Celebrating a fertilizer success story4 min read . Updated: 11 Jan 2017, 02:09 AM IST
The joint venture between India and Oman to produce 1.6 million tonnes of urea in Oman which commenced 11 years ago is completely dedicated for use in India
India is the world’s largest importer of fertilizers. It imports nearly 10 million tonnes of urea annually from global suppliers. That represents one-third of its domestic consumption. Since the main ingredient in urea is natural gas, which India lacks, there is large and persistent import dependence.
Around 10 years ago, there was great excitement when huge gas reserves were discovered in the Krishna-Godavari basin, off the east coast of India, and roughly 2km below the sea floor. The total reserves were supposed to be in excess of 80 trillion cubic feet, announced by various companies (Reliance Industries Ltd, Oil and Natural Gas Corp. Ltd, Gujarat State Petroleum Corp. Ltd and others).
This gas bonanza could potentially transform not just fertilizer production but could also meet the cooking and lighting gas needs of many cities, as well as be used as clean fuel in automobiles. It was supposed to be revolutionary. However, a decade later, for various reasons and due to disagreement on the right price of gas, to this day no new fertilizer capacity has come up to take advantage of India’s gas find.
Since gas represents 80% of the cost of urea production, even a one-dollar per unit increase in price increases the cost of urea by 10-15% of its international price. So, cost-efficient gas is vital for the viability of producing urea in India.
The price of gas is a notoriously slippery concept. At any given point, it can vary from half a dollar to $15 (landed price) for various end-consumers in the world. Indeed, in 2007, this was the case. Long-term fixed price contracts are not very common. The benchmark is the spot or futures price at Henry Hub, a natural gas pipeline hub in Louisiana, US. But even that is quite volatile and the end price paid by someone in Japan or Abu Dhabi can be substantially different from the Henry Hub price.
Farmers in India pay a highly subsidized price for urea, about Rs5,000 a tonne. This implies a subsidy of 60-70% on the international price of urea. This large gap is reimbursed to the supplier (foreign or domestic) by the government. Food and fertilizer subsidy makes up about 12% of the Union budget, and fertilizer subsidy alone was close to Rs1 trillion about three years ago. Due to this huge burden, domestic producers often face great delays in getting reimbursed by the government. That delay can be deadly to domestic producers, as it represents a substantial part of their revenue. Beyond a certain point, they may run out of cash to even pay for salaries to their employees if reimbursement is delayed excessively (not to speak of the interest burden of the delayed payments that they have to bear).
On the other hand, foreign suppliers of urea have to be paid instantly, since otherwise they would stop supplying to India. Thankfully, during the last two years, both oil and gas prices have come down steeply, providing much needed fiscal relief to the Union government. On its part, the government has tried to reform the fertilizer subsidy by moving to a nutrient-based subsidy regime. There is now talk of paying cash subsidy directly to farmers using Jan Dhan Yojana bank accounts, and letting fertilizer companies charge full market price. This approach, though conceptually attractive, is littered with hurdles. For instance, much farming is done by leasing and landless workers, and not by absentee landlords. How then to identify beneficiaries?
Whichever way you look at it, due to gas scarcity and the difficulty of gas pricing, fertilizer production in India does not inspire confidence for fresh investment. No wonder no fresh investment has happened for the past two decades. And India is a major growing market, whose per hectare consumption is less than half that of China. That average further hides a terrible asymmetry in fertilizer absorption, as Punjab has excessive usage (causing soil salinity) and the fertile eastern states have low fertilizer consumption.
In this rather messy scenario, it is worth recounting and celebrating a rather unique and successful fertilizer story. This is the joint venture between India and Oman to produce 1.6 million tonnes of urea in Oman which commenced 11 years ago, it is completely dedicated for use in India.
Since it is expensive to import gas, whether in a pipeline through Iran and Pakistan, or in liquefied form, why not convert that gas into urea in situ, and import the urea instead? This insight is simple yet genius. India also signed a long term contract to utilize gas at less than a dollar per unit, making urea one of the most cost-efficient in the world. At a time when world prices threatened to go above ten dollars, the Oman government requested a mid-contract renegotiation, which the Indian government agreed to out of goodwill. It is still a great success story, which now accounts for almost one-fifth of India’s import of urea.
This story is now being replicated at the Chābahār port in Iran. An Indo-Iranian joint venture is rapidly progressing to produce another million tonnes of urea using Iranian gas near the port, also being built with Indian help, for export to India. This approach of converting India’s vulnerable situation of import dependence for gas, into a joint venture on foreign shores that have abundant gas is a win-win for all concerned. It prima facie goes against the spirit of Make In India, but makes ultimate strategic sense. It can be applied to address India’s food security by encouraging agriculture-production joint ventures in land-abundant countries.
Ajit Ranade is chief economist at Aditya Birla Group.