Fertilizer firms oppose pooling of gas prices

Fertilizer firms oppose pooling of gas prices

New Delhi: Three fertilizer companies —Nagarjuna Fertilizers and Chemicals Ltd (NFCL), National Fertilizers Ltd (NFL) and Rashtriya Chemicals and Fertilizers Ltd (RCF) —have strongly opposed the government’s move to “pool" gas in order to bring about a uniform gas price regime, in the event urea prices are freed from state control.

The three companies have said that such a move would undermine profitability. Their reservations were communicated in separate letters to the Planning Commission and the department of fertilizers (DoF) sent between March and April. The letters have been reviewed by Mint.

“Put together, these companies produce 6.4 million tonnes (mt)of urea each year, out of the total 21-22 mt produced in the country, therefore accounting for about 30% of the total urea production in the country," said Tarun Surana, an analyst with the Mumbai-based Sunidhi Securities and Finance.

NFCL opposes gas pooling as it’s against “all economic principles and past practices which will deny natural advantage in operating in a free market," the company said in its 4 April letter addressed to the Planning Commission.

“In NBS (nutrient-based subsidy) scheme, which is one step closer to decontrol, low cost units should make more profit. However, strangely, the reverse is true. NFCL, which has already been under stress in the current regime, will lose further from existing levels while high cost units will gain further from existing levels at the expense of NFCL," the letter goes on to say.

In other words, a company procuring gas at a price significantly lower than most other producers may end up paying more for it, as the pooled price could be higher than the company’s current price of procurement. This, officials admit, could negatively impact the profitability of companies that produce beyond the cut-off limit, up to which the government takes the entire hit on the gas.

On the other hand, a company that is procuring gas at relatively high levels, could end up procuring the same at a pooled price that is much lower, thereby adding to its profitability for its production above the cut-off mark.

The government mandates the quantity of urea that each plant can produce, up to which subsidy reimbursement is linked to the cost of gas as well as “fixed costs" such as labour costs and costs related to capital expenditure. Till this point, gas is a “pass through"—that is, the government compensates for the entire cost of gas.

Plants producing urea beyond the cut-off quantity are reimbursed on the basis of import parity price (IPP) of urea and the cost of gas is also calculated on IPP basis. Gas is no longer a “pass through" item above the cut off mark.

The cost of gas makes up for as much as 80% of the cost of production of urea.

A senior DoF official said that while the government has tried to address the concerns of all the companies by grouping the plants into four groups with varying levels of subsidy, some plants will still lose out at the cost of others. “We have tried our best to address their concerns and work out the best formula," said the official. “But in a free price regime, a uniform price of gas is essential, so we have little choice," he said.

While Reliance Industries Ltd supplies gas from its Krishna-Godavari (KG) D6 field at $4.2 per million British thermal units (mmBtu), gas from the Panna-Mukta-Tapti (PMT) field comes at $5.25 per mmbtu. Gas sold under the administered price mechanism (APM) also costs $4.2 per mmBtu.

In case of a shortfall, companies buy gas from the international spot market, which usually costs $14-15 per mmBtu according to current prices.

Under the new price proposals being finalized, the government plans to partially free urea prices, while bringing in a uniform gas price regime. To arrive at a uniform gas price, the government plans to pool it at the level of the fertilizer industry coordination committee (FICC).

Surana said that the pooled price of gas, which is finally arrived at, will be the weighted average of price of gas from different sources. “Some companies will suffer, while others will benefit," he said.

“The concept of gas pooling seems to be a mere arithmetic exercise, as the pooling shall ensure that the unit(s) get reimbursed their cost of energy through other units or pay back the extra realisation to pool as the case may be," according to the NFL letter addressed to the DoF on 30 March.

It goes on to say that the methodology being devised by the government to pool gas is silent on issues such as margins of gas providers such as Reliance Industries, connectivity charges, and the additional value-added tax (VAT) levied by states.

Typically, the cost of gas includes variables such as marketing margins, connectivity charges, “take or pay" charges and “ship or pay" charges. In addition to these, production sharing contracts for the supply of gas also have so-called compression charges.

“The method is silent about the ratio of gases to be considered for pooling purposes. It is silent about the price of gas for pooling purpose, i.e. landed price or producer price. Moreover, this may result in huge under-recoveries to units in case of compulsion of consumption of high cost of gas in case of shortage, change in the gas allocation, fluctuation in exchange rate etc. during the year as the same may not get recovered fully from the market," the NFL letter said.

The state-owned RCF has sought clarity on how the price of gas will be calculated for urea produced above the “cut-off quantity." “The Planning Commission has considered the concept of pooling of gas up to cut-off quantity. The proposed policy is silent on the production beyond cut-off," the RCF note said.