New Delhi: To compensate for the loss of gas production from Reliance Industries Ltd’s (RIL) Krishna-Godavari (KG) D6 field off the eastern coast of India, the petroleum ministry may, despite the fertilizer ministry’s reservations, reduce the allocation of the commodity to fertilizer units that also manufacture chemicals.
The existing policy defines the fertilizer industry as a priority sector and is hence entitled to preferential access to the gas supplied from the KG field at Rs 4.2 per million British thermal unit.
If the government goes ahead with this move, then it could impact the profitability of such fertilizer companies as they will have to depend on alternative sources. Alternatively, companies will have to cut back on production, which could impact the supply of fertilizers.
“Reducing allocation to fertilizer units, which also produce chemicals, may be one of the things that may be considered,” said a petroleum ministry official, who did not want to be identified.
Another petroleum ministry official, who also requested anonymity, confirmed the thinking within the ministry.
RIL, India’s biggest company by market value, holds a 90% stake in the KG D6 field, hailed as the world’s largest natural gas discovery in 2002. Canadian hydrocarbon explorer Niko Resources Ltd owns the remaining 10%. However, the output at the offshore block has fallen to 48-49 million standard cubic metres per day (mscmd) from over 60 mscmd in mid-2010.
While the petroleum and natural gas ministry had allocated 15.7 mscmd of gas from the block for 15 fertilizer plants, RIL had been supplying 13-14 mscmd till December, when it effected a 10% cut in supply.
In December, RIL had said that the production of its KG D6 block would be cut across sectors because of supply constraints. However in May, RIL had said that they will comply with the petroleum ministry’s view that, despite the cuts, full gas allocated for priority sectors, including fertilizers, will be supplied to them.
In March, chemicals and fertilizers minister M.K. Alagiri had written to petroleum minister S. Jaipal Reddy, asking the latter to direct his ministry to “review the status of reduction in supply of gas to the fertilizer sector so that the supply of gas is not adversely affected and the adverse impact on subsidy expenditure is avoided”.
Officials in the department of fertilizers (DoF) said that a move to reduce gas supply to integrated plants producing fertilizers and chemicals cannot work in practice, as it would be impossible to exactly determine the amount of gas being used for either fertilizers or chemicals.
Urea makers require 43.14 mscmd of gas annually, one-third of which is supplied from RIL’s KG D6 field. Around 58 million tonnes of urea is consumed in India, with the government spending around Rs 70,000 crore towards fertilizer subsidy.
While an external spokesperson for RIL didn’t respond to emailed questions at the time of filing the story, a senior DoF official, who did not want to be identified, said: “In an integrated plant, you cannot determine with any certainty the amount of gas being used for fertilizers or for chemicals. If, therefore, they reduce supply to such plants, it would be counter-productive for fertilizers, which is itself a priority sector.”
An empowered group of ministers of the government had made a firm allocation of 63.09 mscmd of gas to various sectors in the order of priority. It had allocated natural gas to sectors such as fertilizer, liquefied petroleum gas, power, and city gas distribution for home consumption and transport.
After the dip in production, the petroleum ministry had asked RIL to reduce supplies to non-core sectors such as steel.
Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd, said: “Gas usage is a function of energy norms, efficiency norms and the mandated cut-off capacity for fertilizer production. So, it is possible to theoretically determine how much gas out of the total quantity supplied is being used for production of fertilizers, and how much is going into chemicals.”
The oil-to-yarn and retail conglomerate had also intimated the Directorate General of Hydrocarbons, the nodal agency for development of hydrocarbons in India, that gas production from the KG D6 field could slump further to around 47 mscmd in 2012-13 from 51-52 mscmd at present “unless radical changes were implemented at the block”.