The prices of urea fertilizer are likely to increase by Rs 600 per 50kg bag if OGRA's proposed increase in gas prices is notified, which would hit badly the already dwindling agriculture sector.

This assumption has been shared with the government's decision-makers who are evaluating different ways and means to reduce urea prices in the light of directions issued by Prime Minister Imran Khan.

The Oil and Gas Regulatory Authority (OGRA) carries out the natural gas price determination for Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL), in the light of next fiscal year's revenue requirements. It is well within the ambit of the government of Pakistan (GoP) to advise OGRA of any concessions/special price regimes for specific sectors to be considered while determining the sale price.

The latest OGRA gas price determination issued on December 10, 2019 is under active consideration by the Ministry of Energy. This recommendation is for increase in natural gas prices for the consumers all across the spectrum.

The purported increase in the fertilizer feedstock price is over 236% from Rs 300/MMBTU to over Rs 706/MMBTU.

Fertilizer industry is of the view that the latest agreement between GoP and International Monetary Fund (IMF) necessitates that GoP fulfills this obligation. The price impact works out to be roughly Rs 600 per 50kg bag of urea. This translates into a new price of Rs 2,600 per 50kg bag of urea.

"If such a price determination is to see the light of the day, the agriculture sector would be hit hard. The country would witness unparalleled turmoil in it and undoubtedly it would become the worst performing sector of the already fragile economy that is reeling from recent input energy price hikes," said one of the stakeholders.

The sources said that over the years, the GoP has raised the raw material cost in such a way that the gas component of the urea produced has gone up historically from roughly 30% to 55% at present.

"This would further escalate to 85% of the total urea bag price if the new prices are implemented as proposed and producers are not allowed to raise prices impacted due to this unjust gas price increase," said a fertilizer sector representative.

The impact of fertilizer use on the yield of major crops, wheat and rice, has been to the tune of 250% and 160% respectively in the last fifty years.

"There is a way out of this situation, a win-win solution for all the stakeholders. One plausible solution is to make the fertilizer fuel price adjustments (increase) so as to minimize or no feedstock price increase," he added.

Fertilizer industry was of the view that to maintain a certain level of revenue for the gas companies, only the fuel prices may be increased. This would have the following benefits: (i) minimal increase in the fertilizer prices; (ii) promotion of healthy competition among the fertilizer industry; (iii) and instead of windfall profits for the new fertilizer plants - that enjoy a fixed dollarized feed price for 10 years - the relatively less price increase would benefit the farming community at large having low negative impact on farm economics.

The government has also been suggested to settle the long outstanding Gas Infrastructure Development Cess (GIDC). Fertilizer sector has been subjected to the highest rate of Rs 300/MMBTU GIDC on the feedstock and Rs 150/MMBTU for the fuel gas. If the GoP wants to improve the farm economics, it should implement the already agreed formula of reduction in feedstock and fuel GIDC to 50%. This too would be a win-win solution for all the stakeholders.

Mari Petroleum Company Limited (MPCL) based fertilizer plants have spent billions of rupees on developing their gas infrastructure just to sustain the current production levels. In an ideal world, the gas suppliers/GoP should have footed the bill for such infrastructure development.

Fertilizer industry claims that on one hand, the government is contemplating unjust increase in gas feedstock prices and on the other, a high-powered ministerial committee has been formed to negotiate with the fertilizer manufacturers to bring down the existing urea prices, which are already substantially lower than international prices.

Copyright Business Recorder, 2019