Naphtha-based urea units may get more time to switch to gas

New Delhi: Three urea manufacturing units which could not shift from costlier naphtha feedstock to cheaper natural gas as directed by the Union fertilizer ministry earlier this year may get more time to comply.

On 2 April, the ministry had directed all fertilizer units using naphtha to switch to natural gas from 30 June, failing which they would not get government subsidy. With these three units—two in Tamil Nadu and one in Karnataka— unable to secure gas supplies, the fertilizer ministry is preparing a cabinet note to let them continue receiving the subsidy till December, three ministry officials said requesting not to be named, since they are not authorized to talk on the subject.

The cabinet note will recommend more time for the three plants to switch to gas, as the ministry seeks time to resolve the impasse over gas supply.

The other options are closing the units and importing the shortfall in the farm nutrient, one of the three officials cited above said.

The three urea plants are Southern Petrochemical Industries Corp. (SPIC) in Tuticorin, Madras Fertilizers Ltd (MFL) at Manali in Chennai, and Mangalore Chemicals and Fertilizers Ltd (MCFL) at Panambur near Mangalore.

Despite the April directive made under the New Pricing Scheme III (NPS III), the three plants have continued production as they have not received any orders for closure from the government.

A GAIL (India) Ltd official said that the company was unable to provide gas to these units as its Kochi-Mangalore pipeline is on hold after the Tamil Nadu government objected to laying the pipelines through farmlands.

In the absence of assured gas supply, Tamil Nadu chief minister J. Jayalalithaa had earlier written to Prime Minister Narendra Modi seeking more time for the two plants in her state. Together, the two units produce about 1 million tonnes (mt) per year of urea. The MCFL unit in Karnataka has a production capacity of about 0.3mt of urea.

Fertilizer ministry officials say all three units have made investments for converting to gas, but have not been allocated gas yet.

An official from MCFL, who did not want to be named, said the company has invested ₹ 305 crore to convert its plant to gas but has not received gas supplies.

MFL officials did not respond to phone calls or emailed questions; SPIC officials were unreachable.

A fertilizer industry analyst who did not want to be named said the government was keen to convert all fertilizer units to gas-based units, as natural gas is cheaper and cleaner. “This would enable the government to incur a lower level of subsidy as there is a pass through on fuel costs,” the analyst said.

No new urea capacity has been added in India over the past 13 years due to the lack of an appropriate policy framework. This has resulted in a widening demand-supply gap. While domestic production of urea has stagnated at 22mt, current consumption is around 30mt. The remaining 8mt is imported.

Urea is the most commonly used soil nutrient and its prices are fixed at ₹ 5,360 per tonne. The government pays manufacturers the difference between the cost of production and price as subsidy. The budget has pegged the fertilizer subsidy bill for fiscal 2015 at ₹ 72,970 crore.