Fertiliser must have first claim on gas

India lacks adequate energy resources and is heavily dependent on import of all primary energy resources, be it crude oil, coal or natural gas.

Therefore, utilisation of commercial energy has to be planned to bring both economic and strategic benefits to the nation.

There are competing demands from different sectors of economy for energy, more so for natural gas. That is because natural gas is a clean fuel, and requires less investment in power and industrial plants. Therefore its allocation and price have always been regulated by the government.

India’s demand for natural gas is huge, because it can easily substitute liquid fuels such as naphtha, fuel oil, and diesel. The country produces less than 100 million standard cubic metres of natural gas per day (MMSCMD).

Another about 50 MMSCMD is imported as liquefied natural gas (LNG). However, the immediate demand from various sectors and mainly from power plants could easily absorb another 100 MMSCMD.

While the demand for natural gas has always exceeded the availability for the last two decades, there were times when natural gas was flared. There was no infrastructure to transport it to consumers; industrial and commercial consumers were not equipped to use the gas as fuel.

It was at this stage that government decided to use natural gas for the production of fertilisers. Three large fertiliser plants came up in Gujarat and Assam during 1967-69. The large quantities of gas available offshore on the Western coast, including Bombay High, were first utilised for making fertiliser. Five urea plants were commissioned by Rashtriya Chemicals and Fertilisers and Krishak Bharati Cooperative Limited in 1984-85.

GAS SHORTAGES

In the 1980s, various expert groups and committees recommended that gas was best used for making fertiliser. Therefore the Hazira-Vijaipur-Jagdishpur (HVJ) pipeline was planned to locate the fertiliser plants in consumption areas. The pipeline was constructed and commissioned in 1987.

Simultaneously, six fertiliser plants were sanctioned to coincide with the commissioning of this first cross-country pipeline.

Three plants were commissioned in 1987-88 and another three spilled over to the early 1990s. All these plants were commissioned and operated on gas. Later, due to indiscriminate allocation of gas, there was a shortage of gas in the late 1990s.

The production of ONGC gas started falling. Fertiliser plants continued to suffer till imported LNG was available in 2005. There was also some respite in the form of gas available from joint venture fields. A further decline in supply of gas from ONGC was made up with allocation from Krishna-Godavari D-6, the supply of which started in March 2009.

CLEAN USERS

Today, priority gas allocation to fertiliser units is being questioned. Fertiliser plants use major part of gas as feedstock, unlike power plants which burn it as fuel. When gas is burned as fuel, all carbon in natural gas is converted to carbon dioxide and emitted into the atmosphere. But in case of fertiliser, carbon dioxide is converted into urea and not emitted to the atmosphere.

Therefore, fertiliser (urea) production uses both hydrogen and carbon in gas and reduces emission of greenhouse gas.

COST OF IMPORTS

The argument that fertilisers can be imported and power cannot discounts the serious consequences of fertiliser imports. India is the second largest consumer of fertiliser in the world, only after China. About 59 million tonnes of fertiliser products were used in 2011-12. Of this, only about 16 million tonnes were produced in the country using indigenous raw materials, that is, domestic natural gas and small amount of indigenous rock.

For the balance, either raw materials or finished products are imported. Imported raw materials include liquefied natural gas (LNG).

Large quantities of finished products including urea, DAP and other products are imported. Thus, India is dependent on imports to the extent of almost 73 per cent of its requirement of fertiliser, raw materials and finished products.

In such a situation, whenever India enters the international market for imports, the prices of these materials go up.

International suppliers often form a cartel to push up the prices. India, the second largest consumer of fertilisers in the world, has a self-sufficiency of only 27 per cent. It would be a bad strategy to increase our import dependence.

As for urea, due to stagnant production in the last 10 years, amidst growing consumption, our imports kept climbing. India imported 8 million tonnes of urea, out of 29.5 million tonnes of consumption in 2011-12.

The average cost of imported urea for the first nine months of 2011-12 was Rs 24,564 per tonne. The domestic cost of production of urea, using a mix of domestic and imported gas, is only about Rs 11,000 per tonne. Urea is sold to the farmers at a statutory price of Rs 5,360 per tonne. The Centre bears a subsidy burden of about Rs 5,640 per tonne on domestic urea, whereas on imported urea it is about Rs 18,640 per tonne.

Fertiliser subsidy was more than Rs 1,02,000 crore for 2011-12. Any increase in the cost of fertiliser will raise the subsidy further. Alternatively, it has to be passed on to farmers in the form of higher retail price. An increase in urea retail price by a few hundred per cent will affect agriculture production.

It is a myth that fertiliser plants have been allocated domestic gas to meet 100 per cent of their gas requirement. Fertiliser plants are using more than 9 MMSCMD of imported LNG out of a total supply of about 42 MMSCMD. Still, there is a shortage of more than 2 MMSCMD in the existing plants which is being made up with spot LNG.

It is expected that shortage will increase further due to dwindling supply of gas from ONGC. Further, five fuel oil and one naphtha-based plants have changed the feed from fuel oil and naphtha to natural gas in 2012-13 with a combined investment of Rs 5,000 crore, following a policy directive from the Government.

The gas requirement for these plants is 5 MMSCMD. Thus, there is an immediate demand for 7 MMSCMD of gas for the present capacity itself. Since no additional quantity has been allocated from domestic sources, the dependence on imported gas has increased to almost 33 per cent immediately.

Any replacement of even 1 MMSCMD of existing supply of domestic gas with imported LNG will cost the exchequer almost Rs 1,000 crore in terms of enhanced subsidy on urea.

There have been no new fertiliser plants after the year 2000. Any diversion of domestic gas from fertiliser to power will increase fertiliser subsidy. This incremental subsidy should actually be given to power plants for using imported LNG, and not classified as fertiliser subsidy.

(The author is Director General, Fertiliser Association of India.)