The pricing formula suggested by the Rangarajan committee in its report on production sharing contracts in oil and gas, if implemented, might lead to an increased cost of production for user-industries in the fertiliser and power sectors.
This would further increase the government’s fertiliser subsidy burden and jack up power prices.
The report suggests a formula which would lead to doubling of natural gas prices from the present $4.2 a million British thermal unit (mBtu) to about $8 an mBtu.
Fertiliser plants and power plants take gas from Reliance Industries' D6 block in the Krishna-Godavari basin (KG-D6). Though the government has fixed the cost of KG-D6 gas at $4.2 an mBtu, it is delivered at upward of $7 an mBtu. Fertiliser plants and power plants are on the priority list for gas utilisation.
“If the gas price goes up to $8, the delivered rate for us will go up from $7.8 per mBtu today to around $11.8 per mBtu,” said Ajay Shriram, chairman and senior managing director of fertiliser manufacturer DCM Shriram Consolidated. Shriram seeks 0.6 million standard cubic metres of gas a day (mscmd) from Reliance Industries’ KG-D6 block for its 400,000-tonne a year factory.
“The impact is going to be fairly severe. Specially as the subsidy is provided to the farmer through the fertiliser industry. Unless the government allocates enough funds to ensure the health of the industry is taken care, any increase in gas price would have the impact of further dues on the government, which means the cash flow will be even worse,” added Shriram.
As of today, the central government owes Rs 38,000 crore in subsidy dues to fertiliser makers. Shriram added that in many cases, cash-strapped companies were unable to pay for their raw material. The current dues are over and above this year’s budgetary allocation of Rs 60,974 crore. However, the fertiliser ministry had already exhausted these for meeting the payment obligations till July.
“If gas prices double, it will push our cost of production anywhere between $110 and $125 a tonne. This will push up the government's subsidy. As of today, the production cost for gas-based fertiliser plants is $250 a tonne,” said U S Awasthi, managing director of Iffco. If the government wants to increase the gas price, it will have to raise the the urea price, he added.
State-owned power generator NTPC, operating 4,900 Mw of standalone gas-based capacity, says any rise in gas prices on the lines suggested by the Rangarajan panel will push up power prices for consumers. “We will have to pass on the additional input cost,” a senior NTPC executive said.
The executive added the government must think on whether prices of natural resources should be aligned with global benchmarks. “Power is the lifeline of the nation. Gas prices should be low as compared to international rates,” he felt. NTPC operates eight gas-based power stations across six states. It requires 17 mscmd of gas to maintain 100 per cent Plant Load factor (PLF). The dwindling of KG-D6 output has forced the company to run its plants at 50 per cent PLF, as only nine mscmd is available.
In 2007, an Empowered Group of Ministers (EGoM) had accorded top priority to the fertiliser sector, followed by power, liquefied petroleum gas (LPG) and city gas distribution (CGD) for use of gas.
The EGoM had made firm allocation of 63.3 mscmd to these sectors and an additional 30.16 mscmd D6 gas was allocated to them on a fallback basis, in anticipation that output from India’s biggest gas fields would peak at 80 mscmd by 2013.
But after production from D6 began slipping in 2010, the government classified consumers into two broad categories — core sectors (fertiliser, power, LPG and CGD) and non-core sectors (steel, refineries, petrochemicals and captive power). The petroleum ministry stopped D6 gas supply to non-core sectors in March 2011. Later, with gas production dwindling further, the government stopped fuel supplies to CGD plants, too.
