Urea pricing norms hit domestic gas producers

Domestic natural gas producers have opposed the new pricing policy for urea units as it puts them at a disadvantage vis-à-vis imported liquefied natural gas (LNG).

Under the new policy, the government has capped the prices of natural gas and liquefied natural gas (LNG), which are used as feedstock in the production of urea, at $3 per million British thermal unit (mmbtu) and $3.5 per mmbtu, respectively.

Since suppliers can charge up to $3.5 per mmbtu for imported LNG and only $3 per mmbtu for domestic gas, it puts domestic producers at a 17 per cent price disadvantage.

This is being considered "unfair" as domestic gas has traditionally been provided price preference over imports.

""This is the first time imports have been given protection to discourage competition," an industry expert said.

Officials in the department of fertilisers have tried to explain the higher pricing of imported LNG on the grounds that it costs more than domestically-produced gas.

However, domestic producers say their production costs are also quite high as most of the gas discoveries are taking place in deep waters thousands of miles away from the shore.

In fact, they say, there will be hardly any price difference between the delivered price of natural gas and LNG.

Industry sources point out that the government has already discriminated against domestic gas producers by reducing the Customs duty on LNG to 5 per cent against a royalty of 10 per cent on domestic gas. "The policy will help foreign suppliers of LNG," they said.

Oil experts also say the policy runs counter to the government's declared objective of encouraging exploration to generate more domestic energy resources.

This is likely to have an adverse impact on the recent gas discoveries and may also hamper further investment in the country's exploration efforts.

The experts say import of each million tonne of LNG costs the country around $280 million. Its substitution by domestically-produced natural gas will not only result in the saving of this amount, but also result in an earning of $180 million to the government as per the production sharing contract under the new exploration licensing policy.