Govt mulls removal of gas subsidy

Govt mulls removal of gas subsidy

New Delhi: In a move that could erode the margins of companies producing non-urea fertilizers, the government is considering whether these firms should be taken off price-regulated gas and put on a free-market gas price mechanism.

An oil ministry official confirmed such a move was being discussed. “We want market-determined pricing for gas that goes toward the production of non-urea fertilizers, as the retail price is now deregulated," this official said. He too did not want to be identified. The fertilizer ministry officials said that since non-urea fertilizers are deregulated, the companies manufacturing the same could easily pass the hit on to the customer.

The government deregulated the maximum retail prices (MRP) of non-urea fertilizers in April 2010. It still regulates the MRP of urea but is working toward a draft policy to free this up. Companies typically require gas to produce ammonia, which is used as an intermediate product for manufacturing both urea and non-urea fertilizers. Gas prices for urea will continue to be regulated. While the government subsidizes the entire price of gas for urea, it does not subsidize it for non-urea fertilizers.

Companies typically get gas under the administered pricing mechanism (APM) and that from the Krishna-Godavari D6 gas fields of Reliance Industries Ltd (RIL) at $4.2 per million British thermal units (mmBtu). ONGC C-series gas is sold at $5.25 per mmBtu while gas from the Panna-Mukta-Tapti (PMT) fields is priced slightly higher at $5.6-5.7 per mmBtu.

To be sure, to meet gas supply shortfalls, companies already buy gas from the open spot market. In the case of urea, the same is fully subsidised. One of the fertilizer ministry officials said that if the government were to go ahead with such a move, companies will have to raise the MRP of non-urea fertilizers, which include various grades of complex fertilizers, else their margins will be hit. He said three companies—Rashtriya Chemicals and Fertilizers Ltd (RCF), Gujarat State Fertilizers and Chemicals Ltd (GSFC), and Deepak Fertilisers and Petrochemicals Corp. Ltd (DFPCL)—will be primarily impacted by the move.

R.G. Rajan, chairman and managing director, RCF, said the company uses about 800,000 million standard cubic metre per day (mscmd) of gas.

“We will have to raise prices, but there is little room for that, so it will hit our margins," he said. He declined to comment on the exact impact the decision will have on margins. A phone call and a text message to Sailesh C. Mehta, vice-chairman and managing director, DFPCL, remained unanswered. GSFC officials could not be reached for comment.

An executive of the Fertilizer Association of India (FAI), an industry lobby group, said that while GSFC routes 1.5 mscmd of gas for non-urea production, the figure in the case of DFPCL was about 1 mscmd. The FAI official said if such a proposal was formally moved, the organisation will oppose it. “While it is hard to immediately work out the exact hit on margins, there will certainly be an impact. We will lodge a protest," he said.

Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance, said that it would not be easy to determine what proportion of gas was being used for the production of non-urea fertilizers. “Companies divert gas from the same source for making urea, non-urea fertilizers and other chemicals. It, therefore, becomes difficult to determine exactly how much gas is going where," he said.