The Hindu Business Line : Urea: Decontrol, the only option

It is imperative that, along with a urea pricing policy, the Centre should also formulate guidelines for feedstock allocation which ensure that adequate gas is available.

Urea is the poor farmer's fertiliser. It is in this context that the Centre's new Urea Pricing Policy assumes importance. Not only because it determines the sector's competitiveness but also because there are miles to go before every poor farmer is assured of secure urea supply at an affordable price.

The new policy is euphemistically called "Policy for Stage III of New Pricing Scheme for Urea Manufacturing Units"(NPS III). It seeks to promote the use of natural gas, the efficient and comparatively cheaper feedstock, for urea production. A time-frame of three years has been set for conversion of all non-gas based urea units to gas-based plants.

To expedite conversion, the policy provides for non-mopping up of energy efficiency for five years. In case of non-conversion, the policy disincentivises high-cost production from non-gas based units by restricting their subsidy to the import parity price of urea, after three years.

The Centre has also decided to operate a buffer stock through the institutional agencies and fertiliser companies in major consuming States up to a limit of 5 per cent of their seasonal requirement, to meet unexpected spurt in demands or local shortages.

How will the NPS III incentivise additional production of urea? Urea is the main nitrogenous fertiliser. Its production hovered around 20 million tonnes for the last six years.

About 60 per cent of the urea is produced from natural gas and the remainder from naphtha, fuel-oil, etc. There has been no capacity addition in urea after 1999. This gap between the input's demand and supply has been increasing each year. The main reason for this stagnation is the pricing policy, which, inter-alia, is inextricably linked to constraints in availability and pricing of feedstock.

Shortage of feedstock

Feedstock is the key determinant in shaping the fertiliser industry. It is apparent that the Ministry of Chemicals and Fertilisers, in its latest policy pronouncement, has not addressed the key issue of making available adequate quantity of gas to the fertiliser industry to make it self-sufficient.

Natural gas is the preferred feedstock for urea production as it is a clean fuel and energy source. However, its availability, even to gas-based plants, has been under severe pressure because of the allocation of gas to other consumers at the cost of the fertiliser units. From the mid-1990s, supply of gas to urea units was curtailed despite initial allocation to meet the full requirements. Consequently, gas-based units started facing a supply shortage and had to meet the shortfall using naphtha.

Most of the gas in India is currently produced from the Western offshore fields, and is fed into the Hazira-Bijapur-Jagdishpur (HBJ) pipeline. In addition, there are on-shore gas producing regions, which include Cambay Basin Gujarat, Cauvery Basin, KG Basin, North-East region (Assam and Tripura) and Rajasthan.

With the fast increasing demand, supply shortage and declining production, immediate steps need to be taken by the Central Government to augment gas supplies.

Additional Supply

Additional supplies are projected to come from new discoveries, import of LNG , coal-bed methane (CBM) and, most importantly, through trans-national pipelines. These include the Iran-Pakistan-India Pipeline, the Myanmar-Bangladesh-India Pipeline and the Turkmenistan-Afghanistan-Pakistan-India Pipeline. However, geo-political considerations have delayed the progress of these projects and supplies from such sources remain uncertain.

In any case, there seems little possibility of additional natural gas being made available to the fertiliser sector immediately. Therefore, other options have to be explored. India has huge proven reserves of coal and it would be prudent to exploit this resource for production of ammonia and urea. The newly announced urea pricing policy has no such provision. In view of the emerging hydrocarbon energy scenario, it is time coal gasification was considered as a viable option for urea production.

The natural gas market in the country presents a picture of contrasts. As the cost of feedstock is the single largest cost factor in urea production, feedstock pricing policies have a direct bearing on the production cost and subsidy burden. One fundamental question that needs to be addressed is whether the price of gas for the fertiliser sector should be administered by the Centre or if it should be market-driven; this is inextricably linked to the question of urea pricing — which has also not been addressed in the latest policy pronouncements.

Priority in allocation

The gas supply-demand balance will continue to remain in deficit in the foreseeable future. While new discoveries are being made new investments committed on a mega scale, the demand for gas, essentially the energy demand, is also increasing apace with high GDP growth. Thus the urgent need to devise a workable energy security strategy is vital.

The twin issues of energy security and food security should be addressed together and an appropriate strategy developed whereby adequate feedstock is allocated to the stagnant urea industry so that it can build additional capacities.

It is a recognised fact that highest economic value is achieved by using gas a fertiliser stock and fertiliser production should get priority in gas allocation.

However, due to competing pressures from other sectors, the fertiliser sector has always suffered a shortage of this important input.

The sector's share in total allocations fell to just 29 per cent in 2005-06. It is, therefore, imperative that along with a urea pricing policy, the Central Government should also formulate a feedstock allocation and pricing policy which should operate in conjunction with each other.

The policy should ensure that adequate gas is available not only for gas-based plants but also for conversion of feedstock, de-bottlenecking, expansion projects and also for a few new plants.

Decontrol, the way out

The growth of the fertiliser industry has so far taken place in a government-controlled environ- ment, where such key factors as capacity, location and feedstock process-route were determined by the Government. By all indications, the accepted view is that price controls on urea will continue in the foreseeable future. The policy for NPS Stage III will terminate in March 2010. The portents are not very bright. What, then, is the way out? Obviously, progressive decontrol of the urea industry.

After conversion to gas, urea manufacturers will be better able to face international competition. Meanwhile, the Centre should take steps to decontrol the fertiliser industry in a phased manner. For this, it needs to restrict price control in its concession scheme.

Subsequently, the subsidy has to be capped at current levels. Any escalation in the cost of production of the units covered under the concession scheme should be passed on to the users by increasing the MRP. Subsidy on existing production should be computed on cheapest source of energy.

There should be clear-cut policy in tackling demand risk, output price risk and input price risk and other project risks with the investor, thereby encouraging efficient investment. After April 2010, a time-frame of two years may be fixed and decontrol started gradually for at least half the urea units.

Besides, for some time, the Centre should introduce a cap on the import parity price for the producer price. After total decontrol, there should uniform sales-tax throughout the country.

(The author is a Senior Under-Secretary in the Department of Agriculture and Cooperation, Ministry of Agriculture, New Delhi. The views expressed are personal.)