The government is investing Rs38,320 crore in setting up eight new urea plants and reviving an equal number of closed ones to reduce the high cost of import, but experts said the country may not have enough gas to run all 16 plants.
Fertilizer units currently face a shortage of around six million metric standard cubic metres a day (mmscmd) of gas, an estimated shortfall of 21%. The ministry of chemicals and fertlizers estimates demand for gas by fertilizer units will nearly double in the next five years, growing from 41mmscmd in 2007-08 to 76mmscmd in 2010-11. The estimate doesn’t take the 16 plants into account.
The government has fixed a 2008 deadline for all fertilizer units in the country to shift to gas, which costs less than naphtha or fuel oil. The government is keen to do this because a lower cost of production would help it reduce its subsidy payments significantly. In 2006-07, the government shelled out Rs35,000 crore as subsidy to fertilizer makers to ensure that the retail price for farmers remained low.
“If gas is not available for these units, then capital machinery will be lying idle across the sector, in turn affecting the economic growth of the country,” said Kuljit Singh, a partner at accounting firm Ernst & Young.
The government’s plan to convert the eight plants it hopes to revive, to use gas as a feedstock, didn’t go down well with analysts, who questioned the ministry’s projected cost of conversion of Rs100 crore. “Conversion from naphtha to gas will cost Rs100 crore; that from fuel oil to gas could cost up to Rs600 crore per unit,” said an analyst who tracks the fertilizer industry. He did not wish to be identified.
“While the cost of reviving closed units will be to the tune of Rs120-140 crore each, the cost of each new unit will be in the range of Rs3,000-3,500 crore,” said a top official at the ministry, who did not wish to be identified. The government is yet to decide on the production capacity of the new units.
In addition, to reduce its subsidy burden, the government is planning to set up urea manufacturing plants overseas as reported by Mint on 5 February.
The units will be set up in West Asia where natural gas, the main feedstock for urea plants, is easily available. As a start, fertilizer companies plan to set up two units with a total production capacity of two million tonnes; the government is exploring opportunities to set up these plants in Kuwait, Nigeria, Egypt, Saudi Arabia and Qatar.
While the government plans to make an investment of around Rs28,000 crore for setting up the new units, it will spend Rs1,120 crore to revive the closed units and another Rs800 crore for converting the closed units to use gas as its feedstock (the units were closed in 2000 because they used expensive naphtha and fuel oil as feedstock).
The move to set up two overseas urea manufacturing units is expected to cost Rs8,400 crore.
“All these companies put together are expected to start supplying fertilizer by the end of 2009-10,” said the official.
The landed price of urea works out to Rs15,000 per tonne. “We can save around $75 (Rs3,150) on every tonne if we produce urea domestically. We are aiming to produce 60 lakh tonnes through revival of closed units which will help us save Rs2,000 crore by 2009-10,” the official added.
The feedstock for all these units will be gas and the ministry is confident that there will be enough gas by 2009-10 for all the units. “By 2009-10, all these units will start getting gas from the KG (Krishna Godavari) Basin, GAIL (India) Ltd and the Dahej LNG terminal,” said the official.
However, analysts are not so optimistic. The analyst tracking the fertilizer industry expressed doubts about financing of the new projects. “Who will shell out Rs3,000 crore for a new plant when the existing ones are running on very thin margins?” he asked.