Fertilizer plants: Subsidised gas supply fuels circular debt

ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has been apprised that providing gas to fertilizer plants at subsidized rates has resulted in accumulation of circular debt, well informed sources told Business Recorder.

The issue of supply of gas to local fertilizer industry has also recently been discussed threadbare at a meeting of federal cabinet, when a report of a Cabinet Committee to ensure stability of urea prices in the market was tabled before the Federal Cabinet.

The Ministry of Industries and Production informed that the Cabinet on its meeting held on August, 13, 2024, while ratifying the decision of the ECC of August 2, 2024 submitted by the Cabinet Division, titled ‘Price Fixation of Imported Urea for Kharif 2024,’ relating to the Ministry of Industries and Production Division, had directed the Petroleum Division to ensure uninterrupted gas supply to Fatima Fertilizer and Agritech beyond September 30, 2024.

Fertilizer plants will continue to get uninterrupted gas supply

Furthermore, the Cabinet had constituted a Committee in terms of rule 17(3) of the Rules of Business, 1973 under the convenership of the Deputy Prime Minister to propose appropriate measures to ensure stability of urea prices in the market.

The Cabinet was apprised that the said Committee had held two meetings, on August 17 and September 25 2024, under the Deputy Prime Minister at the Ministry of Foreign Affairs.

During its first meeting, the Committee had been apprised that total expected requirement of urea for Rabi season could be met wholly through domestic production, and that the present capacity was 6.25 million metric tons per annum.

However, if Fatima Fertilizer and Agritech were shut, then the likely shortfall in domestic production would be 420,000 metric tons for the Rabi season, which would necessitate import of urea at a cost of $ 169 million, while a further Rs.22.453 billion would be required for a subsidy to bring its price at par with locally produced urea. It was informed that the Committee underscored the need for continuous operation of the two plants and directed the Petroleum Division, with support from the Ministry of Industries and Production, to negotiate with Fatima Fertiliser and Agritech for enhancement of gas tariff by Rs 200 to 300/MMBTU.

The Cabinet was further informed that for the second meeting, the Petroleum Division had prepared two options for enhancing gas tariffs for the two plants viz Rs.1800/MMBTU and Rs.2000/MMBTU under which the additional revenue for SNGPL worked out to be Rs.466 million and 932 million per month, respectively.

Both options were discussed with the plants’ management, but they were of the view that it would not be possible for them to continue their operations at enhanced gas tariffs. It was also informed that during the meeting the Petroleum Division clarified that continuation of the present gas tariff would result in an increase in LNG price by $ 0.5744 MMBTU and lower its merit order for consumers.

However, the Petroleum Division had agreed that the present arrangements may continue for the next two months. Thus, in view of the importance of the agriculture sector and the setbacks that farmers had recently faced in the case of wheat prices, the Committee considered it important that fertilizer prices should not be increased unilaterally.

After detailed deliberation and for the reasons stated in the report, the Committee had decided ;(i) as far as the gas tariff is concerned, status quo shall be maintained and Fatima Fertiliser and Agritech will be supplied gas at the rate of Rs.1597/MMBTU till December 15 2024; and (ii) Petroleum Division and Ministry of Industries & Production will negotiate with the fertilizer industry to arrive at a uniform gas price.

In the ensuing discussion, the Prime Minister enquired about gas pricing and the final recommendation of the Cabinet Committee. The Deputy Prime Minister explained that much work had been done to arrive at the arrangements, since earlier the Industries & Production Division and the Petroleum Division had taken completely divergent views.

He stated that one Division had kept insisting that fertilizer must be exported, while the other insisted that there was no need. He further apprised that the Committee had discussed all issues and had decided that there was no need for import, but that supplies and prices had to be carefully managed.

One Cabinet Member insisted that all fertilizer manufacturers must be supplied gas at a uniform price and there should be no favouritism. Another Member emphasised that differential gas prices charged from different manufacturers created market distortions. In response, it was clarified that differentiated gas prices were being charged from certain manufacturers owing to long- term binding contracts.

After detailed discussion, it was decided that Petroleum Division, assisted by the Ministry of Industries and Production, will negotiate gas prices with the fertilizer industry to work towards uniform gas pricing and the Committee headed by Deputy Prime Minister shall hold its next meeting in this respect at the earliest.

Copyright Business Recorder, 2024