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POV : With no significant increase in domestic gas production – are power and fertiliser sector ready to absorb R-LNG at much higher prices?

By , ,
Industry : ONG

Both fertiliser and power sector are anchor consumer for gas. Since, these two sectors are also the key contributors to the economy and has got regulated pricing having large financial involvement of the Government, they enjoy the priority sector status and avail gas at subsidised prices.

With decline in production of domestic gas from existing fields and no new oil and gas discovery in sight, it is time to ponder whether these two sectors have the ability to absorb R-LNG. While domestic gas follows APM pricing – the R-LNG prices cannot be controlled and as they are market linked. InfralineEnergy talks to a cross section of stakeholders to bring out possibilities and challenges of this change.

Dr S Nand,Director (Technical),Fertiliser Association of India

Both fertiliser and power sector are looked upon as anchor consumer in the country by policymakers whenever there are plans for setting-up an LNG terminal and laying new pipelines. Having said that a lot of hue and cry is made over subsidies and protection extended to both the sectors. The reality is that as far as agriculture sector is concerned subsidies and special consideration of government exist world over and therefore India is no exception.

Indian farmers in their effort to increase food grain production depend heavily on fertiliser to enhance and enrich soil quality. For fertilizer sector – gas is a major input for producing urea. The demand for urea is all set to increase from current 32 million tonnes per year to 36 million tonnes in 2016-17. Against this projected demand for urea our domestic production of urea currently stands at 22 million tonnes. And best of the estimates prove that by 2016-17 domestic production would only increase to 24 million tonnes. Now, this leaves a huge gap between our demand for urea and the domestic production for the same. This results in country being heavily dependent on imports, thereby resulting in huge import bill.

As of now 23 percent of our urea production is based on gas. At present, urea in the country is selling at an MRP of Rs 5,310 per tonne. The production cost for producing 1 kg of urea turns out to be US$6/MMBtu. Even this price is inadequate to recover the production cost. As part of the Government’s gas allocation policy for priority sector, fertiliser sector is entitled to get 45 MMSCMD of gas at subsidised price. With conservative estimates of LNG prices hovering at US$10 – production of urea is going to become unviable.

The hard reality is that to ensure food security of the country, farmers’ needs have to be met by the Government through continuous and long-term assistance. Fertiliser sector is and will continue to require subsidies to meet the growing need for fertiliser. The moot question to be debated is should the assistance extended to the sector be in the form of input subsidies, minimum support price or through direct cash transfer.

Amulya Charan,Managing Director,Tata Power Trading Company Limited

As per the figures made public by the Power Ministry, the total installed power capacity in the country stands at 182.3 GW. Of this, the gas installed capacity stands at 17.7 GW. Going forward another 100 GW is planned to be added in the XII Plan. And in order to sustain just 10 percent share of gas to produce power in the XII Plan an additional 45 MMSCMD of gas would be required.

The real question that needs to be asked is that whether the power sector has to really compete with other sectors such as fertiliser and CGD for a scarce resource such as gas. Today, power plants based on imported coal producing power at Rs four / unit are struggling to get off the ground. Thus, with no significant increase in domestic gas production, R-LNG can be instrumental in meeting gas demands for the power sector. The cost of producing power based on domestic coal stands at Rs 2-3/kWh against a cost of Rs 3.5-4 based on imported coal and gas. The fact of the life is that there is no way in which distribution companies can recover high cost of peaking power as the power is being consumed by domestic users. With firm take or pay gas contracts – power generators would find themselves in trouble as they do not have firm contract with generators. Also, when we talk about gas or R-LNG for power generation we have to put up against odds including lack of gas storage facilities.

For R-LNG to substitute domestic gas – power tariff in the county needs to be revised. R-LNG can be absorbed by power sector at a price level of US$ 6 to 7 given that we have consumers who are ready to pay Rs 5 for the peaking and uninterrupted supply power.

Deepak Mahurkar,Associate Director - Energy, Utilities & Mining: Oil and Gas,PwC

Clearly power and fertilizer sector as of today cannot digest R-LNG for the peculiar problems that both these sectors face. But other sectors are not saddled with similar problems and therefore they can very happily take higher prices. Typically other sectors that can absorb R-LNG at market prices are Petrochemicals, Pharma, Ceramic, Glass, Captive co-generation and Sponge-iron.

Typical constraints that fertilizer and power industry per se face make for a genuine cause why they cannot afford R-LNG. And the reason for non-affordability of R-LNG for both power and fertilizer sector are different. Although they show the same behavior on gas pricing but the reasons for the same are quite different. One commonality between the two is that the netbacks are poor from these sectors. This means that when I consider a particular price of sale of that product and if I assume reasonable profitability for other entities involved in various value chain i.e. the entry point of the fertilizer project or the power generation the gas net back price works out to be substantially lower than what R-LNG sector can currently manage to supply. And that’s where the affordability to offtake R-LNG is poor. The only way to bring in the affordability to absorb R-LNG is to simply raise the prices of the products of the power and fertilizer sector. Again it is at this very point that the two sectors start behaving differently. In power sector raising the prices is a political issue. Political realities are pushing the power prices down. We are not able to increase the tariffs and somebody has to bear the cost in the value chain which is where fertilizer sector is different from power. The net back prices are low in fertilizer sector given low MRP of major product - urea. The government absorbs the subsidy for fertilizer sector. If we go by the fiscal situation of the Government there does not seem to be any affordability for central exchequer to roll out more money for even urea subsidy. It is highly unlikely that the selling price of the urea is going to be increased and therefore nobody is going to pick the price. In such a situation R-LNG cannot be afforded by either fertiliser or power sector.

(InfralineEnergy thanks Dipesh Dipu, Chandra Bhushan and Coal India Ltd. for sharing their insights. Infraline introduces "Points of View" as an initiative for encouraging dialogue between various stakeholders of the Indian energy sector on contemporary subjects. If you wish to participate in such initiative, please write to feedback@infraline.com)

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