Gas price hike to push up power, urea production costs

If a new gas price of $6-6.5 per mmbtu is finalised, cost of power generation could rise upto 26%

The newly proposed gas price framework could increase power and urea prices by raising their cost of production. Analysts estimate the new gas price of $6-6.5 per million British thermal units (mmbtu), if finalised, could push up cost of power generation by upto 26% with a 10 paise hike in electricity prices.

 

"At the gas price of $6.5 per mmbtu, cost of power production will increase from Rs 4.2 per unit to Rs 5.3 per unit. The cost would rise to at least Rs 5.05 per unit if a gas price of $6 per mmbtu is finalised," India Ratings director Salil Garg said. In absolute terms, the revised gas price would lead to an additional Rs 7,800 crore burden on distribution companies, he added.

 

The UPA government had in January notified a formula for pricing natural gas but the decision was put on hold due to the announcement of elections and the subsequent imposition of the model code of conduct. This formula could have increased the price to $8.4 from the current $4.2.

 

Gas-based power plants account for 9%, or 22,000 Megawatt (MW), of India's total installed power generation capacity of 249,000 MW. The country produced 97 million standard cubic meters per day (mmscmd) of gas last financial year including 26 billion cubic meter (bcm) from national oil companies ONGC and Oil India and 9.5 bcm from private joint venture companies.

 

The power sector received almost no gas supply from the private block KG-D6 operated by Reliance Industries (RIL) while the priority fertiliser sector received 13 mmscmd last year. The government is working on a revised gas price to make several new discoveries viable and resolve the disputes in the exploration sector.

 

According to ratings agency Icra, every $1 increase in gas price increases the cost of power generation by 44 paise, assuming the rupee remains at 60 against the dollar as gas contracts are dollar denominated. 

 

"The impact on cost of power purchase for the utilities would be relatively more in case of states in southern and western region, which account for about 35% and 40% of the gas based capacity (both the operational and under implementation) respectively," Icra said in a recent report.

 

The increase in cost of gas will also impact cost of urea production and increase the subsidy requirements for the industry and working capital requirements. Urea accounts for 60% of total fertiliser production. The domestic urea industry has a gas requirement of around 47 mmscmd at present in addition to 9 mmscmd required for conversion of naphtha or fuel oil-based units into gas.

 

Every $1 increase in gas price raises the cost of total urea production by Rs 3,100 crore. While gas price remains a pass-through for urea under the current subsidy regime, the additional cost would increase the subsidy payable to that extent and correspondingly, the working capital requirements of the urea players in case of delays in payment of subsidy as observed in the recent past, also entailing additional interest costs.

 

"The gas prices are not pass-through in the subsidy for urea sales above the cut-off quantity. Thus, the operating profits of urea manufacturers could take a hit once the higher gas prices kick in," India Ratings said in a recent report. 

 

The government's total fertiliser subsidy has jumped from Rs 18,460 crore in 2006 to Rs 67,971 crore last fiscal. The proposal for gas price revision comes at a time when industry body Fertilizer Association of India (FAI) has made it clear it will agree to a price decided by the government.