Fertiliser plants: Body formed on gas supply, price rationalization

ISLAMABAD: The federal government has established an inter-ministerial panel to devise viable recommendations on gas supply to fertiliser plants and rationalisation of gas prices with the fertiliser industry that is already increasing the price of urea, official sources told Business Recorder.

On Wednesday, decisions of ECC held on October 3, 2023 were submitted to the federal cabinet for ratification of its decisions.

According to Petroleum Division there are ten fertiliser plants in the country, out of which six had dedicated supplies from Mari’s network while four plants are allocated gas through Sui’s network. The Gas Supply Agreements (GSA) of six Mari based plants are valid till June 2024.

The Mari Petroleum Company Limited (MPCL) was entitled to receive wellhead gas prices in accordance with relevant agreements with the government, for gas produced from its various natural gas reservoirs (i.e., HRL, Goru-B and SML/ SUL).

The Mari Field wellhead gas prices are determined and notified by OGRA on bi-annual basis, under Section 6(2Xw) of Oil and Gas Regulatory Ordinance, 2002 read with Regulation (3) of Natural Gas (Wellhead Price) Regulations, 2009.

The wellhead prices so determined depend on the crude oil prices of imports made in preceding six months as per international crude oil prices and the applicable rupee-dollar exchange rate, as per MPCL’s agreement with the Government.

The federal government was empowered under Section 7(1) and Section 8(3) of the OGRA Ordinance, 2002 to advise category-wise consumer gas prices; and revised the gas sale price for fertiliser plants on SSGCL and SNGPL from January 1, 2023.

However, the gas price could not be revised for the fertiliser plants on MPCL since last OGRA’s notification of October 23, 2020 whereby gas sale price was notified at Rs302/ mmbtu for feed-stock and Rs. 1,023/mmbtu for fuel-stock.

Petroleum Division argued that the OGRA notified gas sale prices are not sufficient to meet MPCL’s revenue requirement at notified wellhead gas prices, resulting into negative differential margin. The estimated financial impact of this negative differential margin during the period from January to June, 2023 was Rs. 4.25 billion. The prescribed price for Mari gas fields was determined by OGRA under a two-tier pricing mechanism approved by the Government.

Petroleum Division further noted that sale price of gas supplied out of Mari Field’s incremental production to Engro Old plant and Pak Arab Fertilizer plant was based on Petroleum Policy, 2012, which was being fully recovered. Fauji Fertiliser plant l, II & III and Fatima Fertiliser were; however, being charged sales price of Rs. 302/ mmbtu and Rs. 1,023/ mmbtu for feed-stock and fuel-stock respectively under benchmark production.

Petroleum Division argues that in case the sale price for fertiliser was not revised, the estimated annual net negative differential margin from fertiliser sector at current sale prices would be over approximately Rs. 15.77 billion for FY 2023-24 excluding previous year’s negative differential margin of approximately Rs. 4.26 billion.

It was stated that on a summary submitted by Ministry of Industries & Production, the ECC had constituted an inter-ministerial committee for submission of recommendations on gas allocations and pricing for fertiliser sector to the ECC.

The committee conducted various meetings and submitted its report to the ECC. The ECC in its meeting held on August 8, 2023 approved the report, in principle, with the direction to refer the report to Petroleum Division for consultation with Ministry of Industries and Production, Power Division and private sector stakeholders and to resubmit the final implement-able summary before the ECC.

Accordingly, stakeholders’ comments have been requested and the matter would be resubmitted to the ECC in due course of time. However, this process was largely reformatory and may require threadbare deliberation and analysis whereas consumer price determination for Mari was a regular legal requirement which has serious financial implications.

Petroleum Division submitted following proposals for consideration and approval of the ECC: (i) gas sale price for Mari based fertiliser plants may be fixed as Rs. 580/ mmbtu for feedstock and Rs. 1,580/ mmbtu for fuel-stock from 1st October, 2023 or from the date of approval of ECC, whichever is earlier. The said prices would result in a positive Gas Development Surcharge; and (ii) gas volumes of Mari entitled to the pricing incentive of Petroleum Policy, 2012 would continue to be priced in accordance with the Petroleum Policy, 2012.

During the ensuing discussion, it was observed that due to different gas prices, urea manufacturers had fixed different urea prices in the market. Proposed increase in the gas prices may cause increase of Rs. 500 /bag for Mari based fertiliser plants. Therefore, Petroleum Division may devise a uniform gas price for all fertiliser plants as different prices had distorted the market to the disadvantage of farmers.

It was stated that Fertiliser Manufacturers had already increased the urea prices in anticipation of proposed enhancement of gas prices. It was further observed that due to increase in urea prices, the cost of production of wheat would increase considerably.

Finance Division supported proposed revision of fertiliser gas sale prices, since it had the potential to control the circular debt of petroleum sector. It was suggested that a Committee may be constituted to deliberate on the issue of gas sale prices to fertiliser plants and submit recommendation on rationalization of gas and urea prices.

The ECC constituted a Committee comprising Minister for Finance, Revenue & Economic Affairs (Convener), Minister for Commerce, Industry and Production, Minister for Power and Petroleum, Secretary, Petroleum Division, Secretary Industries and Production Division and Dr Akmal Siddiq, Technical Adviser, Ministry of National Food Security & Research to deliberate on the issue in holistic manner and submit viable recommendations on gas supply to fertiliser plants and rationalisation of gas prices. The Committee will submit its report to the ECC for consideration by 25th October 2023.

Copyright Business Recorder, 2023