Policy watch: Will India stop producing urea?

Last week, media reports talked about how the UPA government has finally decided to defer the proposed urea price hike as part of its plan to decontrol the price of this fertiliser. It wants to find out new ways to price urea-based fertilisers so that

(a) urea producers can afford a higher price of gas, and

(b) the government reduces the subsidy on fertilisers

Inability to deal with both could spell disaster for both the industry and the country. The underlying issues are many.

First, the present policy allows too much of discretion in terms of feedstock pricing for fertiliser units, and the parameters used to calculate subsidy. As is well known, fewer the areas of discretion, lesser are the chances of encouraging corruption.

A second problem is that under the APM (administered price mechanism), all PSUs (public sector units) and cooperative gas producers and some private gas producers had to compulsorily sell some of the gas produced to urea and power producers at $1.8 to $2.4 per mmBtu (million metric British thermal units). Allowing some private producers to get higher prices and others to get lower is not a sustainable option. No policy should allow the unfair enrichment of the private sector over the public sector.

Third, since fuel costs are considered as a “pass through”, there is little incentive for fertiliser units in India to become efficient users of gas (or naphtha). They know that all fuel costs will be reimbursed. Thus, while globally, one tonne of urea requires around 20 mmBtu of gas, most fertiliser units in India ask for 25 mmBtu. The difference of 5 mmBtu alone translates into additional costs of over $10 per tonne at current prices. This could be on account of inefficiency, or plain collusion, or both.

There is, therefore, an urgent need to get away from this corrosive arrangement that only hurts the country, and even the fertiliser industry. The entire urea policy needs to be overhauled.

Unfortunately, while it is true that the best bang for the buck from gas can be got by producing urea, the current pricing of gas may not be conducive for urea production in India.

Gas, as everybody knows, can be used as a fuel for cooking, as CNG for transportation and fuel for generating power. But all three applications allow for carbon to escape into the environment.

When gas is made into urea, the carbon gets trapped, and eventually goes into the earth to help grow plants which are good for the environment.

But using gas for making urea makes sense at prices under $3. It made sense when gas was made available to urea units at administered prices. But when gas prices were raised from $2.43 to $4.2, urea subsidy was bound to increase. At $4.2, making fertiliser from gas is not a viable proposition. If gas prices climb to $12, it would be catastrophic. In fact, as our calculation (see table) shows, just a $4 increase in gas prices will mean an additional bill of $70 billion.

So, what are the options? One option is to retain all gas pricing at $2.43 per mmbtu. Given recent developments, that could be difficult.

The other option is to push public sector urea units to set up urea plants in places where gas can be got cheap — like Kizad (Khalifa Industrial Zone, Abu Dhabi), or the US, or Canada (where gas prices are lower than in the US). Urea production would be viable at such locations. A buyback agreement between these units and the respective governments would reduce the marketing and pricing risks for setting up such ventures overseas.

That will still leave two issues.

One: What should one do with existing private and cooperative sector units?

Second: India will end up creating jobs overseas, and not in India. But we have done this with oil PSUs. So, why not with urea PSUs as well?