Running out of gas

Written by Uttam Gupta | Updated: Jul 29 2013, 09:37am hrs
In its meeting held on July 17, 2013, the Empowered Group of Ministers (EGoM) considered the ministry of petroleum and natural gas (MPNG) proposal to re-prioritise allocation of domestic gas from RILs KG-D6 fields to treat power on par with fertilisers. It was decided to retain extant top priority for the fertiliser sector for now.

The fertiliser sector was spared the ignominy of snatching away its claim on gas not because members of the EGoM recognised its legitimacy. It was the fear of reduction in urea production due to curtailment in gas supply and the resultant shortage at the time of impending elections that drove them to maintain the status quo.

Gas is a national resource and its use has to be decided based on sound rationale under a long-term policy framework avoiding flip-flops based on short-term considerations. In this backdrop, serious implications of MPNG proposal for continued viability of fertiliser plants, increased dependence on costlier import, subsidy outgo and fiscal deficit need to be carefully considered.

At the outset, it is pertinent to refresh the logic behind existing priorities. In the 1970s when gas finds were beginning to become available, Lovraj Kumar Committee (1976) observed national economy will derive the maximum economic advantage if it is to be used in production of fertilisers.

This was reiterated by Satish Chandran Committee (1979), which held opportunity cost of lean gas/methane (after removal of higher fractions) would be maximum when it is used in production of nitrogenous fertilisers. Addition to urea capacity in the 1980s and 1990s and infrastructure for transportation of gas including H-B-J pipeline was planned on this basis.

Gas has chemical value (hydrogen and carbon) which is optimally utilised in production of fertiliser. Carbon dioxide generated in the process is fully converted into urea. Higher fractions such as C-2, C-3, C-4 are fruitfully used in the petrochemical sector.

In power, gas is burnt even as chemical value goes waste. All the carbon present in the gas is converted into carbon dioxide and emitted into the atmosphere. It adds to greenhouse gases and, therefore, is detrimental to the environment.

Therefore, fertilisers get top priority in gas allocation. LPG is at number two and power gets the third slot. Yet requirements of fertiliser plants are far from fully covered. Against 42 mmscmd, they get 31 mmscmd (15 mmscmd from KG-D6 and 16 mmscmd from ONGC/OIL); the balance 11 mmscmd is met from imported LNG (liquefied natural gas).

Under a policy directive from the government, in 2012-13, five fuel-oil and naphtha-based plants were restructured and switched over to gas. They need 5 mmscmd, thus increasing the uncovered gap to 16 mmscmd.

MPNG proposal envisages diversion of 10 mmscmd from fertiliser to power. That would further reduce availability of domestic gas for fertilisers to 21 mmscmd or just 45% of the total requirement of 47 mmscmd.

At the prevailing price of around $20 per mmBtu, LNG costs $16 per mmBtu more than the current domestic price (4 mmBtu make up 1 million Kcal and 1 standard cubic metre is equal to 10,000 Kcal). Therefore, 1 mmscmd equals 10,000 million Kcal. At $16 per mmBtu, the value of 1 mmscmd is $640,000 (16x4x10,000).

For replacing 10 mmscmd of domestic gas by LNG, the daily extra outgo will be $6.4 million (640,000x10). Annualised, this would be $2.336 billion or R14,000 crore. Add to this R22,400 crore due to the already unmet demand of 16 mmscmd (14000x1.6), and extra burden will be R36,400 crore.

Under urea investment policy (UIP), projects with a total capacity of 20 million tonnes are on the anvil. They would need about 36 mmscmd at 600 cubic metres per tonne). Extra subsidy outgo through LNG route will be R50,000 crore (14,000x3.6).

Where will the money for all this come from In 2012-13, revised estimate for fertiliser subsidy at R65, 974 crore was short of actual by about R36,000 crore. For 2013-14, allocation is frozen at R65,971 crore.

Even if the actual could be managed within this (most unlikely), the carry-forward of R36,000 crore has to be cleared. Add R36,400 crore due to substitution of domestic gas by LNG, the shortfall would be R72,000 crore!

This would lead to suspension of payments, liquidity problems and large-scale closure of plants. In 2014-15, situation will be aggravated due to 100% increase in price of domestic gas from April 2014 (Rangarajan effect). Looking further ahead, the non-availability of gas would force abandonment of plants under UIP!

The trigger for acute gas shortage and review of time-tested priorities is the inability of RIL to deliver on its supply commitments. Against 80 mmscmd it was to supply by 2012-13 and 2013-14, the actual production plummeted to 26 mmscmd in 2012-13 and 14 mmscmd in 2013-14.

Sincere efforts are needed to shore up output instead of making alleged low gas price a whipping boy. That will give enough money to RIL even at $4.2 per mmBtu help fertiliser plants run optimally and rein in subsidy as well. The government should refrain from altering priorities.

As regards power, allowing so much of capacity on gas was a flawed decision. Having set up these plants and to ensure that capacities are fully utilised, for now they can be hooked to LNG. Consequential higher cost from these may be spread over entire power units (from all sources) to smother the effect through a price pooling arrangement. Later, when overall gas supply improves, they can be switched over to domestic gas as done in late 1980s under similar circumstances.

The author is a political analyst