The Petroleum & Natural Gas Ministry’s attempted move to re-prioritise natural gas allocation from Reliance Industries operated KG-D6 block has rattled the fertiliser manufacturers.
They warned that any tinkering with the existing policy would hurt the fertiliser industry badly resulting in higher urea production costs, inflate the subsidy burden, besides increasing the import dependency further thereby risking the country’s food security.
The Petroleum Ministry has proposed a review of sectoral priority allocation of the domestically produced gas and a note to this effect has been circulated to the empowered group of ministers (EGOM), which is likely to meet on July 17. It is proposed that about 10 mmscmd of gas would be diverted from the fertiliser to power sector – mainly the merchant power units set up by companies such as Lanco, GVK and GMR among others.
“Why is there a hurry to support the merchant power producers? We don’t understand the logic,” said R. Mukundan, Managing Director of Tata Chemicals, at a press conference organised by the Fertiliser Association of India, the apex body of fertiliser makers.
"The urea plants were set up with motive of increasing of increasing farm productivity to ensure the food security in the country, government's this decision will put that under risk," Mukundan added.
Due to the strategic nature of fertilisers and the need to keep the production costs at reasonable levels, the sector was always given a first priority in allocation of domestic gas.
“If the availability of gas to urea units is reduced drastically, the cost of production will go up making it unviable to produce domestically, resulting in increased imports and higher subsidy outgo,” said K.V. Raju, Chairman of Nagarjuna Group. About 17 of the 30 urea units in the country are already making losses.
The fertiliser sector, mainly the gas-based urea units, were given the top priority in allocation of the KG D6 gas in May 2008, which were allocated 15 mmscmd, from the anticipated output of 40 mmscmd.
However, with the production in D6 dwindling to 14 mmscmd, the allocation to the fertiliser units is not being met fully, forcing the nutrient makers to use the costlier LNG to meet the shortfall.
Further, the diversion of 10 mmscmd gas from fertiliser sector would result in a decline in urea output of 5 million tonnes.
“The delivered cost of LNG is about $18-20 mmBtu and hence the viability of urea production will be adversely affected. Even assuming the cost of gas is passed through under pricing policy, still 2.5 million tonnes of urea output will be lost and imports will go up to that extent,” said Satish Chander, Director General, Fertiliser Association of India.
He said the Government should maintain the status quo in the sectoral priority in allocation of KGD6 gas taking into account the economic, social and fiscal considerations.