industry paper sample

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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. 1

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Liquefied Petroleum Gas includes introduction, background, performance of industry, problems, recommended solution

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Page 1: Industry Paper Sample

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

Page 9: Industry Paper Sample

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

engineers specifically project engineer, refinery engineer, refinery

technician, planning analyst, environmental engineers, and heavy-

equipment operators. For delivering the product, firms are required

to have barges and vessels refilling trucks. For the storage of the

product, tank trucks, and cylinders are required.

The cost behavior refers to how a cost will react or change

as changes take place in the level of business activity

11

2012 2011 2010 20090

5

10

15

20

25

30

35

Series3

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Variable cost varies in total and fixed cost is constant in total,

regardless of change in the level of activity.

The financial statement that the oil companies have is all

consolidated. The cost behavior was not distinguished.

Figure 3- Petron Liquidity Ratio

2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Current ratioAcid test ratio

The Current ratio of Petron in 2010 and 2011 is higher than 1 so it

means that they have enough resources to pay its debt over the next

business cycle. The company has safe liquidity.

The Acid test ratio of Petron in 2010 is 1.16 it means that they have

enough liquid assets to cover their current liabilities but in 2011 their Acid

test ratio goes down to .88 means that their liquid asset isn’t enough to

cover their current liabilities.

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Figure 4- Petron Leverage Ratio

2010 20110

0.5

1

1.5

2

2.5

Debt ratioDebt- to- equity ratio

The Debt ratio of Petron in 2010 is .67 it means that they have

more assets than their debts. In 2011 it goes down to .66 means that they

also have more assets than their debts.

The Debt to equity ratio of Petron in 2010 is 2.03 means that

majority of the company’s assets are financed through debt. In 2011 the

Debt to equity ratio of Petron goes down to 1.95 but it also means that the

majority of the company’s assets is still financed through their debts.

Figure 5- Liquigaz Liquidity Ratio

2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

Current RatioAcid Test Ratio

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The current ratio of Liquigaz in 2010 and 2011 is above 1 it means

that the company has enough resources to pay its debt over the next

business cycle. This means that the liquidity of liquigaz is safe

The Acid test ratio of Liquigaz in 2010 is .71 it means that liquigaz

has low liquid assets to cover their current liabilities. In 2011 the Acid test

ratio goes up to 1.04 it means that they have enough liquid assets to cover

their current liabilities.

Figure 6 – Liquigaz Leverage Ratio

2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

Debt RatioDebt to equity ratio

The Debt ratio of Liquigaz in 2010 is .56 it means that they have

more assets then debt In 2011 it goes down to .47 means that their assets

goes up than their debts.

The Debt to equity ratio of Liquigaz in 2010 is 1.279 it means that

the company’s assets are financed through debt. In 2011 the Debt to

equity ratio goes down to .899 means that the company’s assets are

financed through equity.

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Figure 7- Liquigaz Profitability Ratio

2010 20110

0.02

0.04

0.06

0.08

0.1

0.12

Return on equityReturn on assets

The illustration above shows that in 2010 the return on equity is

greater than the return on assets which means that there is a positive

leverage which is same as to 2011 though the ratio is lower.

Figure 8 – Shell Liquidity Ratio

2010 20110

0.5

1

1.5

2

2.5

3

Current ratioAcid test ratio

The Current ratio of Shell in 2010 and 2011 is higher than 1 so it

means that the company has enough resources to pay its debt over the

next business cycle. The Shell has safe liquidity.

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The Acid test ratio of Shell in 2010 is .94 it means that done have

enough liquid assets to cover their current liabilities. In 2011 the Acid test

ratio goes up to 1.55 means that they have enough liquid assets to cover

their current liabilities.

Figure 9- Shell Leverage ratio

2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

Debt ratioDebt to equity ratio

The Debt ratio of Shell in 2010 is .56 it means that they have more

assets than their debts. In 2011 their debt ratio goes up to .41 means that

they have more assets than their debts.

The Debt to equity ratio of shell in 2010 is 1.27 it means that

majority of the company’s assets are financed through debts. In 2011 the

Debt to equity ratio goes down to .7 means that majority of the company’s

assets are financed through equity.

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IV. Major problem/s Encountered or Currently Encountering by the

Industry and Its Policy Implications

A. The Problem/s Significantly Affect/s the Operation of the Industry

(from news articles etc. to be found at the appendices)

1. LPG being not included in the list of commodities in Section 3

of the price act- Republic Act No. 7581, also known as the

"Price Act": One of the major problems of the downstream oil

industry in LPG is the irregularities of the Republic Act No.

7581, Liquefied petroleum gas (LPG) is not included under the

list of commodities considered as basic necessities under

Section 3 of R. A. 7581, which is very essential to Filipino

people in case a calamity may occur. Unfortunately, liquefied

petroleum gas (LPG) is not included under the list of

commodities considered as basic necessities under Section 3

of R. A. 7581.

Since LPG is widely used and is a basic need by each

Filipino families is must be included in the list of basic commodities.

As such, the price of this actual necessity is automatically frozen at

prevailing prices during emergency situations. Thus, immediate and

direct benefit will redound to the people, considerably easing their

economic plight during times of distress.

2. Oil firms hike LPG prices: Oil firms raised prices of liquefied

petroleum gas (LPG) for household and automotive use. Petron

Corp. and Isla LPG implemented an increase of P6 per

kilogram or P66 per 11-kg cylinder of LPG, exclusive of value-

added tax. Petron also marked up prices of auto LPG by P3.76

per liter.

The problem signifies that there is an increase on the price of

LPG for the household and automotive uses. Companies like

Petron Corp. and Isla LPG increased their prices that will surely

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touch the attention of the consumer due to the poverty here in the

Philippines.

3. Tight LPG supply nationwide to ease up by tomorrow: The

tight supply of liquefied petroleum gas (LPG) nationwide. The

ships arrived last Aug. 2, but they were prevented from

docking at the pier because of strong winds and heavy rains,

Bolisay said.

The problem talks about the tight supply of the LPG

nationwide that is happening in the LPG industry. This is true and

because of the tight supply of LPG, prices increases and it affects

the buyers. Heavy rains and strong winds are also included in the

problem because it delays and prevents the ships from docking at

the pier for the supply of LPG here in the Philippines.

4. Supply ng LPG nag-kakaubusan: NABABAHALA na ang isang

party list representative sa nangyayaring ngayong kakapusan

sa supply ng liquefied petroleum gas (LPG) sa merkado.

Bunsod nito nangangamba si LPGMA party list Rep. Arnel Ty

sa epekto ng maaring idulot ng shortage ng LPG sa merkado.

Idinagdag pa ng solon na marami sa mga LPG distributors at

refillers ngayon angnagrereklamo dahil hirap na silang bumili

ng normal na supply mula sa kanilang dating pinagkukunan.

The problem talks about the shortage of LPG supplies here in

the Philippines that may trigger the prices of the LPG products to

increase. It is also explained above that LPG distributors and

refillers now are having hard time on purchasing normal supplies of

LPG products from their suppliers. It puzzled the minds of the

retailers because there was no problem that occurred on the LPG

market here in the Philippines and even on the other countries.

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5. DOE assures ample LPG supply: Independent players, for their

part, are having troubles in their supply

The problem is about the independent players in the industry

are experiencing shortage in their LPG supply. Due to the rough

sea and high water in the Bataan port which is also a factor to the

delay of the shipment.

6. Oil companies may be creating artificial shortage for

LPG windfall profit - party-list lawmaker: “Alam ng (oil

companies) na may increase next month. Bakit biglang nawala

ang supply? Syempre magdududa ka niyan,” Ty told GMA

News Online in a phone interview.

The problem is about the artificial shortage of LPG by the oil

companies and it goes at the same time with the increase of price

for the next month. This irregularity is very destructive because

people will panic buy because of the disreputable issue regarding

the LPG shortage.

7. Safety in transporting or delivering LPG Tanks- LPG tanks

explode as truck flips on SLEx: A six-wheel truck full of

liquefied petroleum gas (LPG) tanks fell on its side, leading to

several explosions which left the truck a wreck and traffic

snarled for hours.

The problem talks about the LPG truck that is swerving from

left to right that cause the truck to fell on its side. Because of the

driver’s immature driving attitude, flames occurred and explosions

happened on Slex that leads to traffic. This problem deals with the

accidents being encountered by LPG trucks.

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8. Gov’t to issue guidelines to ensure safe LPG trade:

Mishandling of LPG cylinders poses safety problems and fire

risk

This problem indicates the increase of accidents in

motorcycles because of mishandling cylinders, cylinders are usually

transported through motorcycles to be delivered to the consumers.

9. Major LPG player supports BFP call: The illegal manufacturing

of cylinders (most notably, the popular 2.7-kilo “Super Kalan”),

use of scrap or dilapidated cylinders, under-filling of cylinders,

illegal refilling and cylinder capturing and tampering (usually

done to “steal” and rename cooking gas tanks owned by a

company).

This problem specifies the contributing factors to LPG-

related blazes are the unsafe and unfair practices in the industry

such as illegal manufacturing of cylinders, use of scrap or

dilapidated cylinders, under-filling of cylinders, illegal refilling and

cylinder capturing and tampering.

10.LPG in Visayas, Mindanao overpriced, says party-list:

excessive prices of the cooking fuel in the Visayas and

Mindanao.

It has been observed that there is over pricing of LPG in

Visayas and Mindanao.

The researchers conclude that the problems in the

downstream oil industry mainly in LPG are as follows:

a) LPG is not included in the list of commodities in

Section 3 of the price act- Republic Act No. 7581.

b) The price hike by the companies

c) Shortage in the supply of LPG

d) Safety in transporting and delivering LPG

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e) Mishandling LPG cylinders

f) The illegal manufacturing of cylinders, use of scrap or

dilapidated cylinders, under-filling of cylinders, illegal

refilling and cylinder capturing and tampering (usually

done to “steal” and rename cooking gas tanks owned

by a company).

g) The overpricing of LPG in Visayas and Mindanao

Mostly the problems deal with the shortage in the supply of

LPG but the researchers examine well to distinguish what the major

problem is.

The researchers came out with “the illegal manufacturing of

cylinders, use of scrap or dilapidated cylinders, under-filling of

cylinders, illegal refilling and cylinder capturing and tampering”

(usually done to “steal” and rename cooking gas tanks owned by a

company) as the industry’s major problem. The problem mainly

addresses an extremely destructive issue which may cause

accidents to the consumers and to the illegal players and huge

losses to the legal players in the industry because of illegally using

their resources such as cylinders and also the illegal players sells

cheaper than the legal companies offer.

B. Specific Actions Done or Doing by the Industry to Address/Remedy

the Problem/s

Energy Secretary Jose Rene Almendras reported that the DOE

and the Department of Trade and Industry are prepared to penalize

hoarders that refuse to sell their inventory under existing rules,

overpricing of petroleum products like LPG is sanctioned with an

administrative fine of at least P10,000 and an appropriate criminal

sentence.

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Undersecretary Jose M. Layug Jr. said “We plan to increase

government action and enforcement on LPG compliance and

proper handling of LPG cylinders,”  “What we are set out to do is

draft a circular mandating specific or minimum requirements for

transporting LPG cylinders specially on two-wheel vehicles,”

Under the three terms of Councilor Dante Santiago, passed a

City Ordinance No. 42-2009 called the "LPG SAFETY

ORDINANCE OF SAN JUAN CITY” that will penalize illegal refilling,

adulteration, underfilling, and underdelivering of LPG and

automotive LPG in the city.

The Department of Energy (DOE) is crafting new rules to ensure

safety standards on the supply and distribution of liquefied

petroleum gas.

Congressman Arnel U. Ty filed a complaint to DOE regarding

the overpricing of LPG in Visayas and Mindanao

C. Specific Government Policy/s to Address the Problem/s (Laws,

Republic Acts etc.)

Republic Act 8479 “Downstream Oil Industry Deregulation Act

of 1998”

Under the Downstream Oil Industry Deregulation Act of 1998, oil

companies can price their products based on market forces so as

to encourage competition. The deregulation law prohibits the

government from intervening or influencing the pricing schemes of

the companies. It ensures continuous supply of petroleum products,

and enhances environmental protection.

The Department of Energy, these rules shall apply to all persons

or entities engaged in any, a combination of, or all activities or

business of the downstream oil industry, such as importing,

exporting, re-exporting, shipping, transporting, processing, refining,

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storing, distributing, marketing, and/or selling, crude oil, gasoline’s,

diesel, fuel, oils, aviation fuels, liquefied petroleum gas (LPG),

kerosene, and other petroleum products as herein defined, as well

as persons or companies directly importing refined petroleum

products for their own use or requirement. This shall be like wise

include the activities or business of blending, recycling, and/or re-

processing of petroleum products.

Additionally, R.A. 8479 aims to promote retail competition by

encouraging entry of new participants and preventing unfair trade

practices such as monopolization, cartelization, and predatory

pricing. It also specified incentives for new investments. Clearly,

these are laudable aims. But there are several considered not

considered in the new law. First, the new law does not consider the

vertical relations involving new and incumbent firms in this industry.

This is serious for the oil industry has historically been

characterized by a high degree of vertical integration. The probable

effect of having more firms in the industry has not been studied;

instead the framers of the law take it as a given that more firms is

preferable to less. Lastly, no overt relation between the need to

deregulate the downstream oil industry and national competition

policy has been made. This paper weaves together all these

considerations. (WorkingPaper-2008-03-Tanchuco, Republic Act

no. 8479.An Act Deregulating the Downstream Oil Industry and for

Other Purposes. Retrieved October 1, 2007, from

http://www.chanrobles.com/republicactno8479.htm )

It ensures a truly competitive market under a regime of fair

prices, adequate and continuous supply of environmentally-clean

and high-quality petroleum products.

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The entry of new participants needs to secure important

papers and adequate measures to start in engaging in the industry

and shall report to the DOE his or its every importation/exportation.

It ensures continuous supply of petroleum products, and

enhances environmental protection.

The monitoring of the relationship between the oil companies

(refiners and importers) and their dealers, haulers and LPG

distributors to help ensure the observance of fair and equitable

practices and to ensure the enforcement of existing contracts.

DOE provides a "Philippine Downstream Oil Industry

Investment Guide" to new industry participants and prospective

participants. Which includes: introduction to the Philippine

Downstream Oil Industry and the government's unwavering

commitment to deregulation, the entry requirements, and

information on the benefits and incentives for new industry

participants.

DOE shall promote and encourage by way of information

dissemination, networking, and management/skills training, the

active and direct participation of the private sector and cooperatives

in the retailing of petroleum products through joint venture/supply

agreements with new industry participants for the establishment

and operation of gasoline stations: Provided, that the training herein

shall include LPG retailing.

They ensure fair competition and prevent cartels and

monopolies in the Industry, the following acts are hereby prohibited:

(a)Cartelization which means any agreement, combination or

concerted action by refiners, importers and/or dealers, or

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their representatives, to fix prices, restrict outputs or divide

markets, either by products or by areas, or allocate markets,

either by products or by areas, in restraint of trade or free

competition, including any contractual stipulation which

prescribes pricing levels and profit margins;

(b) Predatory pricing which means selling or offering to sell

any oil product at a price below the seller's or offeror's

average variable cost for the purpose of destroying

competition, eliminating a competitor or discouraging a

potential competitor from entering the market: Provided,

however, That pricing below average variable cost in order

to match the lower price of the competitor and not for the

purpose of destroying competition shall not be deemed

predatory pricing. For purposes of this provision, "variable

cost" as distinguished from "fixed cost", refers to costs such

as utilities or raw materials, which vary as the output

increases or decreases and "average variable cost" refers to

the sum of all variable costs divided by the number of units

of outputs.

Republic Act 6173 or Oil Industry Commission Act

Petroleum and its products being vital to national security,

and their continued supply at reasonable prices being essential to

the general welfare, it is hereby declared to be the policy of the

State that the act and business of importing, exporting, re-

exporting, shipping, transporting, processing, refining, storing,

distributing, marketing, and selling crude oil, gasoline, kerosene,

gas and other refined petroleum products as well as the operations

and activities of natural and juridical persons, firms and entities

engaged in the petroleum industry shall be carried out in a manner

consistent with the public interest.

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To assure the public of reasonable prices for petroleum

products considering the international price levels of crude oil and

petroleum products and after allowing for proper and reasonable

cost of importing, shipping, transporting, processing, refining,

storing, distributing, marketing and selling crude oil and petroleum

products in the Philippines, and for a fair and reasonable return;

and to prevent collusive practices in the industry, particularly as to

prices;

To protect gasoline dealers and distributors from unfair and

onerous trade conditions;

To minimize the cost of, and the outflow of foreign exchange

involved in, the operations of the industry.

Executive Order (EO) 172

This executive order has the power to fix and regulate the

prices of petroleum products; Fix and regulate the rate schedule or

prices of piped gas to be charged by duly franchised gas

companies which distribute gas by means of underground pipe

system; Fix and regulate the rates of pipeline concessionaries

under the provisions of Republic Act No. 387, as amended,

otherwise known as the "Petroleum Act of 1949," as amended by

Presidential Decree No. 1700; Regulate the capacities of new

refineries or additional capacities of existing refineries and license

refineries that may be organized after the issuance of this

Executive Order, under such terms and conditions as are

consistent with the national interest; Whenever the Board has

determined that there is a shortage of any petroleum product, or

when public interest so requires, it may take such steps as it may

consider necessary, including the temporary adjustment of the

levels of prices of petroleum products and the payment to the Oil

Price Stabilization Fund created under Presidential Decree No.

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1956 by persons or entities engaged in the petroleum industry of

such amounts as may be determined by the Board, which will

enable the importer to recover its cost of importation. The penalties

for violation of or non-compliance with the terms and conditions of

any certificate, license or permit or any order, decision, rule or

regulation of the abolished Oil Industry Commission, Bureau of

Energy Utilization and Public Service Commission, shall, to the

extent applicable and appropriate in the light of the foregoing

transfers of powers and functions, apply to and may be imposed by

the Board.

Senate bill no. 268 house bill no.16 LPG Cylinder Act of 2004

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. Aims to

protect the interests of the consumer, protect his general welfare

and to establish standards of conduct for business and industry.

This Act can issue closure orders for violators. There are

corresponding penalties and fines for violators. These are

considered unlawful acts: Importation of used or second hand LPG

cylinders; RE-sizing and alteration of LPG cylinders; Repair and

requalification of LPG cylinders by persons who are not accredited

and/or certified by the DTI in accordance with Section 4 of this Act;

Sale and distribution of LPG cylinders considered substandard as

defined by the PNS; Tampering of existing cylinder markings to

convert from one brand to another; Manufacture and/or sale of

cylinder/s carrying a brand name, logo, mark or distinction without

the express approval of the registered brand owner; Manufacture of

cylinder/s using substandard or non-industrial quality steel plates;

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and Wrong or misleading information stamped on the cylinder i.e.

tare weight, etc.

This policy indicates that the DTI have the right to Inspect

and evaluate LPG cylinders, whether local or imported, prior to any

sale or distribution to LPG refiners or refillers and upon repair or

requalification, and certify to their conformity to PNS and their

fitness for public sale and distribution.

This policy includes confiscating illegally manufactured,

repaired, altered and tampered cylinders, whether local or imported

to ensure consumer safety.

This Policy minimizes the unlawful acts of LPG retailers by

providing penalties and fines for violators and setting standards of

conduct for business and industry. This protects the general well-

being and interest of consumers.

A systematic and pragmatic framework is seriously needed

in order to monitor the LPG Industry ensure fair trade practice,

compliance with quality, safety and health standards. This bill

enjoins accountability and responsibility among LPG Industry

participants while ensuring that the industry and consumers alike

could partake of the benefits of deregulation.

D. Discussion on the Strengths and Limitations of the Above Actions

by the Industry and the Government

a. Energy Secretary Jose Rene Almendras reported that the

DOE and the Department of Trade and Industry are

prepared to penalize hoarders that refuse to sell their

inventory under existing rules, overpricing of petroleum

products like LPG is sanctioned with an administrative fine of

at least P10,000 and an appropriate criminal sentence.

Somehow with this the problem can be addressed.

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The firms in the industry that does overpricing in the

LPG products are not fully observed by the DOE and DTI

maybe because the consumers are not aware that there is

an overpricing with some retailers that’s why the consumers

can’t report directly to the DOE and DTI.

The DOE and DTI still can’t resolve the problem

because there are irregularities such as the owner of retailer

store is not around or the owner’s just give them money to

keep their reports and records clean, the officials must be

transparent to fully eliminate the following irregularities.

b. Undersecretary Jose M. Layug Jr. said “We plan to increase

government action and enforcement on LPG compliance and

proper handling of LPG cylinders,”  “What we are set out to

do is draft a circular mandating specific or minimum

requirements for transporting LPG cylinders specially on

two-wheel vehicles” .

The DOE can only impose fines and file cases on

violators, while the Department of Trade and Industry is the

one that confiscates the substandard product.

The DOE wants to have confiscatory powers since it

only collects 40 percent of the fines it is supposed to collect.

DOE fines range from 1,000 to P10, 000 depending on the

frequency of violation. He said that the passing of the LPG

Bill into law will also give the DOE more enforcement power

to violators.

The problem can’t still be eliminated, because

presently the accidents related in transporting the LPG with

a two-wheel vehicle still occur and even got worst. Because

of the improper choosing of human capital, some owners of

the firms just hire irresponsible drivers and also many drivers

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are under the influence of alcohol or drugs and some are

short tempered regarding road fights and issues.

c. San Juan City passed a City Ordinance No. 42-2009 that will

penalize illegal refilling, adulteration, underfilling, and

underdelivering of LPG and automotive LPG in the city.

Santiago said that the clamor to ban and penalize the

use of tampered and substandard LPG cylinders and the

need to punish illegal refilling and the use of dilapidated LPG

cylinders have grown not only in the city of San Juan but in

other places as well.

"As the lawmakers of the city, the Sangguniang

Panlungsod members have acted to protect families, homes,

property and communities from the threat of fires and

explosions that may be caused by unsafe and illegal LPG

gas cylinders or refilling stations," Santiago explained.

The ordinance aims to control if not totally stop

unscrupulous LPG industry players who will sell tampered

and underweight LPG products.

The ordinance helps the city of San Juan to minimize

the LPG industry players who sell underweight LPG

products. There is a strict implementation during the term of

Councilor Santiago.

d. The Department of Energy (DOE) is crafting new rules to

ensure safety standards on the supply and distribution of

liquefied petroleum gas.

The department circular aims to set safety standards

in the supply chain, the plan for LPG is to create rules

requiring standards compliance certificate (SCCs) for

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gasoline stations and even bulk suppliers. Non-compliant

firms will be prevented from doing business with other

market participants The DOE has received reports that even

auto LPG stations are refilling cooking gas cylinders.

The problem still exist because many LPG industry

players is not afraid because they know that they will not be

caught, but the reports received by DOE is helpful because it

will also minimize the unscrupulous activities in the industry.

The DOE still lacks full force in eliminating the irregularities

they needed to be solved maybe because they only have a

small number of human capital.

e. Republic Act 8479 or the Downstream Oil Industry Act of

1998

Under the Downstream Oil Industry Deregulation Act

of 1998, oil companies can price their products based on

market forces so as to encourage competition. The

deregulation law prohibits the government from intervening

or influencing the pricing schemes of the companies. It

ensures continuous supply of petroleum products, and

enhances environmental protection.

It ensures a truly competitive market under a regime

of fair prices, adequate and continuous supply of

environmentally-clean and high-quality petroleum products.

The DOE could not do anything to check a problem in

the absence of a complaint.

Since the oil companies can decide for the price of

their products, they can over-power the government, the

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price will change anytime and the players in the industry will

be planning how much their prices will increase.

f. Republic Act 6173 or The Oil Industry Commission Act

It assure the public of reasonable prices for petroleum

products considering the international price levels of crude

oil and petroleum products and after allowing for proper and

reasonable cost of importing, shipping, transporting,

processing, refining, storing, distributing, marketing and

selling crude oil and petroleum products in the Philippines,

and for a fair and reasonable return; and to prevent collusive

practices in the industry, particularly as to prices.

To protect gasoline dealers and distributors from

unfair and time-consuming trade conditions.

There’s still no solution regarding shortage of supply

in LPG that results to oil firms raised prices of LPG.

g. Executive Order (EO) 172

It provides policy guidelines and regulatory framework

for the activities and operations of the energy sector.

There’s still no solution regarding shortage of supply

in LPG that results to oil firms raised prices of LPG.

h. Senate bill no. 268 or LPG Cylinder Act of 2004

To safeguard the public, the bill specifies unlawful

acts by industry players .and the corresponding fines and

penalties. Some of these acts are Manufacture, sale and

distribution of LPG cylinders without necessary Philippine

Standard License, Re-sizing and alteration of LPG cylinders,

and Sale and distribution of substandard LPG cylinders.

This bill seeks to establish a comprehensive

framework for the monitoring and supervision of the LPG

Industry under a deregulated market environment. Even

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under such structure, the Government reserves the right to

supervise the industry and enforce necessary sanctions to

safeguard consumer and worker rights, protect the

environment, and preserve public welfare.

This law is not strictly implemented. There are many

unscrupulous LPG retailers or dealers that use second hand

LPG cylinders; RE-sizing and alteration of LPG cylinders;

Repair and requalification of LPG cylinders by persons who

are not accredited and/or certified; Tampering of existing

cylinder markings to convert from one brand to another;

Manufacture and/or sale of cylinder/s carrying a brand name,

logo, mark or distinction without the express approval of the

registered brand owner; Manufacture of cylinder/s using

substandard or non-industrial quality steel plates.

V. Areas for Future Policy Prescriptions

A. By Identifying the Strengths and Weaknesses, Provide a

Discussion of your Policy Prescriptions/Recommendations

STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

-Necessity of

people

-Always in demand

-Easy to market

-Increases

economic growth

-Increase of price

-Hoarding or

shortage of LPG

supply

-Lack of freedom

(government

controlled)

-Few competitors

-Profitable

-Discovery of natural

gas

-Exploration of

locations wherein

natural gas may be

present

-New entrants of

competitors

-Continuous

government

interference

-Emergence of the

“bote-bote” method

of retailing

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Alternative Courses of Action:

ACA 1: The Department of Energy should monitor oil prices

regularly

Advantages:

It will let the public know what it is monitoring and how it is

being done.

It will earn the trust of the public and dispel the impression

that it may be acting as spokesperson for the oil companies.

Enlist the assistance or cooperation of entities or persons

who have credibility and in whom the public can trust for

whatever information the DOE wishes to release on its

monitoring efforts.

Will enable to persuade oil companies to spread oil

increases into smaller price hikes over an extended period

and inform the public so that the public understands the

reason behind frequent oil price increases.

Disadvantages:

May be accused of fixed pricing with the players in the

industry.

ACA 2: DOE should continue its efforts to explore and develop

indigenous energy resources

Advantages:

Encourage the use of alternative energy sources.

Promote programs for the conservation of energy and

avoidance of wastages in the use of oil products.

Creates a vast quantity of employment.

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Increases the economy’s profit.

Disadvantages:

It takes too long to fully stick with the county’s own

resources.

High cost because of the machineries needed.

Low knowledge about oil exploration.

ACA 3: The government should create a regulatory act

regarding the compliance of the retailers with the

requirements needed to start a legal activity in the industry

Advantages:

There will be critical implementation of continuous

and rigorous checking of the performances of LPG

producers and retailers.

License and permit will be required and must comply

with the requirement.

The government will work against illegal activities in

the sector such as: illegal manufacturing of cylinders,

use of scrap or dilapidated cylinders, under-filling of

cylinders, illegal refilling and cylinder capturing and

tampering.

The government will be more vigilant and organized in

the strict, equitable and effective enforcement of

regulations.

The government will ensure the personal safety of all

inspectors especially in cases where syndicates and

persons with strong political/police connections are

involved in product pilferage and other illegal

operations.

Disadvantages:

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There might be a special treatment to the player/s

especially if they offer a vast amount of money to hide

irregularities.

Recommendation:

The researchers recommend that ACA 3: The government

should create a regulatory act regarding the compliance of the

retailers with the requirements needed to start a legal activity

in the sector must be implemented by the industry and the

government because of its very helpful advantage such as: there

will be critical implementation of continuous and rigorous checking

of the performances of LPG producers and retailers, license and

permit will be required and must comply with the requirement, the

government will work against illegal activities in the sector, the

government will be more vigilant and organized in the strict,

equitable and effective enforcement of regulations, the government

will ensure the personal safety of all inspectors especially in cases

where syndicates and persons with strong political/police

connections are involved in product pilferage and other illegal

operations. The ACA 3 has the less disadvantage which include

that here might be a special treatment to the player/s especially if

they offer a vast amount of money to hide irregularities.

With the said recommendation, the researchers visualized

that the industry will perform well and even improve its capabilities

such as by, being transparent to the players and soon with the new

entrants in the industry. Also this will minimize the activities of

illegal manufacturers of cylinders, the usage of scrap cylinders,

under-filling of cylinders, illegal refilling of cylinders, and cylinder

tampering. Improve in providing the needs of the consumers

specifically in the LPG product by promising safety with properly

checking and inspecting the firms.

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The researchers came out with “the illegal manufacturing of

cylinders, use of scrap or dilapidated cylinders, under-filling of

cylinders, illegal refilling and cylinder capturing and tampering”

(usually done to “steal” and rename cooking gas tanks owned by a

company) as the industry’s major problem. The problem mainly

addresses an extremely destructive issue which may cause

accidents to the consumers and to the illegal players and huge

losses to the legal players in the industry because of illegally using

their resources such as cylinders and also the illegal players sells

cheaper than the legal companies offer.

B. Discuss your Own View on the Prospect of the Industry for the Next

Five Years

Arias – In the next five years the researcher’s prospect would be

that the LPG industry in the Philippines will be having a vast

innovation specially in fully producing our very own oil without

relying from import. The researcher envisions that the LPG industry

will be operating with minimal irregularities and is working hard to

seek for the compliance of the oil companies specifically in the LPG

industry. Also new players will be present to competitively compete

with the current players in the industry

Bernardo- In the next five years there will be an increase of

demand in LPG. There will be a shortage of supply in LPG. There

will be new regulated price structure and new laws improving the

safety of LPG product.

Gabas- After five years the researcher see that the LPG companies

will be more competitive in the market and the products will be

improved in quality. There will be also many competitors that will be

entering in this industry. The demand for the LPG products will

reach its peak that will result to high profit for the companies.

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Mariaca- The researcher see the LPG market has a very successful

one after five years because the companies will surely innovate

their products and improve the quality of technology that they will

be using to produce LPG products by the help of the best engineers

in the world. After five years, these companies will be spreading to

many parts of the world and Middle East will be a rich part of the

globe because of the never ending demand for LPG products to

each and every part of the world. Many entrepreneurs will be

entering this market and it might be the one of the best market that

will happen in the history.

Sangil- The researcher’s point of view in LPG business in 5 years is

that it will be successful as it is now because as the researcher

sees it, it is now also use in powering up out vehicle, why? Because

it is much cheaper than any other gasoline it is very effective for

those who wants to cut their cost. The cost of Diesel now it P42 per

liter and AutoLPG cost only around P25 what a big savings right.

Many individuals use LPG in their daily lives, for example in

cooking food. LPG is one energy source that is environmentally

responsible, secure, affordable and available on the spot so that’s

one thing the researcher see why LPG will be successful in the

future.

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