According to media reports Petroleum Ministry has intimated that the fertiliser manufacturers operating on the SNGPL network will be provided gas for 15 days in a month alternatively. In addition to this, the earlier prescribed 45 day gas outage has been enhanced to three months in winter. This would severely hamper fertiliser production and would result in substantial increase in Urea price. However the companies operating solely on Mari network would remain immune from this gas cut, hence will benefit from urea price hike.
Gas supply from KESC to be diverted
However, it is believed that the above decision is more of a short-term remedy rather than a long term solution for fertiliser companies. In contrast to the above decision taken by the government, a proposal is under discussion to divert 40mmcfd of gas from Karachi Electric Supply Corporation (KESC) to the Sui Network. As per industry sources, the government will provide High Speed diesel (HSD) to KESC at a subsidised rate to compensate for the diverted gas. However the additional cost of generating electricity through (HSD) will again be dissipated by the Fertiliser companies, hence leading to a possible increase in urea prices.
Govt to impose gas levy on feed stock
The government is contemplating to impose a gas levy on feed stock (projected to generate Rs50billion annually). Through this increase, the government may opt to fund some part of the subsidy cost. Additional revenue generated through this levy will be utilised in Liquid Natural Gas (LNG) and Pakistan Iran (PI) Gas Pipeline projects.
Improvement in capacity utilisation
The current requirement of gas for fertiliser manufacturers on SNGPL network is 240mmcfd. However, they have been facing gas curtailment at an average of 38 per cent since April 2011 forcing some plants to shutdown several times during the year. After implementing KESC based proposal the gas supply is expected to reach 192mmcfd, which will increase the capacity utilisation to 80 per cent of fertiliser companies based on SNGPL network.
Beneficiaries of govt measures
In terms of who benefits from KESC proposal, we think that ENGRO’s new plant would, as it has been forced to shut down several times compared to other fertiliser companies on Sui Network, said Shahbaz Ashraf at AHL, adding that this would also help in diluting investors concerns regarding the company’s ability to service its debt promptly. On a larger scale this will lead to low urea imports and would address the concerns of farmers as price pressure would ease. However, plants operating on the Mari Network (FATIMA and FFC) will continue to benefit from rising urea prices.