Turn off the gas for fertilisers

Natural gas, like most other energy sources, is a scarce commodity in India. Domestic production is limited and the demand-supply deficit is met through imports.

The Government has stepped in to regulate supply, with a certain prioritisation of who is to receive the gas. However, this mechanism is short-sighted and flawed.

The average production of natural gas in India was 106 mmscmd in FY13. Projections for the 12th Five Year Plan indicate a demand for gas of 466 mmscmd against an optimistic domestic production of 209 mmscmd.

While the domestically produced gas is in short supply, the current gas pricing mechanism ensures a wide price disparity between domestic gas (priced in the range of $4.2-5.5/mmbtu) and imported gas (global spot prices of LNG are in the $13-15/mmbtu range).

The artificially low price of domestic gas has led to a desperate claim on this gas from various industries such as power generation, petrochemicals, fertilisers, sponge iron plants, city gas distribution (CGD), refineries, and other industrial users.

THE PRIORITY LIST

The Government came out with a “Gas Utilisation Policy” in 2008, applicable for five years and to be reviewed after that.

Hence, this is a good time to assess the effectiveness of this policy and its financial impact on our nation.

The policy allocates gas according to sectoral priorities, with existing users having priority over greenfield users. The order of preference is as follows:

For existing customers, it is fertiliser producers, LPG and petrochemicals, Power plants, CGD, refineries and finally, others.

For greenfield users, it is fertiliser producers, petrochemicals, CGD, refineries, and power plants.

With such a system, power and fertiliser sectors consumed 61 and 37 mmscmd of gas, respectively, in FY12. The policy intends to further encourage new fertiliser plants, with the gas consumption in the fertiliser industry projected to rise to 106 mmscmd by FY17.

The question arises, why do we have this specific priority list? Could there be a better way of prioritising gas usage? Let us try and develop a more rational and quantitative framework for evaluating the trade-offs.

Energy Sources

We should look at the price paid per unit of energy in order to compare costs across different fuels. From an energy or calorific value perspective, domestically produced natural gas is priced over four times cheaper than crude oil or diesel ($4.2 per mmbtu, against $18.1 per mmbtu and $22.2 per mmbtu in the case of crude oil and diesel, respectively, assuming the dollar at Rs 65.). The price of domestic and imported coal, however, works out to $1 per mmbtu and $3.17 per mmbtu, respectively.

Over the medium term, we should try and increase use of domestic coal as well as imported coal, while substituting diesel/crude/LPG with other fuels wherever possible.

What are the potential applications for gas?In the short term, there is a clear benefit of using the available gas for generating power and hence reducing the use of diesel generators, saving on the costliest form of fuel (diesel). In the long term (applicable to greenfield projects) gas should be used for refineries, LPG, CGD, fertilisers, petrochemicals and then power, in that order of priority.

Fertiliser, which is a current priority sector, goes significantly down the list, whether it is from a shorter or a longer-term perspective.

A change in allocation could lead to a saving of Rs 41,000 crore per year.

Let us compare our current policy of “Prioritise gas allocation to fertiliser (urea) manufacturing and import diesel/crude” with a modified policy of “Use domestic gas to substitute diesel/crude usage and import fertilisers”.

Try to Reprioritise

In the fertiliser industry, natural gas is used primarily in urea production, both as a raw material and as a fuel for processing.

About 26 mmbtu of gas is required to produce a tonne of urea. India currently produces around 21 million tonnes of urea every year, which implies that a total of 546 million mmbtu of natural gas is utilised.

In energy terms, this natural gas can substitute 4.25 billion gallons of diesel, a reduction of $13.16 billion.

However, the resulting decrease in urea production needs to be met through urea imports which would add an additional cost of $6.81 billion to the economy.

Therefore the de-prioritisation of the fertiliser sector could mean potential savings of $6.35 billion (Rs 41,200 crore) per year – in other words, diesel usage being reduced by using domestically available natural gas.

Thus, the “fertiliser first” policy is clearly sub-optimal. India would be much better off importing fertilisers and using domestically available gas to replace costlier diesel.

The annual benefit of doing this (Rs 41,200 crore) would be spread across a wide set of consuming industries, as well as commercial and residential households (by not having to use diesel either for power generation or as fuel)

Unfortunately, the Government does not look at the benefit of the nation, but cares more about its own finances.

In order to keep the fertiliser subsidy at a lower level, it imposes this additional cost of Rs 41,200 crore on various consumers, increasing input costs to our industries as well as our service sector, and affecting the global competitiveness of these industries. The Government needs to correct its policy direction.

(The author is Global Partner and Managing Director, India & Asia Pacific, Strategic Decisions Group )

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