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Move to make the sector globally competitive

Richa Mishra

New Delhi, June 29 With the country aiming to move towards self sufficiency in urea production, the Fertiliser Ministry has sought adequate quantities of gas to be earmarked for the sector at a reasonable delivered price of about $4-4.5 million British thermal unit (mBtu).

The views of the Fertiliser Ministry gain significance as Reliance Industries Ltd is trying to reach a pricing level for its Krishna Godavari Basin gas through an arms length approach. As per reports, the landed price of RIL gas is estimated to cost between $4.33 and $4.6 per mBtu excluding the transportation tariff, marketing margin and 4 per cent Central Sales Tax.

Although fertiliser companies such as Kribhco and IFFCO participated in the bids invited by RIL to determine the gas price, it was more to ensure that gas is tied-up, sources said. The companies had, however, made it clear that the final price would be reached subject to Department of Fertilisers’ approval.

Besides, these companies while participating in RIL’s bid could only quote the floor price, sources said. Indications are that the formula links the price to Brent crude oil price, with a floor of $25 per barrel and a cap of $65 per barrel. The price will be calculated based on a year’s average of Brent crude oil price.

Pitching for a realistic price for natural gas which makes it affordable for the industry, the Ministry has sought a price that would make the sector internationally competitive.

“For the industry, it does not matter who is the source of gas – whether RIL or any other player – all they want is an affordable price keeping in view the price at which fertiliser sector in West Asian countries are sourcing the gas,” sources told Business Line.

The Ministry has also indicated that in case the delivered price at unit location goes beyond $5 per mBtu, a mechanism to subsidise gas for the sector should be considered.

It has also said that transportation cost should be regulated on cost plus principle. The transportation cost should be equal at various locations. This would reduce the subsidy bill by approximately Rs 3,300 crore in the next three years.

It has been estimated that every $1 per mBtu increase in the gas price would lead to increase in the cost of production of urea by at least $21 per tonne.

Therefore, it is necessary that the price of gas for fertiliser sector be fixed at reasonable level. The indigenous industry can absorb at the most a $2.5 per mBtu difference in gas price between the sector in West Asia and that within India.

“Any difference beyond that will make Indian industry uncompetitive and will lead to higher outgo of subsidy,” he said.

The fertiliser sector — which is looking at enhancing production capacity in its existing units, reviving closed fertiliser units and conversion of non-gas based fertiliser plants to gas — has projected a requirement of gas during the Eleventh Plan from 41.02 million standard cubic metre per day (MMSCMD) in 2007-08 to 79.36 MMSCMD in 2011-12.

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