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Natural gas price hike likely to push Centre's fertiliser subsidy bill

Industry insiders expect 10-15% increase in pooled gas prices in fertiliser sector

fertiliser subsidy
The fertilizer sector uses pooled gas which is comprised domestic gas and imported LNG
Sanjeeb MukherjeeSubhayan ChakrabortyShine Jacob New Delhi/Chennai
4 min read Last Updated : Oct 03 2022 | 6:15 AM IST
The Centre’s annual fertiliser subsidy bill is expected to rise as a result of the large increase in domestic gas prices announced by the government over the weekend.

Domestic prices of natural gas were raised by 40 per cent to record levels on Friday.

The decision, taken during the government’s biannual exercise of fixing the rates for the next six months, took effect on October 1. Industry insiders expect a 10-15 per cent increase in pooled gas prices for the fertiliser sector.

This is also expected to push up the cost of producing urea because gas prices account for 80-85 per cent of the raw material cost of producing urea.

The fertiliser sector uses pooled gas, which comprises domestic gas and imported liquefied natural gas (LNG). The pooled gas price in August 2022 was around $25 million metric BTU (mmbtu) and has jumped by almost three times in less than two years.

This, in turn, is expected to raise the government’s fertiliser subsidy bill. According to the last projections, the central fertiliser bill was estimated to have swelled to around Rs 2.3 trillion as against the budgeted Rs 1.05 trillion.

Sectoral impact

As of August, gas consumption in the country was 4,966 million metric standard cubic metres (MMSCM) per day. Of this, the fertiliser sector accounted for the largest chunk (34 per cent), followed by city gas distribution (CGD) (22 per cent), power (13 per cent), refineries (7 per cent), and petrochemicals (2 per cent).

Of late, due to a continuous rise in domestic natural gas prices, the share of domestic gas in the pooled gas dropped to 12-13 per cent with imported LNG making up the bulk.

“For fertiliser companies, energy-efficient plants might see an increase in their working capital needs but at the same time their profitability might rise because of efficient use of energy,” said a senior analyst with a leading domestic research firm.

The balance sheets of fertiliser companies are already under strain owing to rising input costs. The only saving grace is that in the case of gas almost all of the increase adds to the government’s subsidy bill.

Another sector expected to take a large impact is the city gas distribution segment, including compressed natural gas (CNG) and piped natural gas (PNG), which may see a price hike. PNG prices increased by more than 70 per cent during the last one year.

Margins of CGD majors are expected to be affected because of a sustained higher regime in spot LNG prices in recent times. A higher rate in prices in the CGD sector is likely to impact volume growth too in the gas market, due to lower offtake by industrial units.

According to media reports, under government orders given on August 16, city gas companies will receive domestic gas as much as is available.

At present, around 85 per cent of CGD consumption is being met through domestic gas and the rest through imports. There are plans to increase this availability because CGD is one of the priority sectors for domestic natural gas.

Reaching record levels

The latest increase in natural gas prices was the third straight rise in prices since April 2019, and came on the back of firming benchmark international prices.

The rate paid for domestic natural gas was increased to $8.57 per mmbtu, up from the earlier $6.1 per mmbtu. This refers to natural gas that has been extracted from oilfields, which make up almost two-thirds of the natural gas produced in India.

Meanwhile, natural gas produced in deepwater, ultra-deepwater, and high pressure-high temperature areas has been raised to $12.6 per mmBtu from $9.92 per mmBtu.

The government had indicated prices of gas would rise since global headwinds were reducing supply. An escalating war in Ukraine and global uncertainties have led to the price of gas skyrocketing because Russia, a major producer, faces global financial sanctions. 

Also continuing shortage in the number of gas transporters has led to disruptions in the supply chain.

Topics :fertiliser subsidynatural gasGas prices

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