May 2 - 15, 2011

The combined urea production capacity of Pakistani fertilizer manufacturers stands at 6.9 million tons against an estimated domestic demand of 6.3 million tons. This has effectively made the country not only self sufficient but capable of exporting half a million ton urea at least and earn US$2 billion foreign exchange, assuming export price of US$400 per ton. This will be possible only when plants operate at optimum capacities. However, 20 per cent curtailment in gas supply and 45 days mandatory closure of plants getting gas from SSGC and SNGPL and 12 per cent reduction in gas from Mari field will force the country to import 500,000 tons urea, at least. This will result in US$2 billion spending and the government paying Rs8.5 billion subsidy (difference between the cost of locally produced and imported urea). Since price of crude oil is still hovering around US$100/barrel and gas prices are also on the rise it is imperative that the government of Pakistan reviews its decision of gas curtailment/mandatory closure of fertilizer plants, if it is serious in achieving food security and accelerating GDP growth rate.

The installed urea manufacturing capacity got big boost in 2010 after commencement of commercial production by expansion plant of Engro Fertilizers, which is the largest single-train ammonia-urea production plant in the world. The plant has a production capacity of 1.3 million tons per annum and enhanced Engro's urea production capacity to 2.3 million tons per annum.

Natural gas is the key ingredient in the manufacturing of urea and its curtailment reduces urea production. Engro receives gas from Sui twins and Mari gas field. A per the government's gas load management plan supply of gas from SNGPL and SSGC has been curtailed by 20 per cent and from Mari by 12 per cent.

The severity of impact can be best understood by examining Engro's position. The company has been allocated 819mmscfd and as per the gas load management plan supply has been curtailed by 124mmscfd. In addition, there was a 45-day complete outage for plants getting gas from SSGC and SNGPL. In reality the outage extended beyond 45 days to over 60 days for Engro.

SSGC 85 20 17
SNGPL* 240 20 48
Mari 494 12 59
* Includes even allocation of 100 MMSCFD

Some sector experts are of the view that mandatory closure of plants and curtailment of gas will lead to a shortfall in supply by approximately one million tons. The worst affectees are the farmers who have to pay 23 per cent higher price mainly due to curtailment of gas supply.

At present about four million tons urea production capacity is based on Mari gas field, which was dedicated to fertilizer industry in the Fertilizer Policy 2001. Therefore, gas supply to the units getting gas from Mari just should not be curtailed. Another three million tons urea is produced at plants getting gas from SSGC and SNGPL. Historically, gas supply of fertilizer plants has been curtailed during winter to meet the enhanced gas demand of domestic consumers but now gas is being diverted to the power plants to bring down cost of electricity generation.

In fact, curtailment of gas or supply below the agreed quantity is a violation of the contract which the government has signed with the fertilizer manufacturing companies. Since the government has made a commitment, it is expected that the government will maintain the sanctity of these contracts. The government must keep in mind that multilateral financial institutions have extended credit to urea manufacturing companies. Prolonged outages and substantial curtailment affects viability of these projects, which give them a reason to ask the government to honor these contracts.

Some experts say that burning furnace oil at power costs three times more as compared to gas and therefore insist that the gas being supplied to fertilizer plant should be diverted to the power plants. However, they look at one side of the coin only. In fact when gas supply to the fertilizer plants is curtailed/suspended to provide gas to the power plants the government has to bear a colossal cost owing to import of urea. Therefore, running power plants on gas does not look a prudent proposal.

Government policies have encouraged sponsors to establish fertilizer plants and there is still a scope for enhancing installed capacity. Investors in fertilizer industry have benefited from regular and substantial dividend payout by the leading players. As long as Pakistan continues to grow different crops, market for fertilizer will continue to grow and all the stakeholders benefit.

In order to ensure balanced use of fertilizer appropriate dosage of urea and DAP has to be applied. Against a global average of 2:1 Pakistani farmers use 4:1 ratio that is four bags of urea and one bag of DAP. However, they do not realize that using extra urea does not yield any benefit but proves counterproductive. This practice becomes more evident when DAP prices go many times the price of urea. Therefore, the appropriate measure would be to gradually increase feed gas price and adjust the price accordingly and enhance subsidy of DAP, to keep its price at modest level. The gradual increase in urea prices would be easy to bear and the total cost of fertilizer input will remain more or less unchanged for the farmers.

An impression that fertilizer manufacturers are minting money due to supply of gas far below its international prices is also a fallacy. The matter of fact is that the benefit of supplying gas to fertilizer plants at lower cost is passed on to the farmers and it may be said that farmers get urea at subsidized price. There seems nothing wrong in following such a policy because around the globe many governments pay huge subsidy to farmers to achieve food security and to keep them safe from any volatile movement in the prices of inputs.

There is a suggestion that fertilizer industry instead of crying on gas curtailment should form a consortium for establishing an LNG terminal. Enjoying strong balance sheet and robust profit and loss statement mobilizing funds for this project should not pose any problem for them. They will not only be able to operate plants at optimum capacity but also earn foreign exchange by exporting urea to finance cost of imported LNG, partly at least.