The propane-butane market in Ukraine has undergone dramatic changes due to the war. No one expected such a drop, because the volume of autogas decreased by 40%. At the same time, the demand for gas in cylinders increased.. To discuss this topic, NaftoRynok went to Poltava, where the deputy head of the private enterprise “Nadezhda Company” Stanislav Batrachenko and the head of the bottled gas direction – Maxim Karandeev outlined the prospects of the project.
Your company is one of the few who put the bottled gas direction on commercial rails.
Filling cabinets, cylinder workshops, now – containers with cylinders at each gas station. How did it all start, what can be considered a starting point for the development of the project?
Stanislav Batrachenko: A little history about the development of municipal and household gas in Ukraine. The structure of supply to the population was built with a link to each region on the basis of regional gas companies.
This was convenient and correct given the availability of specialists who had permits to work with gas under pressure.
It was a powerful and extensive network of gas stations and gas pipelines with transport and a large fleet of cylinders, the work of which existed at the expense of the republic’s budget.
After Ukraine gained independence and with the emergence of private co-owners, commercial interest in the sale of liquefied gas in cylinders was only at specialized auctions, which started in 2000.
This made it possible to maintain gas supplies to the population at a relatively low cost.
In parallel, commercial auctions were held at the expense of state-owned companies, where liquefied gas was sold at a much higher price and was intended for enterprises, organizations and autogas.
But later a corruption-scheming scheme appeared to transfer “cheap” gas from specialized auctions to commercial structures.
And the “gas scheme” reached its peak in 2010-2013 (during the presidency of Yanukovych). Around that time, or rather in 2009, our company acquired a company in Crimea, which, in addition to the gas station network, also specialized in the sale of municipal and household gas.
There, for the first time, we began to supply liquefied gas to the population. This was important as a social duty of our company to the region (the majority of the population of Crimea and the entire network of hotels and tourist resorts were not connected to natural gas).
It was actually a difficult period for the branch and the main company, because we understood that we could not work according to the post-Soviet principle. But we were not allowed to participate in special auctions, and we decided to introduce new principles of control and technology for selling gas.
Inefficient, and it was clear in advance that this would cause losses. But the most difficult test was the restoration of the fleet of cylinders that were in the population. There was no other way out than to repair, replace valves, paint and check each cylinder under pressure.
Any enterprise that fills cylinders is responsible for the technical condition of each cylinder and, therefore, for human life.
By the way, we are currently going through the same path of restoring the fleet of cylinders almost throughout Ukraine. Currently, this is the most expensive item.
Today, there are a sufficient number of enterprises that have the appropriate documentation for activities with cylinders, but this is a low-profit activity and requires large investments. And this, unfortunately, hinders the development of the cylinder direction.
A wonderful excursion!
What has the cylinder direction grown to in the group of companies?
Maksym Karandeev: Currently, our company operates five LPG filling stations and 15 mini LPG filling stations in the Transcarpathian, Ternopil, Kyiv, Cherkasy, Chernihiv, Mykolaiv, Zaporizhia, Poltava, Sumy and Kharkiv regions.
20 units of specialized transport are involved, which serve up to 1,000 enterprises of the country and almost 18,000 households. The company’s cylinder fleet is growing due to the emergence of Ukrainian production of cylinders under the BVS brand.
For the convenience of users, containers with cylinders for exchange are placed at most BVS gas stations. You have probably seen such an approach in Europe, in particular in Poland. I believe that in Ukraine, in the near future, most gas stations will have containers with LPG cylinders.
S. B.: But despite the prospects of the direction, I want to emphasize the main problems of the bottled gas business – this is the high cost of gas in a bottle.
The costs for each kilogram of liquefied gas are several times higher than for autogas at a gas station.
High quality gas, accurate service, repair of cylinders and consumables, constant investment in the cylinder fleet and transportation to the end consumer by special transport increases the cost by 40-60% of the initial cost at the gas station.
For example, only the logistics costs for delivery to the end consumer fluctuate within 7-11 UAH per kilogram, because the number of 24-60 units is limited for transporting cylinders in one vehicle, and this is a total of 400-900 kg of liquefied gas, and not like in a gas tanker 18 tons.
And so on to each village, and not always the “grandmother” is ready to replace the cylinder, because there is still something left in it.
Additionally, it must be proven that her cylinder (at best) is from the “Gorbachev” times and cannot be used. And she does not know that when buying municipal gas, she additionally pays excise tax for the restoration of Ukraine’s roads.
Unfortunately, today the sphere of municipal gas also suffers from the negative image of autogas as an affordable fuel and gasoline (a more expensive competitor). But municipal gas is actually not that cheap due to the higher costs, as mentioned.
The logistics of gas in cylinders is currently 7-11 UAH per kilogram
And that’s not all. According to current legislation, municipal and household gas is an excisable product that cannot be sold outside the territory where the license for the sale of excisable goods has been issued. Therefore, the conditional “grandmother” must come to the gas station to pick up a cylinder and pay for it on the spot.
Are you proposing different excise rates for the same product? What volume of the Ukrainian LPG market is accounted for by gas in cylinders?
S. B.: The rates are, of course, different, because what does gas in cylinders have to do with road construction? None. To avoid fraud, I propose to pay for it during import or production first in full, and then to document its sale. By the way, it is sold in kilograms, not in liters, like autogas.
I estimate the market for bottled gas for heating and industry at 10-20%. This is currently 120-200 thousand tons per year. For 2022, the growth was approximately another 100%. This discrepancy arose due to the refueling of only half of the cylinders at gas stations.
Our calculations are based on the average life of cylinders and a comparison with the percentage of ungasified settlements. Cylinders are in greater demand among the population in the spring and summer period.
Also, rural summer kitchens are traditionally equipped with gas propane stoves.
Currently, the media is calculating the cost of fuel after the full return of VAT and an almost double increase in excise duty. How will this affect gas prices according to your calculations?
S. B.: Wait, what does an increase in excise duty mean? Didn’t Ukraine return the excise duty on liquefied gas to the pre-war level last fall? LPG lost the most in terms of volumes, although, I think, it “excellently” overcame the crisis of spring-summer 2022. Let me remind you that when there was no gasoline and diesel fuel at gas stations, there was gas almost everywhere. And since September 30, 2022, we have been paying excise duty, as before the war, that is, €96/t (€52/1000 l – NR). Where else to increase it?! We are already 100% within budget! It was your analysis that claimed that the retail markup on a liter of autogas is four times lower than on gasoline – and this is not compensated by the difference in fuel density. There is something to think about, isn’t it? (Laughs).
Therefore, we are not even considering such options, the increase in the excise tax rate on propane-butane in July – will not happen, it happened six months ago.
The average consumer had the impression that gas in cylinders is just a summer cottage option or a can in a tourist’s backpack. Who else do you supply bottled gas to?
S. B.: The Ukrainian liquefied gas market is one of the largest in Europe, very competitive and dynamic (I mean the traditional low margin and strong volatility of prices on the shelves, which differs from the slow fluctuation of gasoline and diesel prices at gas stations). But liquefied gas has a wider scope of application, namely: in the agricultural, logistics, processing, food, chemical, metallurgical, paper, construction, road construction sectors, in the production of beverages, glass, jewelry and perfumery. It is impossible to do without liquefied gas in the tourism, restaurant business and for heating premises.
Excise duty on liquefied gas from September 30, 2022 paid, as before the war, €52/1000 l – this is 100% of the pre-war price
The main users of cylinders today are our military, defenders of Ukraine. They use all types of cylinders: collets (220 g) with various burners and portable stoves, five-liter ones with burners, 27 and 50-liter cylinders. In the field, this is convenient for quick cooking. The military took over part of the supply, and volunteers also supplied a significant amount.
There is a sore topic of the Technical Regulations for autogas, the adoption of which is being postponed for the third year. And what about the requirements for bottled gas?
S. B.: Yes, the requirements for the quality of gas for municipal and household purposes differ from the requirements for autogas. This is the presence of a significant percentage of propane versus butane. The supplier company must purchase propane and butane separately, with mandatory separate storage, and control the mixing (proportions) based on the needs of a specific user. To put it simply, a propane mixture is needed for cooking due to its high efficiency, and it also burns out as much as possible from the cylinder.
Additional procedures require qualified specialists. What is the staff working in the Nadezhdy bottled gas project?
M. K.: Currently, there are 48 employees. Repair, transportation of full and empty cylinders, specialized transport, the presence of specialists with permits and a large investment infrastructure with a package of permits, licenses and requirements require the enterprise to incur large expenses and a rigid vertical of engineering service. The personal responsibility of a master locksmith with a personal brand (put on each checked cylinder) is a great responsibility and pride of the enterprise. Every year we reject and withdraw from circulation up to a thousand cylinders, which requires replenishing the fleet at the expense of the enterprise with new and high-quality units.
S. B.: This is a costly industry of liquefied gas. For example, in Europe, benefits have been established in the form of zero or reduced excise tax. In neighboring Poland, since 2004, a zero excise tax rate has been in effect on municipal and household gas, but on autogas – 387 zlotys/t (€82/t). Compare with the rates in Ukraine, by the way, where the rate for all liquefied gas is already €96/t.
Why don’t we do this here, why not integrate European practice?
S. B.: In general, the European Union has over 50 years of market experience in using liquefied gas, that is, it has the corresponding many years of experience in regulating excise taxes, which combines the experience of each European country with its own characteristics. There is an EU Directive regulating taxes. It establishes the status of liquefied gas as an alternative fuel. The Ukrainian market is becoming similar to the Polish one. For example, Poles consume a total of 2.5 million tons of gas, which is only 0.5 million tons (data for 2021) more than in Ukraine. The market is also similar in using autogas, 1.5 million tons (2021) versus 1.8 million tons in our country.
In Ukraine, the state lacks trust and understanding of the importance of liquefied gas for municipal and household purposes in the bottled gas business. All remaining obstacles stop the development of the bottled gas market, which has become very popular over the past year. No one would import 200,000 cylinders in 2022 without the country’s need!
If we compare the excise tax rates on LPG among European countries, we can see a relationship between the quantity, scope of use and the amount of tax, namely: where there is more use (importance for the population), there is a lower tax. Right now, Ukraine is on the verge of the recommended amount of excise tax on liquefied gas in accordance with the EU Directive.
Perhaps the lack of administration of different excise tax rates (for example, for municipal and household gas and autogas (UKTZED 21) by the state does not allow setting fair rates, that is, reducing the excise tax on liquefied gas for municipal and household purposes. The tax strategy decides whether there is a prospect for the development of liquefied gas in cylinders in Ukraine.
What changes did the war bring to the bottled gas business?
M. K.: Bottled gas is extremely important for cooking and heating. Both for the population and the military. The absence of smoke when using and the mobility of transporting the cylinders themselves.
During the war, the importance of liquefied gas as an alternative to electricity increased. Ease of transportation and ease of use came in handy at the front for the defenders of Ukraine. During the de-occupation period, as was the case in the second-third quarter of 2022, when there was no electricity and natural gas, propane cylinders – this is heat, hot food and fuel for generators. This was proven in 2022 by the example of Chernihiv, Sumy, Kharkiv, Mykolaiv, Kherson and Donetsk regions. But there are obstacles in delivering to the user due to the “excise duty” of municipal and household gas. We have encountered this and emphasize that this issue must finally be resolved.
During the shelling of the energy sector, the need for gas in cylinders increased. In Kyiv, residents of high-rise buildings massively bought tourist and 5-liter cylinders.
M. K.: Yes, residents of cities with a population of millions made the so-called first purchase, that is, they purchased their first gas cylinders. But not everyone filled them up a second or third time, because our Armed Forces can now protect the energy infrastructure, which has reduced the number of power outages. We, of course, felt this demand.
During the blackouts, a new inexperienced user appeared (especially for residents of cities that were dependent on electricity). For example, using cylinders on the 11th floor is already commonplace, and there is nothing you can do about it. During this period, a stream of various devices and cylinders poured into the country, not always of high quality, which were difficult even for an experienced person to understand. The lack of instructions for use often led to accidents.
But I am sure that the resident of the high-rise building, as well as new users (and these numbers are much higher than pre-war figures), will continue to take care of their cylinders.
How did the gas cylinder fleet in Ukraine change in 2022, what is its current state?
S. B.: At one of the meetings at the Ministry of Energy, it was announced that last year only one well-known chain of stores imported 13 thousand cylinders. And according to preliminary data, almost 200 thousand cylinders from various manufacturers were imported to the country in a wide range. There are no additional requirements for the sale of an empty cylinder as an empty container, but this cylinder is purchased for gas filling, and after the first filling it falls under more stringent requirements. So, the buyer takes the risks. For example, in most European countries this is normal, because the user fills the cylinder on specialized equipment for filling cylinders.
M. K.: The situation here is sad, but it is necessary at the moment. In fact, in Ukraine, most users fill cylinders at gas stations.And if there are no instructions on the cylinder, then it is technically impossible to fill the cylinder to 85% of its volume. Only an experienced gas station attendant can do this and avoid danger. But the fleet has expanded significantly over the year, which in turn will increase the number of users of bottled gas many times over, and, in addition, the responsibility of those who fill the cylinders will increase. For example, last year, cylinders were brought to us whose age has long since ceased to meet the requirements for operation!
And what are the prospects for cylinder production in Ukraine?
M. K.: Oddly enough, it was during the war that the first domestic manufacturer of high-quality and certified cylinders appeared in Ukraine. We are very happy about this, we support them with orders and will continue to support them in every way. 220 g tourist cylinders, which are hand-held and easy to use, also became very popular. Unfortunately, the Ukrainian manufacturer of the collet itself was forced to move production to a neighboring country. In general, there are several enterprises in Ukraine that complete tourist gas cylinders and fill them with gas, and this is enough for our needs in the future.
Because of the war, Ukraine has ceased to experience a shortage of natural gas, and after our Victory, we will probably also export it. What is the place of bottled propane-butane after the Victory?
S. B.: Yes, Ukraine has significant reserves of natural gas and an extensive network of pipelines for users, this is what distinguishes us from European countries. This is good, but, as I said, there is still a post-Soviet principle that destroys any supply. Today, only 72% of settlements in Ukraine are gasified. So, more than 2,000 settlements remain without natural gas, due to the lack of gas pipelines, many are forced to refuse to connect to gas networks. Also, after the war, many new facilities will be built in places where there is no gas pipeline network at all. The post-war construction boom will require more liquefied gas for a long time to come. Therefore, we must move ahead.
Firstly, populist pricing for natural gas, electricity or liquefied gas will lead to a new collapse of energy supply. We must change this scheme, following the example of European countries.
Secondly, a significant burden on the liquefied gas network in the municipal and household sector is the excise tax, which is not imposed on natural gas and electricity, but performs the same energy function.
These are the two main obstacles to the creation of a safe market for affordable liquefied gas for industry and the population.
How do you assess the development of the tourist gas canister market?
M. K.: Last year, gas canisters (220-300 g) worth $7 million were imported. Convenient storage and small size are the reasons for the popularity of tourist gas canisters. In everyday life, they have a very wide range of applications. For example, this is a new, so-called “blowtorch” of widespread use. Truck drivers, housewives, plumbers and construction workers use it almost daily. You can conveniently and quickly heat a fireplace or simply light a fire. While the war is going on, cans are warmth and hot food for our defenders at the front.
I announce that our company plans to place a network of containers for receiving used cans for the purpose of further safe disposal. I hope that I will not surprise anyone when I say that the tourist can is disposable. The valve is designed for single use. Disposing of it independently is dangerous for humans. And after our Victory, tourism will develop, and the need for the military will continue to exist.
Source: NaftoRynok
