Home Gas effect It’s time to reform pricing, subsidy regimes

It’s time to reform pricing, subsidy regimes

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From October 1, the price of natural gas (NG) on field supplies donated to Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) on a nomination basis, as well as those donated under the new Exploration and Licensing Policy (NELP), increased from $ 1.79 per million British thermal units (mBtu) to $ 2.9 per mBtu, an increase of $ 1.1 per mBtu. Going further, the price will drop to $ 5.93 per mBtu from April 2022 and to $ 7.65 per mBtu from October 2022.

According to NG pricing guidelines in vogue since November 2014, this price – known as the Managed Price Mechanism (APM) – is a weighted average of the price in effect at four international locations – UK, US , Russia and Canada. The price is revised every six months. The expected sharp price increase is due to the tightening of the global supply-demand balance as the impact of Covid eases.

This will have a debilitating effect on the fertilizer industry, which alone consumes 37% of the household gas supply at around 77 million standard cubic meters per day (mmscmd).

Almost all urea production of around 24 million tonnes (mt) per year is based on gas. Of its total gas needs, two thirds are met by domestic gas / APM and one third by imported LNG. For every dollar increase in the price of gas, the cost of producing urea increases by Rs 1,800 per tonne (24 mBtu for a tonne of urea). For an increase of $ 1.1 per mBtu (from October 2021), the impact will be Rs 2,000 per tonne. On two thirds of production or 16 million tonnes, it will be Rs 3,200 crore.

The price of imported LNG on the spot market has risen from around $ 5.5 per mBtu in April to $ 14 per mBtu currently, an increase of $ 8.5. This will increase the cost of urea by Rs 15,300 per tonne (1,800 x 8.5). Out of four million tonnes of urea from imported “spot” gas (nearly 50% of total imports; the rest is based on long-term agreements at a pre-fixed price), the additional expenditure would be over 6,000. rupee crores. APM plus imported gas, the additional charge would be over Rs 9,000 crore.

At $ 7.65 per mBtu as of October 2022 or an increase of about $ 6 per mBtu from the current level, the amount of the cost surge would be Rs 17,000 crore (1800x6x16). The price of imported LNG in the spot market is also expected to rise to $ 20 per mBtu, $ 14.5 above the current level. The additional expense on this score would be Rs 10,000 crore. In short, the urea manufacturers will end up spending Rs 27,000 crore more.

Under the current controlled regime, the maximum retail selling price (MRP) of urea is controlled at a low level unrelated to production and distribution costs; the difference is reimbursed to the manufacturer in the form of a subsidy on a “unit specific and” actual “basis. Thus, each time the price of gas increases, the resulting additional cost is paid in the form of a subsidy to the manufacturer.

In 2020-2021, subsidy payments to urea producers amounted to Rs 100,000 crore (including arrears from the previous year). For 2021-2022, the budget allocation is Rs 59,000 crore. Thanks to an imminent rise in gas prices, real expenditure will be much higher; it will increase sharply from the second half of fiscal year 2023.

For now, a significant easing of the budget deficit target – 9.5% of GDP – has given the government leeway to keep the subsidy on fertilizers (in addition to food) high. But sooner or later he must return to fiscal tightening and curb subsidies.

What is the instruction ? The logical thing to do is to remove the control over urea MRP and remove the subsidies, albeit through the manufacturers (the government can give subsidies directly to poor farmers). This will lead to a sharp increase in MRP and a drastic drop in its use. In his “Mann ki Baat” (November 26, 2017), Modi called for reducing urea use by 50% by 2022. There can be no more effective way to achieve this goal. In addition to limiting its overuse, reducing the imbalance in the NPK utilization ratio (currently it is 6.7: 2.4: 1 against a benchmark of 4: 2: 1) and improving soil health, it will also reduce subsidy expenditure by at least Rs 30,000 crore.

In this scenario, considering the drop in urea demand to 15 million tonnes, domestic production can be reduced by 40%, which means that this industry will need less gas up to 20 mmscmd – a quarter of its national supply – thus easing pressure on supply. This will force gas suppliers to be more responsible in setting NG prices.

At the same time, the government should implement reforms in the gas sector by dismantling the MPA, deregulating gas imports and making handling and transport infrastructure accessible to all suppliers on the principle of “common carrier”. “. This will create a “stable” and “favorable” political environment to attract long-term investment in gas exploration and production, thus helping to improve the supply-demand balance with a favorable price effect.

(The author is a Delhi-based political analyst)

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