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Fertilizer firms’ fuel bill to be cut by 50%

Fertilizer firms’ fuel bill to be cut by 50%
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First Published: Wed, Apr 18 2007. 12 10 AM IST
Updated: Wed, Apr 18 2007. 12 10 AM IST
Mumbai: The fuel costs of fertilizer companies in India could drop by about 50% when Reliance Industries Ltd (RIL) starts selling natural gas to some of them from its biggest offshore field at the Krishna-Godavari (KG) basin from mid-2008.
RIL, India’s biggest company by market value, is negotiating with a clutch of domestic fertilizer firms to sell its gas at $4.5 (Rs189 at current prices) per million British thermal units (mBtu), said a person familiar with the negotiations who did not want to be named.
Currently, fertilizer makers use naphtha or imported liquefied natural gas (LNG) as a feedstock to power their plants. Naphtha is purchased from oil firms at about $14 per mBtu while LNG imported by Petronet LNG Ltd is sold by gas utility GAIL (India) Ltd at $9-10 per mBtu. Roughly, the use of naphtha and LNG could be in the ratio of 50:50.
An mBtu is a standard unit of measurement for natural gas and provides a convenient basis for comparing the energy content of various grades of natural gas and other fuels. One mBtu is equivalent to 28 standard cubic metres (the volume of gas produced from a field in a day).
Because of the steep difference in prices of existing fuel supplies and what RIL is promising to provide, the cost of manufacturing fertilizers such as urea and di-ammonium phosphate is likely to go down, assuming the incremental savings are passed on to buyers.
More significantly, a lower fuel bill for fertilizer companies might mean a reduction in the subsidies that the government pays to the industry.
For instance, the Union Budget for 2007-08 has allocated Rs36,000 crore towards fertilizer subsidy, which is given to bridge the gap between the current high cost of production and the low retail prices.
“The gas price being finalized is based on several factors, including the cost of setting up pipeline infrastructure for supplying gas to end-user customers. Reliance may find it feasible to supply gas at $4.5 per mBtu given the huge daily requirements of fertilizer units ranging from five mBtu to 10 mBtu,” said a person close to the discussions. An RIL spokesman declined to comment on the price negotiations or the length of the proposed supply agreements.
The price finalized by RIL will have to be cleared by the government as per the production-sharing contract signed between the two sides at the time of awarding the contract. Once all fertilizer units in India start using gas instead of naphtha and LNG, the collective requirement will be in access of 105 mBtu per day.
“We plan to go to the government sometime in June or July for the approval (of the price),” P.M.S. Prasad, president of RIL’s oil and gas business, said recently. He noted that the government wants RIL to supply fertilizer companies, steel makers, oil refiners and other heavy industrial users that are facing shortage of fuel.
RIL is developing two deep-sea gas fields in the KG basin off the coast of Kakinada in the southern state of Andhra Pradesh and aims to produce 80 million standard cubic metres of gas a day (mmscmd) by the middle of 2008. It would initially produce only 40-50 mmscmd of which up to 15 mmscmd would be used for captive purposes at its Jamnagar refinery in Gujarat. The remaining would be available for commercial uses.
RIL is building a 1,400 km-long pipeline from Kakinada to Gujarat and pipelines linking cities in the south, including Chennai, Bangalore and Mangalore at a cost of $3.5 billion. The pipeline will supply gas to the western region where a number of potential buyers, including leading fertilizer firms such as Rashtriya Chemicals and Fertilizers Ltd (RCF), Gujarat State Fertilizers & Chemicals Ltd (GSFC) and Gujarat Narmada Valley Fertilizers Co. Ltd (GNFC) are located. In certain areas, RIL will also share the pipeline of GAIL and Gujarat State Petroleum Corp. Ltd (GSPC).
India’s current gas supply of 85 million cubic metres a day, including imported LNG, falls short of the potential demand of 170 million cubic metres, according to estimates put out by the oil ministry. Gas consumption may rise to 400 million cubic metres a day by 2025 if the economy grows at the projected rate of 7-8% a year.
RCF, one of the largest state-owned fertilizer firms with a total urea production capacity of about 2.13 million tonnes (mt) at its two units located at Tal and Trombay in Maharashtra, will require seven mBtu of gas per day for urea production. It buys naphtha at $14 per mBtu and imported LNG at $9-10 per mBtu from GAIL.
India has about 29 urea units in public, private and cooperative sectors, and collectively these units produce about 22mt of urea a year.
According to Ram Vilas Paswan, the minister for chemicals, petrochemicals and fertilizers, there is a shortage of 12 to 14mt of urea as the country requires over 36mt annually. The minister had said last week that in the 11th Five-Year Plan, the government anticipates revival of more than seven fertilizer units across the country and also convert all these units from naphtha/LNG feedstock to gas-based plants.
RCF apart, other major players in the fertilizer industry are National Fertilizers Ltd (NFL), Brahmaputra Valley Fertilizer Corp. Ltd (BVFCL), the Fertilisers and Chemicals Travancore Ltd (FACT), Madras Fertilizers Ltd, GSFC and GNFC in the public sector; Tata Chemicals Ltd, Nagarjuna Fertilizers & Chemicals Ltd, Spic Fertilizers & Chemicals Ltd, Indo-Gulf Fertilisers Ltd, Chambal Fertilisers and Chemicals Ltd Duncan Industries, Paradeep Phosphates Ltd (PPL) and EID Parry (India) Ltd in the private sector and the cooperative units such as Krishak Bharati Cooperative Ltd (Kribhco) and Indian Farmers Fertiliser Co-operative Ltd (Iffco).
Earlier, RIL had signed a letter of intent with the state-owned power generation firm NTPC Ltd to supply 132 mBtu of gas to the latter’s 2,600MW expansion projects in Kawas and Gandhar in Gujarat at a mutually agreed price. However, following differences on the liability clause in the pact, that matter has ended up in a legal dispute with the Bombay High Court. RIL will also be supplying gas to Reliance Natural Resources Ltd, an energy resources firm in the Reliance-Anil Dhirubhai Ambani Group, which is setting up power generation unit in Uttar Pradesh.
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First Published: Wed, Apr 18 2007. 12 10 AM IST