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Business

July 5, 2018

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Fertiliser sector braces for crisis as gas reserves going up in smoke fast

LAHORE: With the shortage of gas doubling to eight billion cubic feet per day (bcfd) by 2025, a severe energy crisis is in the making and seen leaving an early as well as an ugly impression in the shape of curtailed urea manufacturing in Pakistan.

An industry assessment shows the demand and supply situation of gas has changed from affluent to deficient and after 2006 the country has entered into the deficiency phase.

The proven natural gas reserves of the country at the end of 2012 were 22.7 trillion cubic feet (0.6 trillion cubic meters) with reserve-to-production ratio (R/P ratio) at 15.511. This ratio shows the reserves would last for approximately 16 years more, if consumed at the current rate of production. If the current gas scenario prevails, Pakistan would bear a gas shortfall of 8 bcfd by the year 2025-26.

The poor vision of Mushararf government, which decided to promote compressed natural gas (CNG) stations for short term gains and the unfortunate geopolitical environments in the region that have restrained implementation of TAPI and Iran-Pakistan Pipeline projects are two main causes of the shortage. The policy of burning gas as cheap fuel has led to a situation, where the sectors adding value to the natural gas with no substitute raw material will suffer and it will have an ultimate negative impact on economy and food security.

Although Pakistan has been blessed with natural gas reserves, years of mismanagement, lack of strategic vision, limited investments in energy sector and inadequate exploration of these reserves have led to shortage of natural gas in Pakistan. This prime energy source is to be distributed among five critical sectors i.e., households, commercial, industry, power, transport.

While all others burn this precious commodity, the fertiliser manufacturing is based on processing the natural gas into ammonia and then urea, thereby adding value to it.

Therefore, fertiliser sector was on top priority in national gas allocation and management policy. Unfortunately, the policy has been manipulated in the recent past thereby lowering the fertiliser industry to third on the list of priorities.

Moreover, the gas dedicated to fertiliser manufacturing has been diverted to other sectors thus causing early depletion to the gas reserves. The fertiliser companies have spent over Rs20 billion on the installation of compression stations to ensure the right pressures.

In the recent past the liquefied natural gas (LNG) marketers have influenced the minds of policymakers to the worst. Instead of working on adding natural gas, they went for the lethargic option of imported LNG as an alternative to natural gas. Many analysts are not able to perceive the gravity of this situation, as they are projecting the LNG is bringing a positive change in Pakistan’s energy-equation. The reality is that, although, the high-priced imported LNG might be fulfilling the national demand for gas, it is not promising any long-term benefits for the industrial sector in general and fertiliser sector in particular.

Supply of imported LNG at high prices and the insufficient distribution of local gas, is already hurting this important industry, whereby the smaller producers are already on the verge of collapse. Some factories have been totally deprived of the indigenous gas supply.

So they are being forced to operate on expensive regasified liquid natural gas (RLNG) to avert degradation of plant/machinery due to idleness or inoperativeness and somehow retain their highly skilled workforce.

The price mechanism for fertiliser sector as per Fertiliser Policy envisages availability of natural gas as feedstock at the rates prevalent in Middle East to ensure availability of fertiliser at prices lower than international market. However, imposition of Gas Infrastructure Development Cess (GIDC) has led to an average price of $4.88/mmbtu against the international average of $2-$3. Such high cost of production will ultimately hamper the use of costly fertilisers and lower growth. The RLNG with exorbitant prices does not make any economic sense for fertiliser production.

Fertilisers are strategically one of the most important industries for an agrarian economy like Pakistan. In the absence of a consistent subsidy policy or a favourable regulatory environment the agriculture sector will continue to suffer.

Fertiliser plants such as Pakarab Fertiliser Ltd (PFL), Fauji Fertiliser (FF), and Agritech who are working with Sui Northern Gas Pipelines Ltd (SNGPL), have experienced frequent shutdowns on account of availability or affordability of gas, resulting in huge financial losses.

The expensive RLNG is not a financially viable option for production of urea particularly under the prevailing price mechanism. The minimum essential affordability level should enable the above-mentioned companies to keep the capital-intensive plants in operation, retain skilled manpower and maintain their presence in the market, if the gas is provided in a sustained manner.

A special tariff for feedstock gas can also be developed for plants operating on the RLNG. The government can implement a formula for mixed-billing, based on domestic gas price and the RLNG rate, thus, reducing the burden of gas cost on the fertiliser industry, by following the same method as applied to the power sector in Pakistan.

This is a practical, long-term solution to resolve the energy crisis in the fertiliser industry. The restoration of priority of gas allocation to fertiliser sector and provision of sustained gas supply as per Fertiliser Policy 2001 is essential to ensure optimum utilisation of national capacity, thus avoiding expensive imports and huge subsidies to sell the imported commodity.

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