The government is planning to make all the fertiliser companies running on naphtha switch to the cleaner and more cost effective natural gas by introducing notional price pooling of gas for the sector as early as next fiscal. Price pooling will make imported LNG more affordable but domestic gas slightly costlier for some producers.
Under notional gas price pooling, the government will calculate the subsidy on urea based on a weighted average pooled gas price.
Currently, one-fifth of the total output of the commonly used plant nutrient ? urea ? is produced with naphtha, a liquid hydrocarbon which pushes up its production cost three-fold when compared with gas-based units. Big urea producers like SPIC (Tuticorin), DIL (Kanpur), MFL (Chennai), ZIL (Goa) and MCFL (Mangalore) rely on naphtha.
Official sources said the urea production cost of a gas-based plant is only R8,500 per tonne, whereas naphtha-based units incur up to R28,000 a tonne, which imposes a heavy financial burden on the government on account of subsidy on fertilisers. This burden gets heavier when consumption of urea goes up in years that get a good monsoon, such as 2010-11, in which agriculture output rebounded to 6.6% from 0.4% a year ago. Urea is still under government price control, unlike phosphatic and potash fertilisers that were partly freed from control last fiscal.
The petroleum ministry now allocates about 15.3 million metric standard cubic metres a day (mmscmd) of RIL gas to the fertiliser sector. ?Most of the urea producers in South India are naphtha-based and are unable to shift to gas due to its unavailability,? said a government source. Endorsing notional price pooling of gas for the sector, Fertiliser Association of India director general Satish Chander told FE that it would enable the industry to add more imported LNG in its energy mix and reduce the cost of production. This would mean that some producers who now get gas from ONGC and RIL at $4.2 per unit will have to pay slightly more to make the cost of the fuel uniform across the sector.
The fertiliser sector, which has not seen any new capacity addition in the last few years due to non-availability of domestic gas, is likely to attract fresh investments after the introduction of price pooling.
Adoption of notional price pooling will also bring uniformity in the price of urea, which is now characterised by at least five different prices depending on the fuel used, which accounts for 80% of the production cost. This will pave the way for introducing nutrient-based subsidy and partial decontrol of the commodity.