WITH a higher gas price slated to take effect on April 1, the fertiliser ministry has written to the oil ministry, arguing the draft gas sales and purchase agreement (GSPA) sent by Reliance Industries Ltd (RIL) to fertiliser companies includes major amendments from the extant regime and could result in substantial dilution of RIL?s obligations and put additional financial burden on the already strained fertiliser companies.

In a letter dated March 20, 2014, fertiliser secretary Shaktikanta Das wrote to petroleum secretary Saurabh Chandra: ?The term of proposed GSPA is only for one quarter i.e. up to 30 June, 2014 and further extension is on quarter-to-quarter basis at the discretion of sellers. Therefore, as far as determination of gas price is concerned, RIL envisages determining the gas price on their own instead of using

the gas price notified by petroleum ministry from time to time. This will result in severe financial implications for fertiliser companies as well as the subsidy outgo of the government and will violate the Domestic Natural Gas Pricing Guidelines 2014.?

Fertiliser companies had sought GSPAs of at least five years ? similar to the existing agreement signed in 2009 ? rather than the three-month tenures proposed in the draft GSPA. They have estimated that a $4/unit increase in price of gas would push up the cost of urea by R5,200 per tonne, and the annual fertiliser subsidy bill by around R10,000 crore at current (subsidised) retail prices for urea.

The fertiliser ministry contends that RIL has restricted the scope of GSPAs to only 3 gas fields instead of the entire KG-D6 or KG-DWN-98/3 block.

Currently, RIL has a total output of 13.28 mmscmd of gas from D1, D3 gas fields and MA oil and gas field in the KG-DWN-98/3 block. This includes 8.17 mmscmd from D1 and D3 and 5.11 mmscmd from MA field.

The draft GSPA proposed by RIL also proposes a marketing margin of $0.135/million metric British thermal units (mmBtu) to be levied on a gross calorific value from current net calorific value, which will effectively increase gas margins by 11%.

The Fertilizer Association of India (FAI) in its letter to the fertiliser ministry has said, ?RIL has started dictating its own terms which are totally unjustified.?

The FAI also claims that the draft GSPA absolves RIL from all liabilities and obligations and do not give an assurance about any supply level. Under the earlier agreement, RIL was liable to reimburse fertiliser companies any ‘Ship or Pay’ liabilities in case of reduction in gas flow. This clause has been deleted from the current draft GSPA.

The the new gas pricing regime under the Rangarajan Committee formula (which is indexed to major LNG hub prices) if implemented, will double gas prices from the current $4.2/mmbtu. However, the matter is still pending with the Election Commission, which last week indicated that the price hike could wait until the elections are over and a new government is in place.

The price of urea, the most widely used fertiliser, is highly subsidised and fixed by the government. The last major revision was on April 1, 2010, when the price was increased to R5,310 per tonne from R4,830. In October 2012, the price was marginally hiked by R50 to R5,360 a tonne.

India produces about 22 million tonne of urea a year and consumes a little more than 30 million tonne. The gap is met by imports. The fertiliser industry consumes 31.5 mmscmd of gas from domestic sources and receives top priority in allocation of domestic gas.