New urea plants likely to get subsidised gas

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jun 1 2010, 02:28am hrs
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In a bid to woo fresh investments into the urea sector, the government is considering the option of giving natural gas to new urea manufacturing plants at a discounted price for a limited period and ask state-owned gas distributor GAIL India to guarantee long-term availability of the feedstock to them. The move is part of the proposed new urea investment policy.

A previous policy, aimed at boosting investments in the sector brought out two year ago, did not allow new entrants to get gas at the government-administered price of $ 1.79 per million British thermal unit (mmBtu), the lowest price for gas in the country until recently.

This had dampened the enthusiasm of investors in the urea sector. One of the options under consideration is to give subsidised gas for a limited time. If 80% of the cost of urea production is attributable to natural gas price, there should be certainty on the price as well as sufficient supply of gas for new investments to come in, said a government official, who asked not to be named.

The move comes in the wake of government raising the administered price to the level at which RIL sells its K-G D6 gas$4.2.

Also, Anil Ambani-promoted RNRLs efforts to get gas from the prolific K-G D6 field at a cheaper rate than the government-fixed price was blocked by a Supreme Court order that said pricing and allocation of gas has to be as per government policy. But the view among some officials is that since the urea sector badly needs investments, it could get a differential price for a limited period.

Another government official, who too did not wish to be identified, told FE that at the current global price of urea, the feedstock price of $4.2 per mmBtu is viable, but that may not be the case if gas price goes up. In a gas-based urea plant, there would be a fixed cost of $150 and a variable cost of 21 times the cost of gas for making a tonne of the fertilizer. At the current (administered and KGD6) gas price of $4.2mmBtu, the total production cost works out to $276 a tonne of urea, when the product sells in global markets at $290 a tonne. That makes the $4.2 a viable feedstock price for urea. But if it goes up, the plants viability will be affected, explained the official, emphasising the need for firm commitments on price and supply of natural gas.

Manufacturers who have not availed the previous urea investment policy of 2008 get gas at the APM price and gets a 12% post tax return on the commodity, which is under price control. Beneficiaries of the policy were to get a better price for urea but had to rely on non-APM gas. But the policy did not help much in the absence of guaranteed availability of affordable gas. There has been no new investments in the urea sector for more than a decade, making supplies fall short of demand by an estimated 1.9 crore tonne by the end of next year.

Now, under the proposed new policy, the government is also looking at providing some incentives for building gas pipelines to new urea production facilities as gas is more efficient a feedstock than naphtha, said the official.

There is no point in asking producers to shift to gas in, say three years, if there are no pipelines, the official said.