The proposed system will also remove the disadvantage that units like these have from higher gas transportation cost that affect their production cost.
Both Tata Chemicals and Chambal Fertilisers have their production plants in Rajasthan, far away from producing gas fields. On the other hand, companies like Rashtriya Chemicals and Fertilizers Trombay unit and Kribhcos Hazira unit enjoy relative proximity to gas sources.
Although the proposed price pooling for gas would compensate some firms at the expense of others, who have managed cheap gas supply, the new pricing scheme for urea cleared by the group of ministers led by Pranab Mukherjee would have a neutral impact on all companies.
That is because the proposed new policy regime for urea offers a flat rate of subsidy to all producers after making their cost of production uniform through the price pooling mechanism. Now, the cost of production varies differently, which is taken into account while calculating the subsidy entitlement of individual producers to offset their cost advantage from sourcing of gas. Of course, post deregulation of urea, the flat subsidy given to companies would be much less than what it is now and will be in line with the governments paying capacity.
The proposal for notional price pooling of gas and deregulation of urea price with an informal understanding with the industry not to raise price by more than 10% in the first year, was cleared by the group of ministers on August 6. The proposal is now awaiting clearance from the cabinet committee on economic affairs.
The proposed price pooling of gas removes all the advantages and disadvantages that urea producers now have from the price of gas. The industry would not have found the proposals acceptable had the overall impact on them was not neutral, said Tarun Surana, research analyst with Sunidhi Securities & Finance. The price pooling does not leave any one with a surplus or deficit in terms of the gas price compensation. However, companies with greater efficiency would be able to make some gains as the subsidy and cost will be uniform to all.
Producers now get gas from different sources including at an administered price of $4.2 per unit from ONGC and Oil India, at a similar price from Reliance Industries and at higher rates from blocks nominated to the two state owned energy companies in addition to the sharply costlier imported liquefied natural gas.
Of the total 44 million metric standard cubic metres per day (mmscmd) of gas used by the fertiliser sector, about 15 mmscmd is APM gas and a similar quantity is from RIL. The government has assessed that the sectors appetite for gas is set to go up by 17 mmscmd in 2012-13 and by 64 mmscmd each in the subsequent two years.
Making the price of gas, that account for 80% of the urea production cost, uniform, the government wants to felicitate fresh investments into the sector. A specific urea investment policy is now being prepared by a panel chaired by Planning Commission member Saumitra Chaudhuri, which is expected to give its recommendations next month.