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The fertiliser ministry has opposed Reliance Industries' demand for hiking the KG-D6 gas price in line with the Asian LNG spot price, effective from April 2014. The ministry wants the price to be not more than $8/mmBtu.
RIL pitched for the gas price, post March 2014, to be about 10% below the spot price of LNG imported from Qatar $12-13 at current rates.
According to sources, during discussions with the government, the fertiliser ministry contended that such a price (on which consumers will have to pay an extra $1-1.5 to cover transporation charges and marketing margins) is not viable for the fertiliser industry whose output is highly subsidised, adding that any such move will cause a burden on the exchequer.
"Globally, the prices of domestically-produced gas are available at very cheaper rates at around $1.5-$4. With the government clearing the new investment policy for fertiliser sector, at least eight new plants are going to set up. If the gas price is fixed at more than $8, it will increase the subsidy bill and put more stress on companies willing to set up plants," a ministry official said.
The gas price from the once-prolific block off the Andhra coast (where the output has seen a sharp decline in the past more than a year) is slated for review by an empowered group of ministers (EGoM) in 2014. The current price of $4.2/mmBtu was fixed in 2007 and implemented from 2009 for a five-year period.
With gas production from KG-D6 block expected to fall further from existing 26 mmscmd to 18 mmscmd next year, the fertiliser ministry wants to protect the fuel allocation for the sector it presides over. The government has originally given the highest priority in allocating gas to fertiliser units, allocating 15.35 million standard cubic meter per day (mmscmd) of gas from the KG-D6 block to the existing gas-based fertiliser plants. Power, city-gas are among the other sectors that are allocated gas.
While the overall demand growth for fertilizers industry has remained steady at around 5% over the period 2005-12, production has remained largely stagnant during the said period. Indias dependence on fertilizer imports has increased at a rapid pace, and currently imports constitutes around 27% of urea consumption and 68% of DAP consumption.
Former oil minister S Jaipal Reddy, in a letter to the Attorney General before leaving office, had said that if the demands of Reliance Industries for increasing the gas price are accepted, the government could lose around $6 billion on the subsidy front.
In 2007, an EGoM fixed $4.2/mmbtu as the price of gas produced from the KG-D6 fields, which was implemented in a 2009 production-sharing contract when the production started from the block. The price was fixed for a period of five years and was supposed to come up for revision only in 2014.
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