ISLAMABAD (February 09 2010): The Ministry of Industries is facing stiff resistance from Ministries of Petroleum, Finance, and Water and Power and the Planning Commission on a proposal regarding unprecedented post-BMR concessions on feed gas to Pak American Fertiliser Limited (PAF), official sources told Business Reorder.

The issue will be considered by the Economic Co-ordination Committee (ECC) of the Cabinet in its meeting on Tuesday. "Ten years' period available for concessionary pricing of Rs 36.77 per million British thermal unit (mmbtu) expired on September 12, 2008 and any concession in rate would be in direct conflict with the existing Fertiliser Policy," sources said.

The Planning Commission in its observations has stated that the Industries Ministry should also assess the revenue loss to government by freeing up of 9 mmcfd gas from fuel and convert it into feed gas on account of BMR. It is estimated that 9 mmcfd gas per day will result in total Rs 2821500 loss per annum.

The Fertiliser Policy 2001 is the mother document which deals with the fertiliser industry, and gas pricing for this sector is also done under specific provisions of the said policy. According to Petroleum Ministry, the proposal floated by the Industries Ministry needs to be evaluated in the light of Fertiliser Policy 2001.

Official documents, prepared by the Industries Ministry, suggest that Pak-American Fertiliser is undertaking 'Balancing, Modernisation and Rehabilitation' (BMR) of its fertiliser plant with an investment of $60 million to expand its urea production.

The BMR will enhance urea production by 136,867 tons per year. Currently, urea is produced using gas both as 'fuel' and 'feed'. The BMR will introduce shift to using coal as 'fuel' and use gas feed up from 'fuel and from the BMR generated efficiency' to produce additional urea. It has requested to be allowed to avail of 2001 Fertiliser Policy concession for BMR that allows use of feed gas at full concessional rate for a period of seven years for the additional urea to be produced post-BMR.

According to Industries Ministry, Pak-American proposal is therefore recommended on the following grounds: (i) the consumption of urea is increasing steadily and is around 5.4 million tons as against the production of around 4.9 million tons.

The urea demand is going to increase agriculture productivity and to be self-reliant for the food needs of Pakistan's rapidly increasing population; (ii) Fatima Fertiliser Company has set up a urea phosphatic fertiliser project having a capacity of around one million ton of fertiliser of which 0.5 million tons is urea. Engro Chemical Pakistan Limited is establishing a new fertiliser plant to produce around one million tons of urea alone that will come into production during October 2010. In spite of these additions, demand for urea will continue to outstrip its supply; (iii) scarce foreign exchange is spent on import of urea.

The government is providing subsidy on the import of fertiliser. In 2008-09 the government had provided a sum of Rs 27 billion as subsidy on DAP at 2200 per 50 kg bag as well as for other phosphatic fertilisers. Approximately Rs 47 billion was spent on import of urea alone from 2004 to 2009 while at conservative estimate Rs 17 billion will be required to import urea in the next five years; (iv) if fertiliser is imported foreign exchange goes out of the country while if the concession is on the feed gas then ultimately the money spent remains in the economy in terms of subsidy passed on to the growers and growth in the economy.

In view of these facts, Industries Ministry has proposed that the 9 mmcfd gas, generated from switch to feed from fuel and from the BMR generated efficiency to produce additional urea subject to actual post-BMR confirmation, be allowed the concessionary feed gas rate for seven years as provided for the Fertiliser Policy 2001 and review for Fertiliser Policy June 17, 2004.

The Finance Ministry, sources said, is of the view that PAFL's request for diversion of 9 mmcfd gas from fuel gas is not covered under the Fertiliser Policy 2001 because the plant was established under 1989 Fertiliser Policy. Finance Ministry is also of the view that the PAFL had filed civil suit in the former Islamabad High Court for extension in period for commercial production for 14 months. There is a need to wait for final verdict from the court before proceeding further.

As per Fertiliser Policy 2001, the company is obliged to make a request for additional gas for making use after BMR completion, and not make diversion of existing fuel gas to feed gas. In the Fertiliser Policy 2001, it is stipulated that gas would be supplied for new investment and BMR at a price of $70 per mmbtu (million British thermal unit) which comes to Rs 57.82 per mmbtu, and not Rs 36.77/mmbtu as requested by the PAFL.

Petroleum Ministry, in its comments has stated that in a similar case of Fauji Fertiliser Bin Qasim Limited (FFBQL), the ECC, while considering a summary of Petroleum on May 23, 2005 approved that the price of the additional 10 mmcfd gas to FFBQL would be the Middle Eastern Price prevailing on the date of signing of the Gas Sale Agreement (GSA) or $0.77 per mmbtu whichever is (less the discount of 10 percent mentioned in 2.1.3) as per clause 2.4 of the Fertiliser Policy 2001 which provides that if any investor undertakes an expansion, major BMR or de-bottlenecking or an existing plant which results in increase in the production capacity of the plant, such additional feed gas shall be treated at par with the new plant for 7 years.

The initial allocation of FFBQL was 75 mmcfd (55 feedgas+20 fuel). However, with the additional allocation of 10 mmcfd, the consumption mix for pricing purpose was revised as 85 mmcfd (70 feed stock+15 fuel). In the said case, shifting from fuel stock to feed stock attracted no preferential treatment, and only additional allocation was entitled for price under clause 2.4.1 of the Fertiliser Policy.

On this analogy, shifting from fuel to feed is not entitled for any preferential treatment. However, additional allocation, if any, would be entitled for concessionary pricing for 7 years. Ten years period available for concessionary pricing of Rs 36.77/mmbtu has expired on September 12, 2008.

Copyright Business Recorder, 2010