Two urea plants: Ministry under pressure to extend period of cheap RLNG supply

ISLAMABAD: The Ministry of Energy is said to be under pressure to extend the period of cheap RLNG supply to two urea fertilizer plants, after November 2020, well-informed sources in Power Division told Business Recorder.

On October 27, 2020, during a Cabinet meeting, Special Assistant to the Prime Minister on Petroleum, Nadeem Babar, requested correction in the decision of the ECC in the case titled " gas rate for operations of two urea fertilizer plants" adding that gas would be available for the month of November 2020 only and not beyond that. Another official told this newspaper that as per ECC decision the supplies for the two urea plants will continue till November 30, 2020. The federal cabinet had approved the supply of re-gasified liquefied natural gas (RLNG) at a concessional tariff of Rs 756/MMBTU to the two fertilizer plants from July 26 for three months. The initial government notification showed that an unbudgeted subsidy of Rs 969 million was being provided to these players to produce around 200,000 tons of urea to avoid any shortages of this commodity in the country. However, the actual subsidy impact is of more than Rs 2 billion based on June prices of LNG notified by OGRA. Further, this decision was taken at a time when the projected annual demand of 5.9 million tons could have been met by indigenous gas-based manufacturers and a channel inventory of 0.4 million tons was also on hand to meet the minimum stock requirements.

In its October 21 meeting, the ECC approved the extension of RLNG-based plants till November-end. This extension has caused a further loss of nearly Rs 800 million, based on July prices of LNG notified by OGRA, to the national exchequer. However, the ECC was informed that the loss was of Rs 0.42 billion.

In 2019, these two RLNG-based plants produced 767,000 tons of urea that placed a fiscal burden of nearly Rs 17 billion on account of subsidies and foreign exchange outflow of Rs34 billion ($ 200 million).

Based on available data, indigenous gas-based manufacturers are expected to close the year with an inventory of around 400,000 tons of urea. Additionally, the dealers would also have up to 320,000 tons of stocks against a historical average of 150,000 - 200,000 tons. In view of the urea market being adequately supplied, the government should optimize gas supplies and redirect the RLNG subsidy towards domestic consumers, who face low gas pressure and have a higher demand for heating, especially during the peak winter months of December and January.

According to Sunny Kumar, an analyst at Topline Securities, "After a slowdown in the first quarter due to COVID impact, the fertilizer sector has bounced back well to register record sales and production volumes. The market is sufficiently supplied even without the production of RLNG-based plants, which are heavily subsidized by the government."

After the government's decision to allow LNG imports by the private sector, Fatima Fertilizer and Agritech have already applied for capacity allocation on terminal-II. However, this process is likely to take considerable time as the regulatory bodies need to overcome several legal and operational hurdles related to third party access mechanism.

As a result, the government will be forced to allocate LNG to these two fertilizer plants from the existing supplies that may compromise other consumers and industrial sectors.

"Ministry of industries and Production has sent a summary to the Ministry of Energy, asking if they have surplus gas for urea plants beyond November 30, 2020," the sources added. In reply to a question, an official, who requested anonymity, stated that certainly the Ministry will be under pressure, but it will send recommendations on the basis of gas availability. The power sector also needs RLNG in winter.

Copyright Business Recorder, 2020