Fertiliser ministry wants cheaper natural gas for urea units to continue

Written by Prashant Mukherjee | New Delhi | Updated: Jan 30 2014, 05:45am hrs
Contending that cost of urea production needs to be kept under check and so should the subsidy burden, the ministry of fertiliser has asked the petroleum ministry to continue providing natural gas to urea fertiliser units at the current price of $4.2/mmBtu or at least at a concessional rate in relation to the Rangarajan formula-based price to be effective from April 1.

From April 1 this year, the price of domestic gas is set to nearly double as the Rangarajan formula based on reference rates in key gas markets would apply.

In a letter to the petroleum ministry, the ministry of fertilisier has referred to finance minister P Chidambaram's statement after the Cabinet meeting on gas pricing in June last year that even as the output price (price to the gas producers) is being fixed under the formula, the input price (the price at which the consumers buy gas) could be determined later.

The ministry's statement was in reference to the power and fertiliser sector units, which account for nearly 60% of the country's domestic gas consumption.In fact, in line with the fertiliser ministry's thinking, the power ministry has recently said that gas price above $5/unit would make power tariff unviable. However, no particular concessional price has been mooted by the fertiliser ministry.

According to the parliamentary standing committee on finance headed by the former finance minister and BJP leader Yashwant Sinha, an increase of $1/mmbtu in price of domestic gas will increase the average cost of production of urea by Rs1,384 per tonne.

The committee has also suggested that the decision to increase domestic gas price needs further strict deliberations. "It is thus evident that gas pricing has serious repercussions for the economy as a whole, which warrants careful deliberations and prudent decisions," the report said.With fertiliser and power continue to enjoy priority status for gas allocation, recently, an empowered group of mininsters decided to put a cap of 31 million standard cubic metres a day (mscmd)on domestic gas supply to the fertiliser sector.

The fertiliser ministry argued that urea plants are already using more than 9 mmscmd of LNG of total supply of about 42 mmscmd. Still there is a shortage of more than 2 mmscmd for the existing plants that is being made up either with spot LNG or results in lower production.

It is expected that shortage will increase further due to dwindling supply of gas from ONGC under administered pricing mechanism. Any additional replacement of even 1 mmscmd of domestic gas with imported LNG will cost the exchequer almost Rs1,000 crore. Almost 20 gas-based fertilizer plants are facing difficulties due to scarcity of natural gas, with few plants being fired by the more expensive naphtha fuel. India produces about 22 million tonne (mt) of urea in a year and consumes a little more than 30 million tonne.

The remaining is met through imports. The price of urea, which is highly subsidised, is fixed by the government at Rs 5,310 per tonne. The government has estimated fertiliser subsidy at Rs 65,971.50 crore for the 2013-14 fiscal.