Gas-based fertiliser units will have to pay more for their feedstock as the government is mulling pooling of its price with imported liquefied natural gas (LNG), which is much costlier.
About 70% of the 28 million tonne domestic urea output is based on domestic natural gas at present, while the rest is based on naphtha. Pooling is a mechanism under which fuel sourced at different prices would be sold to the consumers at a weighted average price.
The move would impact fertiliser majors like Iffco, Kribhco and RCF, among others. With price pooling, about 30% of the capacity in the fertiliser industry that now relies on naphtha, a liquid hydrocarbon, would be able to switch to the cleaner and more efficient gas. The government wants all fertiliser producers to run on gas by 2013-14, a person privy to the development told FE. Only then can urea, a mass-use fertiliser, be deregulated without subjecting the less efficient producers to severe competition from the gas-based ones.
A panel led by Planning Commission member Saumitra Chaudhuri is currently preparing a model for fertiliser sector reforms including gas price pooling and nutrient-based subsidy for urea.
The power sector, which was also considered by the petroleum ministry for price pooling earlier, has rejected the proposal because of the expected price increase for some consumers.
Price pooling would lead to a flat price of natural gas for all consumers, irrespective of whether it is domestic or imported, while gas producers like ONGC and Reliance Industries will continue to get the price guaranteed in their contract with the government. There is wide variation in the price of gas produced within the country now as contracts were signed between the state and the producers at different points in time.
Fertiliser producers that now enjoy a lower price, say the $4.20 per million British thermal unit that Reliance Industries is allowed to charge on gas from its D6 block in the Krishana-Godavari basin or other consumers that get gas at administered prices, will have to pay more, while those going for imported LNG would get gas cheaper than their landed cost. Once consumer price for gas becomes steady, then the government can give pricing freedom to urea producers.
In such a scenario, deregulation of the commodity would lead to the extinction of a section of the industry and eventually to higher import dependence. The decision to go for price pooling indicates the government’s commitment to reform the fertiliser sector in spite of the reduced availability of natural gas. The country’s largest gas producer, RIL is witnessing a decline in gas production due to technical reasons. This has forced fertiliser minister MK Alagiri to take up the issue with petroleum minister S Jaipal Reddy, who has made a pro-rata reduction in gas allocation to various user industries.
