Gas price hike may burden urea cos by Rs 9,000 cr

The production cost would increase by Rs 1,384 per tonne with every increase of $1 per MMBTU in gas prices

The hike in domestic gas price, which is expected to be implemented from April 1, 2014, may burden urea producing companies by over Rs 9,000 crore.

According to a report submitted by Parliamentary Standing Committee on Finance headed by Yashwant Sinha, the production cost would increase by Rs 1,384 per tonne with every increase of $1 per Million British Thermal Unit (MMBTU) in gas prices.

Most of the country's natural gas is currently sold at $4.20 per unit. The price of gas in April next year would be around $8.42 and over $10 in the following year.

The Rangarajan-gas pricing formula would be applicable for five years. It uses long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India.

The Yashwant Sinha panel said according to the information they received from the Department of Fertilisers, if gas price increases by USD1/MMBTU, then per tonne increase in production cost of urea will be Rs 1,369.5 and the total production of urea by gas-based fertiliser companies is pegged at 18 million tonne.

"On an average, in India around 24.893 MMBTU of natural gas is required to produce one MT urea. Increasing gas price by USD 1/MMBTU translates into enhanced cost of almost Rs 2,465.1 crore for 18 MMT of urea produce by gas based units per annum," the committee said.

"It is thus evident that gas pricing has serious repercussions for the economy as a whole, which warrants careful deliberations and prudent decisions," it observed.

According to arithmetic, the resultant burden would be Rs 9,060 crore as with the Union Cabinet's decision, the gas price would be almost USD 4 more than existing prices.

India Ratings & Research, a part of Fitch ratings group, had earlier said the country produces about 22 million tonnes of the key nitrogenous fertilisers annually, but consumes around 30-32 million tonnes. The gap is met through imports.

Though the fertiliser sector was getting its supplies as per priority fixed by the government, in the present economic situation with rampant inflation and slowdown of economy, any increase in gas prices will have a derailing effect on the economy generally and downstream core sectors of fertiliser, power and steel in particular, the Parliamentary Committee said.

The committee suggested that the government needs to do a thorough impact study of gas pricing on different sectors of the economy, particularly the core sectors of power, fertiliser, steel and small scale industry, specially those effected by pollution control laws/orders.

The panel submitted its report and recommendation in August.

Congress MP Sanjay Nirupam, a member of the committee, in his dissent note said all the fertiliser units in India were started before the NELP regime and as a matter of policy the government gives priority to the fertiliser sector as far as gas supply is concerned.

"However, due to sharp decline in gas production, the sector is largely dependent upon import of LNG. Initially, gas price revision may result in increase in prices of urea but in the long run, with increased production of domestic gas, the fertiliser sector will be benefited due to reduction in import," Nirupam said in his note.

At present, the cost of import of gas at the rate of $12 per MMSCMD will subsequently come down to $8 per MMSCMD.

In the long run, cheaper gas will be available in the domestic market, Nirupam added.