Come October 1, 2021, the price of natural gas (NG) on supplies from fields given to Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) on nomination basis as well as those given under given under the New Exploration and Licensing Policy or NELP will increase from the current US$ 1.79 per million British thermal unit (mBtu) to US$ 3.15 per mBtu – up by US$ 1.4 per mBtu. From November 1, 2014, this price – known as administered price (APM) – is a weighted average of the price prevailing at four global locations viz. UK, US, Russia and Canada. The price is revised every six months.
Going by the emerging trend, the APM gas price is likely to rise to US$ 5.93 per mBtu from April 1, 2022 and further to US$ 7.65 per mBtu from October 1, 2022. This will have a debilitating effect on users industries particularly, fertilizers (besides power) which together account for over 50% of gas consumption.
Almost all of urea production about 24 million ton per annum is based on gas. Of the total gas requirement, 2/3rd is met from domestic/APM gas and 1/3rd comes as imported LNG. For every dollar hike in gas price, production cost of urea increases by Rs 1800 per ton (24 mBtu for a ton urea). Corresponding to increase of US$ 1.4 per mBtu, the impact will be Rs 2500 per ton. On 2/3rd production or 16 million ton, this will be Rs 4000 crore (2500×16).
The price of imported LNG in the ‘spot’ market has gone up from around US$ 5.5 per mBtu in April, 2021 to current US$ 14 per mBtu – up by US$ 8.5. This will increase urea cost by Rs 15,300 per ton (1800×8.5). On 4 million ton urea supported by imported ‘spot’ gas (nearly half of total import), the extra outgo would be over Rs 6000 crore (15,300×4). Put together – APM and imported gas – the extra annual burden would be Rs 10,000 crore.
At US$ 7.65 per mBtu from October 1, 2022 or a hike of about US$ 6 per mBtu over the current level, the quantum of cost push would be Rs 17,000 crore (1800x6x16). The price of imported LNG in the spot market is also projected to increase to US$ 20 per mBtu – or US$ 14.5 higher over the current level. The extra outgo on this score would be Rs 10,000 crore (1800×14.5×4). In totality, urea manufacturers will end up spending Rs 27,000 crore more.
Under the present controlled regime, the maximum retail price (MRP) of urea is controlled at low level unrelated to the cost of production and distribution; the excess of the latter over the former is reimbursed to the manufacturer as subsidy on ‘unit-specific’ and ‘actual’ basis. This means that each time the price of gas goes up, the resulting additional cost is paid as subsidy to the manufacturer.
During 2020-21, fertilizer subsidy payments were about Rs 134,000 crore of which Rs 100,000 crore was on urea alone (these numbers included arrears from the previous years). For 2021-22, the budget allocation for fertilizer subsidy is Rs 80,000 crore including Rs 59,000 crore on urea. Subsidy payments on urea will increase leaps and bounds particularly from 2nd half of FY 2022-23.
For now, huge relaxation in fiscal deficit target viz. 9.5%/6.8% of GDP during 2020-21/2021-22 (courtesy, Covid) has given leeway to the Government in allowing high subsidy on fertilizers (besides food). But, sooner than later, it has to get back to fiscal tightening which will require reining in subsidies. What is the way forward?
The logical thing to do is to remove control on urea MRP and withdraw subsidy albeit through manufacturers (the Government may give subsidy directly to poor farmers). It will lead to steep increase in MRP and drastic fall in its use. This is precisely what is needed to curb its excess use, reduce imbalance in fertilizer use, improve soil health and the environment. In the “Mann ki Baat” (November 26, 2017), Modi had called for reducing urea use by 50% by 2022. There can’t be a more potent way of achieving it.
This will help achieve better balance between demand and supply of gas. In this scenario, India will need only 15 million tons (mt) urea which means domestic production can be slashed by 40% from its current level 24 mt. As a result, there will be compression in demand for gas by close to 20 million standard cubic meter per day (mmscmd) – 1/4th of total domestic supply.
This will also create a fertile ground for moving away away from APM to a market based and competitive regime for pricing of gas – a win – win for all stakeholders.
Will Modi crack the whip?