Gas re-prioritisation to increase fertiliser subsidy by Rs 6,000 cr

EGoM to meet on July 17

The A K Antony-headed Empowered Group of Ministers’ (EGoM) July 17 meeting to look into natural gas allocation could determine the fertiliser subsidy outgo in the coming years.

According to the industry, if the EGoM decides to shelve priority ranking in gas allocation and re-allocate gas for urea facilities to the power sector, it might add another Rs 6,000 crore to the urea subsidy.

The industry also expects urea subsidy to increase by another Rs 21,000 crore from the next financial year due to an expected cut on allocation, coupled with an increase in domestic natural gas prices and also the rupee depreciation.

“If the rupee stays around the 60-mark, it would add another Rs 4,000 crore, while the domestic gas price hike with effect from April 2014 is likely to have an impact of Rs 10,000 crore. Along with this, if we add the cut of around 10 million standard cubic feet a day (mscmd), the subsidy mark would reach Rs 45,000 crore for urea alone from the current Rs 24,000 crore,” said Satish Chander, director-general, Fertiliser Association of India (FAI).

According to estimates, every $1 increase in gas price will raise the annual production cost of the sector by Rs 2,738 crore.

At present, the total gas supply to fertiliser plants is 43.6 mscmd, of which 19.5 per cent (8.5 mscmd) comes from imported liquefied natural gas (LNG). According to an industry source, if the government decides to divert 10 mscmd of its allocation to power, it would increase the imports to 45-50 per cent of the total gas requirement. “The diversion of 10 mscmd KG-D6 gas from fertiliser sector would also result in reduction of five million tonnes of domestic urea production. Even if the cost of gas is passed through under pricing policy, 2.5 mt of domestic urea production would be lost,” the association said in a letter to the ministries concerned.

According to FAI calculations, even excluding the rupee factor, and taking into consideration of gas price hike and re-prioritisation only would increase the cost of production of urea by more than Rs 7,300 a tonne, while the current maximum retail price of urea is only Rs 5,360 a tonne.

Out of the total 43.6 mmscmd for fertilizers, 12.6 mmscmd comes from APM gas, 14.4 mmscmd from RIL and another 2.7 mmscmd from ONGCs non-APM fields. At the same time, the shortfall of gas for the sector is around 4.96 mmscmd. 
 

A major draw back occurred because of the drop in RIL’s KG-D6 gas. The priority-basis was first for existing gas-based urea plants, LPG units, power plants lying idle, city gas distribution projects and if remains for existing gas based power plants. About 25 power plants were running short of gas due to the decline in production to 15 mmscmd in KG-D6 from 61 mmscmd in 2010.

The allocation for these power plants from KG-D6 were supposed to be around 29.7 mmscmd, which turned to zero supply for the sector now.