Don’t play around with gas allocation

The woes of the fertiliser industry do not appear to be showing any signs of easing. Already battered by the financial squeeze, due to grossly inadequate Budget allocation, it may now face a huge shortage of gas.

Gas is a ‘clean’ and ‘environment-friendly’ fuel. It is the most preferred feedstock for production of fertilisers. About 80 per cent of production capacity for urea in India is based on gas (balance 20 per cent on naphtha and fuel oil).

Gas being a resource of national importance, the Central government allocates available gas to various sectors — fertilisers, power, petrochemicals, sponge iron, and household consumption.

Historically, this job was performed by the Gas Linkage Committee (GLC) — an inter-ministerial platform chaired by Secretary, Ministry of Petroleum and Natural Gas (MPNG).

Now, this responsibility rests with the Empowered Group of Ministers (EGoM).

GAS SCARCITY

In the current scheme of allocation, the EGoM has given ‘top priority’ to fertilisers, power and other industries in that order. The distribution of gas from K-G fields of RIL (estimated at 80 mmscmd ‘committed’) was also done on this basis.

Gas from K-G fields started flowing from 2010. To begin with, supply was 40 mmscmd; this was to be scaled up progressively to reach 80 mmscmd. Far from that, supplies have declined progressively and have now plummeted to below 20 mmscmd!

This has led to substantial shortfall in availability for almost all the industries vis-a-vis their respective requirement. It has also triggered a clamour from various sectors to garner a bigger slice of available gas.

Ideally, Government’s response should be to distribute shortage on a pro-rata basis but not alter the priorities. Thus, if the share of any industry in total allocation is ‘X’ this should remain at X (even after cut).

Ignoring the above fundamentals, reportedly, the Ministry of Petroleum and Natural Gas is putting up a note for EGoM seeking to change the priority for gas allocation in favour of power. This has led to consternation in the fertiliser sector.

Already, some 20 gas-based fertiliser plants are facing shortage. They are forced to use alternate fuels viz., naphtha, fuel oil/LSHS — invariably in off-site facilities (captive power and steam generation) and in some plants even as feedstock — which are more expensive and difficult.

This has led to a steep increase in production cost and higher subsidy outgo, with a view to keeping selling price at a low level. Delayed payment of subsidy dues brings in additional problems in the form of cash flow and high interest cost remaining uncompensated.

SUBSIDY OUTGO

If the EGoM were to assign ‘higher priority’ to power, this will result in further steep reduction in supply of gas to fertiliser units. This could spell disaster by causing exorbitant increase in production cost and subsidy, and even bringing several units to brink of closure.

The domestic gas is supplied at $4.2 per mBtu (as per EGoM decision in 2007). Assuming allocation to fertiliser plants is cut by 25 per cent, and if this is to be made up by imported LNG at around $16 per mBtu, they will have to shell out Rs 7,500 crore.

Before contemplating any change, policy mandarins would do well to revisit how priorities for gas allocation evolved.

In the 1970s, when gas finds were beginning to become available, the Lovraj Kumar Committee (1976) stated as under:

“The national economy will derive the maximum economic advantage if it is to be used in the production of fertilisers.”

This view was upheld subsequently by the Satish Chandran Committee (1979) on optimum utilisation of off-shore gas. It held: “The opportunity cost of lean gas (after removal of higher fractions C-2, C-3, C-4) would be maximum when it is used in production of nitrogenous fertilisers”.

In the 80s, when there were indications of gas surplus, Committee of Secretaries (CoS) recommended its use in power plants as well.

Some power plants on gas were set up on this basis. ‘First priority’ for fertiliser continued.

In the 90s, however, despite anticipated surplus not fructifying and emerging gas shortage, priorities got distorted. On flawed logic that ‘fertiliser can be imported while power cannot’, power gained at the expense of fertiliser.

A major slice of rise in fertiliser subsidy during the 90s can be attributed to denial to the fertiliser industry its legitimate share of gas (courtesy distortion in priorities), forcing plants to use more expensive feedstock viz., naphtha, fuel oil/LSHS.

The distortions were corrected with the dawn of the current century. ‘Top priority’ for fertilisers was resurrected. The EGoM has reiterated this and very rightly allocated domestic gas, giving maximum of around 40 per cent to fertilisers.

Besides energy, gas has ‘chemical’ value which is optimally utilised in production of fertiliser.

India has abundant reserves of coal which can be fruitfully utilised for power. Coal gasification technologies are available that can make power generation environment-friendly, too.

Use of coal in fertiliser poses a monumental challenge. This is vividly demonstrated by the huge disappointment with the two plants viz., FCI at Ramagundam and Talcher set up three decades ago and sick from Day One.

RETAIN PRIORITIES

As for the argument that ‘fertiliser can be imported while power cannot’, policymakers recognised its fallaciousness long back. It makes no sense to use subsidy to boost high profits of exporters to India.

All through, Government’s policy — as adumbrated in successive plans — has been to avoid excessive dependence on imports for meeting fertiliser demand. Now, if it does not give gas for running our plants optimally, this objective will be defeated.

Top priority for use of gas in fertiliser is based on sound ‘scientific’ and ‘economic’ logic and has stood the test of time. Voicing its ‘strong’ protest over the contemplated move of the Oil Ministry, the Department of Fertilisers (DoF) has very aptly pointed out serious implications. The EGoM should refrain from altering extant priorities for allocation of gas.

The author is policy analyst, and former Executive Director, CropLife India.

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