prices or selling it locally; and Australia needs to import LPG at world prices into east coast markets where there is a propane shortage. International prices for LPG are generally based on the Saudi Aramco Contract Price (Saudi contract price). This price is based on tenders received for supply to potential customers and prevails for all shipments in the relevant month for which the contract price has been posted. LPG producers and importers in Australia generally determine an Australian landed price based on the Saudi contract price plus a freight allowance (from Saudi Arabia), insurance and loss, storage and handling. The freight and insurance related cost components currently approximate US$45 per tonne, while storage and handling costs can vary. Retail LPG prices will reflect the above base cost plus transportation and storage costs within Australia, wholesale and retail selling margins, franchise fees and bulk breaking costs. Retail prices also are subject to intense competition for market share in the capital cities leading to discount cycles for automotive LPG. As LPG is transported in tanks under pressure it is necessarily more expensive to transport LPG than to transport petrol. As the international price for LPG is determined monthly, volatility in the Australian market is influenced primarily by strong competition in the local retail markets. Why do the prices of LPG and petrol move independently of each other? While Australian LPG prices are based on the Saudi Contract price, Australian petrol prices which are based upon the Singapore Mogas 95 Unleaded price. Accordingly, separate supply and demand factors can operate to differentiate movements in the international prices of LPG and petrol reflected in retail prices. Why did LPG prices rise so dramatically until late 2000? From April 1999 to November 2000, the international price of LPG (represented by the average Saudi contract prices for propane and butane) rose from US$129 (A$203) per tonne to US$345 (A$657) per tonne, an increase of over 167 per cent. In Australian dollar terms, this increase was around 224 per cent with the falling rate of the Australian dollar against the US dollar. Increases in LPG prices experienced up to November 2000 were predominantly due to increases in the Saudi contract price and the depreciation of the Australian dollar. The increase in international prices was predominantly due to increased global demand for LPG in developing countries such as China and India as well as from increased seasonal demand associated with northern winter heating requirements. On the other hand, world LPG supply has not grown as quickly to meet the growth in demand. In percentage terms recent rises in the retail price of LPG have exceeded that of petrol and diesel as the Commonwealth does not impose the fuel excise on LPG which is levied on petrol and diesel. This excise, which is set in cents a litre, tends to buffer sharp price movements in retail petrol prices. As there is no excise on LPG, fluctuations in world LPG prices tend to be reflected more quickly in LPG retail prices.

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FACT SHEET Liquified Petroleum Gas

What has happened to LPG prices over 2001?

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Between November 2000 and January 2002, the international price (Saudi price) of LPG fell from around US$345 (A$665) per tonne to US$216 (around A$414 ) per tonne representing a decline of around 35 per cent in Australian dollar terms. The reduction over much of this period in large part reflected falling Northern Hemisphere seasonal demand for LPG. There is an annual pattern of strengthening demand for LPG late in the year with the onset of the Northern Hemisphere winter, however the current season this has not resulted in as pronounced price rises as in previous years. The estimated landed base price for LPG in Australia, including US$45 freight and other costs, exceeds US$261 (around A$500) per tonne by the amount of attributable storage and handling costs which vary. (As a general rule there are some 1845 litres of LPG in a tonne. The precise number of litres depends upon the propane/butane balance.) As stated above, the difference between the landed price and the retail price is due to transportation and storage costs within Australia, wholesale and retail margins, taxes and franchise fees. The average retail automotive LPG price in Australia's mainland State capitals fell from around 54 cents per litre in November 2000 to around 43 cents per litre in January 2001 primarily reflecting the decline of the world price. Daily information on automotive LPG retail prices at Shell retail locations throughout Australia is available from Shell Australia's web site at www.shell.com.au. What are the reasons for the city country prices differential for automotive LPG? Price differentials between regions are mainly determined by the volume of fuel that is sold at a retail site. Freight costs also contribute to the price differential, however to a lesser extent. A retail site that has a high volume of sales is able to spread its costs over those sales and reduce its operating margin on each litre of fuel compared to a retail site with a lower volume of sales. Country service stations typically sell less than half the fuel of a metropolitan service station. There are generally lower sales of high profit margin non-fuel items in the country. The lower level of non-fuel sales tends to push country prices higher for all types of fuel. In city areas competition is generally intense, with significant discounting and pricing cycles. Competition in country areas is usually less intense and discounting less common than for city areas. Metropolitan consumers have a much larger number of outlets to choose from. This concentration of outlets means that once price discounting commences in one location, it tends to spread throughout the metropolitan area. In many country towns, particularly those with little passing traffic, the potential to increase sales through discounting is limited. Why do automotive LPG prices fluctuate by as much as 10 cents per litre? The automotive LPG market is frequently subject to significant discounting cycles during which selling prices can actually fall below the retailer's cost price. While the major factor affecting domestic prices is the direct link to international LPG prices, local retailers also set prices according to their commercial assessments of the competition in their areas. LPG prices can fluctuate as much as 10 cents per litre over a few weeks due to intense competition. Service station operators set their own petrol and LPG prices and sometimes discount prices to attract more customers. One service station may reduce its price, lowering profits but hoping to increase sales (not only of petrol and/or LPG but other retail goods). Competitors closely monitor prices and usually respond by similarly reducing their prices. As prices fall, the service station operators request price support from their wholesalers (the distributor or oil company). In periods of heavy discounting, petrol stations and oil companies may end up selling petrol and/or LPG at a loss and eventually the discounting must stop. If price support is withdrawn, service station operators will put up their prices again, usually returning to earlier levels and the pricing cycle begins again.

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FACT SHEET Liquified Petroleum Gas

What determines bottled gas prices?

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Bottled gas is used for domestic purposes (cooking and heating) and consists solely of propane while automotive LPG usually consists of a mixture of propane and butane. For safety reasons, automotive LPG cannot be used for domestic purposes. Considerable volumes of propane are regularly imported to meet shortages in east coast markets, primarily as it is more economic for NSW and QLD to import from overseas. In 2000, 0.4 million tonnes of LPG (mostly propane) was imported into Australia. This represents around 17 per cent of Australian annual consumption. Such imports of course, need to be paid for at prevailing world prices. The international factors affecting the automotive LPG market also apply to the bottled gas component of the gas market. The cost of bottled gas is higher than automotive LPG because its delivery in small cylinders increases per unit transport costs. Storage and dispensing methods are more expensive for bottled gas and this is also reflected in the per unit price. There are also higher administrative costs of order taking, billing and customer service in supplying bottled LPG than in supplying service stations with automotive LPG. The Government does not levy excise on automotive LPG or domestic LPG (propane). The Goods and Services Tax does apply to domestic LPG supplies but this is no different to other domestic energy sources. Demand for bottled gas for domestic purposes is being impacted by the expansion of regional natural gas reticulation systems. Why doesn't the Government control LPG prices? LPG prices should be determined by the free operation of market forces. LPG is an internationally traded commodity. If Australian prices do not reflect international prices, investment in the Australian exploration, extraction and refining industries will disappear. Competition is delivering lower consumer prices than would be achieved under price regulation. The Australian public rejected Federal Government control over retail prices in a referendum in 1973. What is the role of the Australian Competition and Consumer Commission (ACCC) in monitoring LPG prices? Through the ACCC the Commonwealth has responsibility for the investigation of anti-competitive behaviour in local markets. The ACCC can take action under the Trade Practices Act if anti-competitive conduct is found to have occurred. Currently the ACCC monitors petrol, diesel and automotive LPG prices at around 4,000 sites across Australia. About 1,500 of these sites are in 150 country towns across all States and Territories, representing around 70 per cent of the rural population. The ACCC can also conduct additional random monitoring in remote areas, and will investigate complaints about price changes through its GST Price Line. Information about the ACCC is available at the ACCC website www.accc.gov.au. What support does the Government provide for LPG use? The Commonwealth exempts LPG from the excise that is collected on petrol and diesel. This ensures that automotive use of LPG is still relatively advantageous. As a result, automotive LPG has captured more than eight per cent of the car fuels market. The LPG excise exemption means that it is substantially less expensive than it would otherwise be. The excise exemption is provided at a cost to Commonwealth revenue of around $800 million per year. LPG is subject to the goods and services tax (GST), however, qualifying businesses are able to claim an input tax credit for any LPG used for business purposes.

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FACT SHEET Liquified Petroleum Gas

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In addition to the excise exemption, the Government has several programs in place to promote the use of alternative fuels, including LPG. Incentives to use LPG are provided through the Alternative Fuels Conversion Program (AFCP) and the Diesel and Alternative Fuels Grants Scheme (DAFGS). Under the AFCP, grants are provided to operators of heavy commercial vehicles to convert engines to LPG. The AFCP commenced in January 2000 and is a four year $75 million program. Under the DAFGS, grants are provided for diesel and alternative fuels (including LPG) used by heavier transport vehicles for eligible journeys, principally being journeys wholly or predominantly outside of metropolitan areas. For eligible LPG use, the grant is 11.925 cents per litre. The Government is supporting the wider use of LPG in passenger vehicles through a grant for the Australian Liquefied Petroleum Gas Association's "Autogas Challenge" program. The program is designed to increase the use of LPG within Australia's passenger vehicle fleet to at least 10 per cent of total consumption by 2005. Business purchases of LPG vehicles will benefit from the Government's recently announced 2001 Budget proposal to allow full input tax credits to offset GST on motor vehicles. An inquiry into taxes on fuel is currently being conducted which may have some implications for LPG. The Fuel Taxation Inquiry report is due for release in late March 2002. Is the Government proposing to establish national fuel quality standards for automotive LPG (Autogas)? The National Fuel Quality Standards Act was passed on 21 December 2000 and provides a legislative framework for setting national fuel quality standards. The first fuel standards, addressing petrol and automotive diesel, were tabled on 22 August 2001. The next set of standards to be developed will be for automotive LPG (Autogas). The main objective of the Act is to regulate the quality of fuel supplied in Australia to: 1. reduce the level of pollutants and emissions arising from the use of fuel that may cause environment and health problems 2. facilitate the adoption of better engine technology and emission control technology; and 3. allow the more effective operation of engines. A paper entitled Setting National Fuel Quality Standards Paper 5 Proposed Standards for Liquefied Petroleum Gas (Autogas), prepared by Environment Australia, was released in October 2001 for public comment by 14 December 2001. The paper is available at the Environment Australia website at www.ea.gov.au/atmosphere/transport/fuel/index. How much does LPG sell for in other countries? LPG in Australia is considerably cheaper than in other OECD countries. For example: The retail price of LPG in the UK in the January 2002 is about A$1.00 per litre The retail price of LPG in Japan for the month of November 2001 was about A$0.95 per litre. The average retail LPG price in Australia's mainland State capitals for the month of October 2001 was around 43 cents per litre. What is the price of Australian exports of LPG to Japan? There is an urban myth that Australia exports LPG to Japan at extremely low prices relative to the price of LPG in Australia. This is entirely wrong. LPG sold to Japan is priced around or above the current Saudi Aramco LPG contract price. As Australian LPG producers are located in closer proximity to Japan than Middle East producers they have a freight advantage which provides the opportunity to sell Australian LPG at a premium to the Saudi price. The estimated average price of propane and butane exports to Japan for November 2001 from the North West Shelf is around 25 Australian cents per litre. This is the price importers pay in Australia prior to shipment to Japan, and is indicative of the price which other production areas, such as Bass Strait, receives for exports to Japan.

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FACT SHEET Liquified Petroleum Gas

The final retail price of Australian LPG exported to Japan, in addition to the export price, includes transport, insurance and demurrage costs. The estimated retail price of automotive LPG in Japan in November was around A$0.95 a litre which is significantly higher than the retail price of automotive LPG in Australia. The export price of LPG to Japan is a 'bulk" price reflecting that Australian LPG is exported to Japan in very large quantities (a shipment may hold over 40,000 tonnes) direct from a bulk storage terminal in Australia. Note: US$ to A$ currency conversions are based on the 6th to 10th working day of the month of January exchange rate average (US$1=A$1.91582).

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