Gas price loss is urea’s gain

Under new pricing guidelines notified in October, 2014, the price of domestic gas was fixed at $5.61 per mBtu on net calorific value (NCV) basis with effect from November 1, 2014 — an increase of 33 per cent over the $4.2 per mBtu prior to that date. The price was applicable till March 31, 2015.

The price was arrived at by taking a weighted average of gas prices in Henry Hub (the US), NBP (National Balancing Point, the UK), AGR (Alberta Gas Reference, Canada) and Russia. It was to be revised once in six months based on movement in these indices for a full year, three months prior to the date of the next revision. Thus, for price effective from April 1, 2015, the reference period would be January-December 2014.

For April 1-September 30, 2015, this was reduced to $5.18 per mBtu. Since October 1, the price has been further reduced to $4.24. This will help reduce subsidy on urea. About 18 mt annual urea production is based on gas, including 8.5 mt during the first half of the financial year and 9.5 mt in the second half. Since domestic gas meets only two-thirds the total requirement, production likely to be affected are 5.7 mt and 6.3 mt respectively.

Taking 24 mBtu for a tonne of urea, reduction in gas price by $0.43 per mBtu — applicable to the first half — would yield a saving of about $60 million or ₹390 crore. A cut of $1.37 per mBtu — applicable to the second half — would yield about $210 million or ₹1,365 crore. For a full year, the saving will be ₹1,755 crore.

One-third of gas-based output or 6 mt is met from imported LNG. Its price has recorded a much sharper decline from around $10 per mBtu to $7 per mBtu now. This would yield $432 million or ₹2,810 crore. So, the total saving would be about ₹4,500 crore or 12 per cent of ₹38,200 crore, being the Budget provision for subsidy on indigenous urea.

But, the big takeaway is that the government can leverage declining gas price to bring about structural reforms in this sector. Gas cost alone accounts for 75-80 per cent of urea production cost. On March 31, 2015, the Cabinet Committee on Economic Affairs put in place ‘uniform’ gas pricing for all urea units. The rest is processing cost which depends on efficiency and cost effectiveness of individual units.

Naphtha price has declined sharply, but would still be higher than pool gas price. The three naphtha plants — Madras Fertilizers Limited, Mangalore Chemicals & Fertilizers Limited and Southern Petrochemicals Industries Corporation Limited — should be brought on gas without delay.

The distribution and movement controls on urea should be removed, as also the system of reimbursing ‘primary’ freight on transportation by rail on unit-specific basis. All units should be given uniform freight besides uniform ex-factory price.

At pool price of around $5 per mBtu, feedstock cost for a tonne of urea is $120. Add $50 towards processing, indigenous urea would be available at $170 a tonne, which is much lower than the landed cost of imported urea. So, there is great opportunity to save on subsidy by increasing production of domestic urea.

At present, urea imports are allowed only through designated agencies. This has led to inflated cost at more than double the price given to an efficient gas-based plant. The government should also pursue joint ventures in countries where gas is available in abundance. The proposed JV in Iran where it is negotiating for a price as low as $1.5 per mBtu for 1.2 million-tonne urea plant is an excellent move.

Prime Minister Narendra Modi should fully leverage the gas price bonanza to stem the mess in the urea industry for long-term gains. This will also enable a smooth transition as and when the government decides to a take a call on removing control on the MRP of urea.

The writer is a policy analyst

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