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Even as the Election Commission of India takes its time to decide whether the govt can increase gas prices before the elections get over, Reliance(RIL) has circulated new terms to urea manufacturing units who are the consumers for the gas produced in the KG Basin. There are two main changes that has come up between Reliance and the fertiliser companies.
First and the less controversial of the two is the term of gas sales purchase agreement (GSPA). Presently GSPAs were signed between the supplier and the buyer for a period of five years. But Reliance had initially proposed that since gas prices would be revised every quarter as per the Rangarajan formula, so should the GSPA. The fertiliser ministry objected to such an agreement and there seems to be some compromise whereby an annual GSPA (Read here) will now be signed.
But its the second clause which has raised a number of questions, not only on part of Reliance but also on the Rangarajan Committee which devised the formula.
According to news agency PTI, Reliance wants 10 per cent higher prices than the declared $8.3 mmBtu. Reliance has proposed to charge the government on a gross calorific value (GCV) rather than the current practice of net calorific value (NCV).
Before we move any further, it is important to understand the difference between GCV and NCV. Gross Calorific Value, also called the Higher Calorific Value is the quantity of heat produced by its combustion (burning). Now when fuel burns it normally produces carbon dioxide and water. Since the temperature is high at the time of burning, water is in the form of water vapour. There is heat trapped in this water vapour which can be extracted by condensing them. This excess heat produced by condensing water vapour is also used by consumers, especially in power plants. The total heat that is produced by burning and recovered by condensation is called the net calorific value (NCV).
Reliance wants to charge fertiliser companies for this heat that will be extracted by condensation of water vapour.Globally, fuel is priced on GCV basis. India is one of the few countries where fuels are priced on NCV basis. Even coal in India was priced on NCV basis, which is now being shifted to GCV basis.
Ironically the Rangarajan Report does not have a word on whether the revised price should be charged on GCV or NCV. It however takes the average prices at various trading points, which are based on GCV, to arrive at the price at which gas will be priced in India. The natural deduction should be that the $8.3 per mmBtu price is based on GCV. But since the report has not clearly mentioned it, Reliance Industries has a point to exploit.
However, the biggest flaw in the calculation affects the fertiliser sector which uses gas as a feedstock. Gas is used for production of ammonia which in turn produces urea. Gas is been used as a substitute for naphtha, hence the concept of GCV and NCV will not be applicable for it. Fertiliser companies will be using the hydrocarbon present in the gas rather than their properties as a fuel. Gas accounts for 80 per cent of the production cost of Urea.
Rangarajan Committee report is silent on the use of gas as a feedstock, which has now created a new controversy.
