Gas allocation Priority: Will Fertilizer sector retain its top most priority amidst a severe gas crunch?

Gas allocation PriorityAmidst reports coming from plan panel that priority allocation should only be reserved for fertilizer sector, power sector seems to be left in lurch. The buzz was created some days before that government was actively considering a fresh revision to the allocation priority amidst KG D6 nearly zero supply to the power sector which was hurting the industry like never before. The PLF is at all time low for gas based power plants in the country at around 25%. Recent news also confirmed that LPG sector is also going to feel the pinch as it will be the next victim of falling supply from KG D6.

The gas supply side is under severe distress. Government in a desperate attempt had increased the price of gas to USD 8.2 per mmbtu but it will not be having any short term impact on the gas supply scenario in the country. Power and fertilizer sectors are the two top most sectors which will bear the burden. For power sector, it is proposed that gas price pooling concept be considered where domestic gas price will be pooled with imported gas and a common price will be discovered. The modalities and formulas are already set out by the committee headed by Ms. Chnada Kochar, MD and CEO, ICICI bank and it is under review now. The impact of such a pricing is studied in details now. The suggestion as regards to equal priority to power and fertilizer and the burden to be divided equally are the bone of contentions to this issue. The weight-ages of such an pricing formula and the burden bearing capability and governments role in providing subsidy needs to be deliberated in detail before any concrete steps to be taken.

Now the big question is that will fertilizer sector retains its top most priority? As regards to priority allocation, the EGOM had decided the following priority rankings:

  1. Fertilizer
  2. LPG
  3. Power
  4. CGD
  5. Other noncore sectors

This stand was clear when gas allocation from KG D6 was allocated way back in 2009 as follows:

Sector
Firm Allocation(MMSCMD)
Fall Back allocation(MMSCMD)
Fertiliser
15.67
LPG
2.59
Power
32.58
12
Other non core sector
12.33
18.17
Total
63.17
30.17

Source: MOPNG

From a peak of 61MMSCMD, KG D6 now produces nearly 15MMSCMD, just fulfilling the firm allocation of fertilizer sector. Other consuming sectors like power have been demanding equal status to that of fertilizer sector so as to get some gas diverted to its ailing power plants. And this time, the lobby from private sector is making inroads into the decision taking authority.

With news pouring in from different sources, fertilizer sector pitches in with its own sets of arguments. lt sets its tone with raising the pitch for food security to a country like India where the economy is largely driven by agriculture. With any curtail of supply to this sector would see a reduction in production of fertilizer or see import costs rising for the sector and in both the cases, it would hurt the Indian economy. Technically also, fertilizer sector uses the chemical value as well as heating value of the gas and thus creating less pollution. Hydrogen in natural gas is converted to ammonia to produce carbon dioxide for making of urea.

The facts and figures seem to be in favour of fertilizer sector too. Out of 59Mts of fertilizer products consumed in India in 201-12, only 16MTs were produced using indigenous raw materials.   For other 70% of the fertilizers, either raw material or finished products were imported. It shows that the import dependency for fertilizer is already huge for India. On urea front, 8MTs out of 30MTs requirement is imported to India. Also, from the balance 22MTs, only14MTs of urea is produced using domestic natural gas. Balance production is coming from imported LNG or Naphtha. Fertilizer sector was already using 9MMSCMD LNG and it has gone up to another 5MMSCMD due to feedstock change from naphtha and fuel oil based 5 plants according to new pricing policy of Govt. (NPS).

Apart from all this, the subsidy burden to the government will be higher as import dependency will increase many fold. Freight cost would also increase as urea plants are located in the hinterlands. Apart from this there are infrastructure constraints in logistics as is faced for the coal import too. Power sector argues that irrigation will become a problem without power, true but to some extent where lands are irrigated by pumps. But in India, most of the lands are rain fed or river fed. Apart from this government does not procure all grains from the farmers to take into the rising cost of the fertilizer.

For a country like India, food security is the top most priority for socio- political reasons. A farmer needs power for his basic requirements and not for luxury as in case of urban masses. Removing priority from fertilizer sector will not do any good to the country and it will be boomerang for the ruling party in power also as the larger base of vote bank comes from the rural fraternity. While government has set its intentions by pushing  for the food bill by taking the ordinance route with a larger picture of 2014 general election; it is a distant possibility that the priority norms will be changed in favor of power sector. Fertilizer sector is expected to retain its top most priority in gas allocation.

*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

2 comments

Fertiliser sector has retained the top priority for KG D6 gas allocation as of now. The ministerial panel headed by Mr A K Antony has retained the top slot for the fertiliser sector and asked MOPNG to find ways to provide gas to power sector without disturbing the allocation priority.The decision has been taken due to fears of a reduction in fertilizer production during the peak summer cropping season.

Situation in AP is worse due to non availability of gas. EGom has allocated 9.16mmscmd of gas to AP but due to KG D6 fallinf supply, it has now got zero supply and is facing a a peak deficit of 2700MW. There is idle capacity of 2770MW due to want of gas and another 3936MW of merchant power plants based on gas are stranded half way.

recent news confirmed that KG D6 is now producing only 14.63 mmscmd of gas and there is no supply to LPG sector. If this situation continues, fertiliser sector will soon become the victim of Kg D6 dwindling supply.

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