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Comercialization of Liquified Petroleum Gas ("LPG") in Ecuador
By
Dario G. Lamanna
This article describes the terms and conditions of the supply
activities and commercialization of LPG in Ecuador, analyzing
the actual legal conditions, analyzing all commercial aspects
and the actual business situation, and concluding about the
ecuatorian future within the international context.
1. Legal Framework
The commercialization of liquefied petroleum gas (“LPG”)
in Ecuador is developed within the framework of free competition.
The organizations that provide this service are obliged to
ensure such, without abusing of their dominant position when
faced with users, mediators or other providers. And they must
abstain from restrictive or monopolized practices of the free
competition and qualifies as public service 1.
When The State Petroleum Company of Ecuador (“PETROECUADOR”)
by itself or through its subsidiaries (PETROCOMERCIAL or PETROINDUSTRIAL)
works as a supplier,
it cannot give preferential treatment nor establish in its
favor special conditions as far as quality, prices
or procedures that prevent a competition based on supply
and demand
are concerned 2.
Taking into consideration that the volume that is internally
consumed is not significant for the international limits,
its activity is as of complete importance for its social
and politic
impact.
There is freedom of operation and construction. Any natural
or legal, native or foreign person may construct and operate
a supply, storage and package plant nationwide relying on
the corresponding registry of the National Hydrocarbon Direction
(“DNH”) to do so.
The distributors of LPG cylinders may sell cylinders of different
brands pertaining to other traders. Users have the right
to freely exchange cylinders with those of another brand
or traders.
The commercialization of LPG qualifies as public service;
consequently, its service may not be suspended by the national
or foreign
companies involved.
As one of the stages of the hydrocarbon industry, the commercialization
of gas is declared public utility which according to law
and to the constitution of servitude leads to expropriation
of
land and of other properties if necessary for its development
3.
The commercialization of LPG is an activity standardized
by the Minister of Energy and Mines (“MEM”),
who settles the technical requirements, quality norms and
environmental
protection and control by interval of the DNH as far as technical
and operative activities are concerned whether it be through
or directly with qualified
companies, and The National Direction of Environmental Protection
(“DINAPA”) regarding environmental issues 4.
2. Included Activities and Their Exercise
The commercialization of LPG understands the following activities:
- Acquisition of LPG in bulk
- Storage
- Packaging
- Transport
- Consumer Distribution
Besides Petroecuador, on behalf of and by State authorization,
may exert these activities as a whole or individually, by national
or foreign companies, privates or publics, legally established
in the country, that assume the responsibility and
exclusive
risks of the investment without jeopardizing public resources.
Natural people or legal entities, natives or foreigners who
exert totally or partially the activities afore mentioned,
except the sale to the public, are called “Traders”.
Petroecuador is included in this concept.
People or entities, who make the sale of LPG in cylinders
to the final consumer, denominate “Distributors” and
act under contract of distribution with a Trader 5.
Traders that exert all theses activities as a whole must acquire
the product at a refinery plant established in the country
or import it. They must also have supply plants available to
receive, store and dispatch the LPG to the bulk, storage plants
intended to receive the LPG to the bulk with the purpose of
storing it, and package plants destined to package the LPG
in portable cylinders.
These companies must also display environmental studies on
the influence area, as
much for the construction as for the
remodeling of supply plants, storage terminals, package plants
and service stations.
At the moment, Petroecuador through its Petrocommercial branch
supplies liquefied petroleum gas to traders and these simultaneously
provide the distributors, under corresponding provision
contracts. 6
The requirements that a commercial company has to meet to execute
the commercial activities of LPG are included in the Rule
laws for the Authorization of Commercial Activities of Petroleum
Liquid Gas. 7
3. System of Supply
The commercialization of LPG can be made directly with Petroecuador
or, by delegation, natural people or legal entities, natives
or foreigners, public or privates, legally established in the
country, or unions of legal entities, such as partnerships
or associations, whether they have or not subscribed contracts
of exploration and hydrocarbon operation, of well-known experience
in those activities, that have authorization from the President
of the Republic and are enrolled in the registries of the DNH.
PETROECUADOR may also delegate the hydrocarbon commercialization
by establishing partnerships or constituting companies
of mixed economy that are in charge of the operation of such
activities,
or by celebrating contracts of association, of operation
or other contractual forms of delegation in the Ecuadorian
legislation 8.
Another way to accede commercialization, in this case on behalf
of state oil companies, is by means the celebration of
strategic alliance agreements or general agreements of bilateral
cooperation
and contracts derived from these with state oil companies.
These agreements establish a bilateral or multilateral
relation between two or more state oil companies which have
one common
objective and may also cooperatively participate in the
exertion of LPG commercialization projects by incorporating
and interchanging
skills, resources and experiences 9.
Through the Executive decree No.799 10 for year 2000 10, the
regulation for the celebration of these strategic alliance
agreements or resolution or general bilateral agreements and
contracts proceed from these, with oil state companies which
get associated to carryout all related projects with any of
the phases of the hydrocarbon, in and out the country. The
Agreements, subscribe in a direct form with Petroecuador, previously
approved by the Administrative Board of Petroecuador. The modality,
can not only be of specific services, but forming partnerships,
associations or, adopt a more convenient and contractual mode.
The contract celebrated under this rule system, have a special
warranty of given stability in the Constitution 11.
The people who perform LPG commercialization activities, take
on the responsibility and risk of their investment without
jeopardizing public resources, that is to say without the State
or its institutions obliged to make fund investments, finance
or guarantee loans required for such effects and is subject
to the common tributary regime. This brings with it a political
and social problem and loss of competition against other neighbor
countries. The responsibility and risk of the investment understands
the management, administration and control of all authorized
activities as well as the obligation to pay all costs and related
expenses, also the right to perceive and to administer the
originating income of those activities.
In order to exert LPG commercialization activities, one must
also account the insurance of civil responsibility that
covers damages to third parties, to their property and damage
to the
environment that may occur within operation facilities
and when handling liquefied petroleum gas without incurring
any additional
insurance. Every year the MEM settles the minimum coverage
amount for each case based on the risk level and the commercialized
volume of LPG.
The distribution and sale to the public may be done by natural
people, previously subscribed and authorized by the MEM
of the corresponding Branch 12.
The requirements that a commercializing company must be able
to import liquid oil gas are included in authorization
Rules for the Commercializing activities of Liquid Petroleum
Gas 13.
The Government from Ecuador signed a contract in year 2005,
with the firm Trafigura Beheer, in force up to December 2007,
with which LPG is bought, at a fixed price published in Platts,
and a plus for transport and storage matters.
4. Prices and Subsidy of the State
Consumer sale prices of LPG are regulated by the President
of the Republic Decrees 14.
The sale price for commercial and industrial use, provided
in Decree 1610, must weekly be determined by Petrocomercial
and based on the average import price paid
by Petroecuador during the previous week, including tax, without
exceeding the total average price from the previous semester 15.
The current public sale price of liquefied petroleum gas for
domestic use is USD $ 0.1066 per kilogram, including tax
to the added value (VAT), therefore the equivalent price for
a
15 kilogram of liquefied petroleum gas cylinder is USD
$ 1.60, this price includes refinement cost, internal commercialization
and import expenses, as well as the effective VAT 16.
Petrocomercial, subsidiary of Petroecuador, acknowledges the
authorized LPG trading companies to operate with the following
tariff scale: a) Cost of the commercialization process; b)
Yield on assets; c) Orography and distance compensation. According
to this tariff scale, the values for LPG commercialization
by commercialized metric ton are the following:
LPG
trader qualified and
authorized for public service provision of LPG commercialization
|
LPG
commercialization public service provision tariff (US
dollars by
commercialized metric ton)
|
| AGIPECUADOR |
95.86
|
| AUSTROGAS |
99.34
|
| AUTOGAS |
85.96
|
| COECUAGAS |
90.75
|
| CONGAS |
92.45
|
| DURAGAS |
86.79 |
| ECOGAS |
86.55 |
| ESAIN |
87.74 |
| GASGUAYAS |
81.57 |
| LOJAGAS |
114.72 |
| MENDOGAS |
96.45 |
*17
In the year 2006, LPG demand was estimated at 10.5 million
barrels, the national production increased to 2.1 million,
being this the reason why import was of 8.4 million barrels.
Taking into consideration that the demand of LPG is superior
to the national production and that the Hydrocarbon Law arranges
that the storage, distribution and sale to the public of hydrocarbon
derivatives are made by Petroecuador, natural people and native
or foreign companies, this State Company is forced to import
LPG.
According to the established international price and recent
bidding process, the cost structure of the imported product
is the following:
US
$ per metric ton
|
|
| FOB
cost |
700.28
|
| Freight |
116
|
| Insurance |
0.35
|
| Tariff 18 |
102.49
|
| CIF+Tariff |
919.12
|
| Per
kilogram |
0.92
|
| Cylinder
15- Kilograms |
13.79
|
However
the effective sale price to the public of the cylinder with 15-
kilograms of LPG is of U.S. $1.60 as
previously indicated. This generates distortions in the Ecuatorian
economy, even
more in different social classes, some of them
which see themselves beneficiated with these prices, as
well
as competitiveness
prices and contraband with neighbor countries
like Perù and
Colombia. The government has announced that they
will implement some measures to modify these distortions,
but the price
of the gas in Ecuador has a high social and political
impact.
With the present outline, the historical subsidy
has been:
| YEAR |
AMOUNT
OF US $ (MILLIONS) |
1992 |
71 |
1993 |
78 |
1994 |
99 |
1995 |
165 |
1996 |
169 |
1997 |
146 |
1998 |
120 |
1999 |
127 |
2000 |
186 |
2001 |
155 |
2002 |
163 |
2003 |
215 |
2004 |
292 |
2005 |
470 |
2006 |
627 (Estimated) |
5. Taxes
The LPG traders are subject to the common tributary
regime and must declare and pay all taxes contemplated
in the effective
legislation, considering the countable registries.
On July 28th, 2000 the zero% tariffs were established
on import tax and safeguard clause for LPG
imports, in accordance with
the subpart tariff detailed in the first article
of Resolution no. 061, Council of Foreign Trade
and Investments:
| NANDINA |
DESCRIPTION |
AD
VALOREM |
SAFEGUARD |
| 2711.11.00 |
-
Natural gas |
0 |
0 |
| 2711.12.00 |
-
Propane |
0
|
0
|
| 2711.13.00 |
-
Butane |
0
|
0
|
| 2711.14.00 |
-
Ethylene, Propileno |
0
|
0
|
| |
Butane,
Butadieno |
0
|
0
|
| 2711.19.00 |
-
Remains |
0
|
0
|
*19
LPG traders must pay to have control rights
and operative and environmental regulations
annually fixed by the
Minister of
Energy and Mines according to article
33 contemplated in the Law of Investment Promotion and Citizen
Participation 20.
6.- Bookkeeping
LPG traders and distributors must keep accountable
records showing trustworthy operations in accordance
with overall principles
of accounting and norms determined by the MEM.
LPG traders must declare and pay all tributaries
contemplated in the effective legislation,
also considering countable registries 21.
7. Importation
Authorized traders may import LPG observing
the following requirements without damage of
the fulfillment of
any special law:
a.
Request authorization for fuel importation to MEM.
b. To own storage plants or to have
available third party ones in order
to store LPG, registered
in the
DNH. The fulfillment
of this requirement is made with
the presentation of legal documents
that prove to have this
infrastructure.
In each case the DNH determines the
volumes of liquefied petroleum gas
that traders may
import based on their
investments and
to their participation in the national
market.
The
MEM by means of resolution authorizes importation of liquefied
petroleum
gas on the report basis
presented by the DNH.
The trader authorized to import
LPG must inform the DNH, five
days in
advance, of product volume
and
quality, ports of departure
and arrival in order for the
respective inspection to take place. They
must also provide necessary
documentation and information,
easy access from one facility
to another, so that personnel of that
dependency can make
quality and
weight verifications
on land as much as on board
the ship 22.
At the moment LPG imports are made by Petroecuador under transaction
contracts and supply with the storage floating system, that
are adjudged by the Administration Council of Petroecuador,
through licitations of qualified companies.
The sales company must pay all costs of storage, transports,
delays, unload, insurances, commission of load, losses
by manipulation and evaporation, taxes, harbor rates, as well
as all the rates
and taxes that take place related to the declaration
of Customs Deposit or Fiscal Storage of floating storage ship,
the same
one that must officially be constituted by the salesman
as Customs Commercial Deposit. The salesman or company must
also
grant a Customs Guarantee to assure payment, rights and
corresponding rates, in agreement with the Ecuadorian laws.
The price of the concerned product settles by metric ton, and
is determined on the basis of average prices for propane-butane
products in the international market.
The transport of the LPG ought to be carried out in accordance
with the Law of Exports Facilitación and the Aquatic
Transport of Ecuador for which it is due to coordinate with
the Ecuadorian Oil Fleet ("FLOPEC").
8. Future Plans
The Government of Ecuador decided during the last few months
of 2006, to call an international bidding process for the construction,
operation and maintenance of LPG land storage which until now
is done on ships.
The infrastructure work includes the marine terminal, with
capacity for large ships and boats, the storage in the terminal
with enough capacity to receive and to store up to 50 thousand
tons.
It is anticipated to construct a gas pipeline from the earth
terminal towards the south of the country, near the locality
of Pascuales, near the harbor city of Guayaquil. A storage plant
for the subdistribution of LPG to industrial clients will be
constructed in this area. The construction of
the new earth terminal for reception and storage of LPG
and other facilities,
will demand at least two years as of the date the contract
is awarded.
The companies that remain interested for the construction of
gas storage in land are Techint, Odebrecht, Colombiana
S.A., Puma, Glencore, OMZ, Astap y otras 23.
It is foreseen that the storage plant construction Hill cost
approximately 97,4 million dollars.
In the second semester of the year the Government announced
that will bid four blocks in the Coast, and that a very brief
reform of the hydrocarbons law has been sent to the Congress,
in order to obtain contracts in the gas explotation.
Conclusions
In Ecuador the LPG market shows itself in to stages: (i) supplies;
and (ii) commercialization.
At first the production and importation of LPG which
is commercialized, it`s done by the state Country Petroecuador,
through its
filial Petroproducción.
In other hand, the second – the commercialization – is
been carried out by 11 private commercial companies,
besides the filial to the state company, Petrocommercial.
The storage and packing of the LPG is been done in various
public and private centres, placed in Quito, Guayaquil, Ibarra,
Cuenca, Salcedo, El Oro and Riobamba.
23 See note in newspaper Diario “LA HORA” (Quito),
published on April 24, 2007. (www.ecuadorinmediato.com)
In the actual time, the LPG which is commercialized in the
country, comes from a 35% of national production (produced
by gas fractions associated to petroleum wells and state refineries)
and a 65% of importation.
In year 2006 Ecuador spent 554,000 TM (metric tons) of LPG.
For this reason, Petroecuador imports 60,000 TM of LPG) pre
month (720,000 TM annual) to supply the local market.
In the present, they have land storage installations with a
capacity of 3,170 TM (metric tons), which allows to have a
reasonable amount of days in stock of LPG (less than two days)
which has driven the State to pay a high differential over
the international price of the GLP to cover the high operation
costs of the supply.
In the last 15 years there have been a few frustrated intents
to bid the construction of storage land construction which
allow to reduce the importation of LPG. It looks like, with
the bid in course, their will hopefully bring into conformity
this Project.
Based in legal antecedents, taking into consideration that
Petrocimercial is obligated of LPG storage, filial of the state
company Petroecuador, the private companies can import LGP
keeping the forseen in the authorization rules for the authority
activities of LPG commercialization.
But, due to the gas subside, it does not seem too attractive
to import LPG to commercialize it in the domestic market, at
a lower price in which is bought.
The volume and time of the contracts, do not result very attractive
for the international industry players.
Notes:
1
(Hydrocarbon Law, Art. 1-A added for the Art. 31 of the Law
Decree 2000-1, R.O. 144-S, 18-VIII-2000). (Rules for the
Commercialization Activities of
Liquid Petroleum Gas Executive Decree Rules No. 2282 Official Register N° 508
of February 4th, year 2002, Art. 6).
2
Hydrocarbon Law and Executive Decree 2282.
3 Hydrocarbon Law, Art. 4.
4
(Hydrocarbon Law Art. 9 and 68). (Regulations that Substitute
for the Environmental Regulations for Hydrocarbon Operations
in Ecuador. Decree No. 1215 Official Registry 265, 13- II-2001)
5
(Regulations for the Authorization of Liquefied Petroleum
Gas Commercialization Activities (Executive Decree No. 2282,
Official Registry N° 508 dated February 4, 2002).
6
(Hydrocarbon Law, Art. 3, substituted by Art. 46 of Law 2000-4,
R.O. 34-S, 13- III-2000 and amended by Art. 7 of Law 2000-10,
R.O. 48-S, III-31- 2000, Art. 69 amended by Art. 24 of Law
45 , R.O. 283, 26-IX-89).- (Regulations for the Authorization
of Liquefied Petroleum Gas Commercialization Activities,
Executive, Decree No. 2282 Official Registry N° 508,
dated February 4, 2002.).- (Regulations that Substitute for
the Environmental Regulations for Hydrocarbon Operations
in Ecuador. Decree No. 1215 R.O 265, 13-II-2001)
7 Executive Decree N| 282, R.O. 508, 4/11/02.
8
(Regulations for the Application of the Law that Amends the
Hydrocarbon Law No. 44, R.O. 326 dated November 29, 1993,
amended by Law 49 R.O. 346 dated December 28, 1993. Art.
50)
9 (Regulations for the Execution of Strategic Alliance Agreements with State
Oil Companies. Decree No. 799, R.O 170, 25-IX-2000)
10
(Executive Decree N° 799 published in Official Gazette in September 25, 2000)
11 (Art. 271 of the Political Constitution of Ecuador)
12
(Regulations for the Application of the Law that Amends the
Hydrocarbon Law No. 44, R.O. 326 dated November 29, 1993,
amended by Law No. 49 R.O. 346 dated December 28, 1993. Art.
49)
13 (Executive Decree N° 282, R.O. 508 dated 11/4/02).
14 (Hydrocarbon Law, Art. 72, substituted by Art. 17 of Law 44, R.O. 326, 29-XI-93).-
Regulations for the Authorization of Liquefied Petroleum Gas Commercialization
Activities, Executive Decree No. 2282, R. O. 508 dated February 4, 2002. Art.
7)
15 (Executive Decree 1610, R. O. S. 359 dated July 2, 2001).
16 (Regulations that Substitute for the Regulations that Rules the Prices of
Hydrocarbon Derivatives. Decree No. 1610 R.O. 359 dated July 2, 2001, Executive
Decree No. 1834 R.O. 408-S, 10-IX-2001)
17
(Executive Decree No. 2592 R.O. 575, MAY-14- 2002, which
establishes the new tariff structure for the provision of
the public service of liquefied petroleum gas commercialization
by the companies that commercialize LPG and that are authorized
to operate).
18
Includes: duties tariff 0%, modernization rate 0.05, FODIN
0.5%, VAT 12%.
19
(Decree 603 R. O.130 dated July 28, 2000)
20 (Regulations for the Authorization of Liquefied Petroleum Gas Commercialization
Activities.- Executive Decree 2282 R. O. 585. February 4, -2002.- Ministerial
Agreements 238 and 239 R.O. 487- S dated January 4, 2002).
21 (Regulations for the Authorization
of Liquefied Petroleum Gas Commercialization
Activities – Executive Decree 2282 R.O.585, February 4, 2002).
22
(Regulations for the Authorization of Liquefied Petroleum
Gas Commercialization Activities. Executive Decree 2282 R.O.585,
February 4, 2002).
23
See note in newspaper Diario “LA HORA” (Quito),
published on April 24, 2007. (www.ecuadorinmediato.com)
Dario
Gerardo Lamanna, legal and international business manager of Teikoku Oil
Co. LTD. Petroleumworld
not necessarily share these views.
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