gas pooling & new urea policy 2015 - june 2015

GAS POOLING & NEW UREA POLICY 2015: CREDIT POSITIVE FOR

INDIAN UREA MANUFACTURERS

Analyst Contacts

K. Ravichandran

[email protected]

+91-44-4596 4301

Pranav Awasthi

[email protected]

+91-124-4545 373

Ankit Deora

[email protected]

+91-22-6169 3347

Website www.icra.in

Summary

The Government of India has recently come out with a slew of policy

measures aimed at containing subsidy outgo, improving energy

efficiency, levelling input costs and preventing diversion of urea from

agriculture. These policies are expected to have a significant impact on

individual fertiliser players and the overall industry in the next few years.

Gas pooling: On May 20, 2015, the Ministry of Petroleum and Natural

Gas came out with a notification regarding guidelines for gas pooling for

the fertiliser sector post the approval of the policy by the Cabinet

Committee of Economic Affairs on March 31, 2015. This policy alters the

dynamics of the urea industry by levelling gas costs for all gas-based

units.

The cost structure of urea units is primarily dependent on two

parameters: (i) energy efficiency of the plant (ii) cost of gas. Currently,

cost of gas varies widely for various units as gas is contracted by

individual units from diverse sources. This benefits plants who have

access to low cost domestic gas, while it disadvantages plants who have

had to use high cost imported R-LNG due to lack of gas supply from

domestic sources. By pooling domestic gas with imported gas, the

delivered gas cost for all units will be uniform for all players who are

connected to the natural gas grid. Through this policy, the GoI aims to

incentivise competition on the basis of the cost structure of individual

units, which will now depend primarily on energy efficiency.

Urea production beyond re-assessed capacity1 earns import parity price

(IPP)-linked pricing based on the existing policy. Units having access to

low cost gas get significantly higher contributions on this production as

compared to production upto reassessed capacity. The policy also does

away with differentiation in contribution due to such artificial differences

and lays the onus of profitability on the energy efficiency and production

volumes of individual players.

The policy will allow the industry to focus on its core business of

increasing urea production at healthy energy efficiency, while laying the

onus of gas supply on LNG suppliers and gas pool operator GAIL (India)

Ltd. By aggregating gas demand, gas suppliers may be able to negotiate

gas supplies more effectively, which may help the GoI reduce subsidy

payout.

Many of the units which were not able to produce urea beyond the re-

assessed / cut-off quantity in FY15 due to low international urea prices

and high cost of gas, should now be able to produce urea beyond the

cut-off quantity provided international urea prices remain at reasonable

1 Capacities of players were re-assessed based on the recommendations of the Alagh

Committee (2000) to determine their effective capacities for calculating subsidies

under New Pricing Scheme.

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mailto:[email protected]

http://www.icraindia.com/

ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis

ICRA Rating Services

levels. Even if international prices of urea were to decline significantly, the impact would be on an industry-

wide basis and more particularly for high cost / low energy-efficient units, instead of impacting even energy

efficient players, who may not have access to low cost gas at present, under the existing policy.

The policy also does away with a major impediment for setting up new urea plants – gas supply at

reasonable cost. The onus of contracting gas supply for new units set up under the New Urea Investment

Policy 2012 was earlier on the individual players. This hindered viability of those projects as domestic gas

supply is limited and hence, those projects would have had to be largely dependent on imported gas,

making them uncompetitive against imported urea. Gas pooling would ensure that the new plants get gas

at the same price as the rest of the industry, resulting in reasonable gas costs. While many of these

projects may still not materialise due to high capital costs and low prevailing international urea prices, ICRA

believes that the gas pooling as a concept is a credit positive for domestic companies who have been

looking to set up gas-based brownfield / greenfield urea projects. While operational issues and

implementation risks remain, ICRA believes that GoI may approve 3-5 new projects in the near-to-medium

term depending on pipeline connectivity and financial viability.

Overall, ICRA believes that gas pooling is a credit positive for the fertiliser industry as it would provide a

common cost base to the industry, especially considering that natural gas accounts for ~75-80% of the

cost of production of urea. This should enable the industry to increase production levels, while reducing

overall cost of urea production by marginally lowering weighted average gas cost for the industry – due to

aggregation of demand and increase in efficiency of individual plants by increasing production volumes.

The DoF estimates that the policy will lead to additional domestic production of 3.7 MMT of urea in existing

units during FY16-FY19, leading to reduced import dependence and an estimated saving of Rs. 1,550

crore of subsidy.

New Urea Policy 2015: On May 25, 2015, the Government of India notified the New Urea Policy 2015 for

the period from June 2015 to March 2019 post the approval of the policy by the CCEA on March 13, 2015,

which alters the pricing parameters as provided to the urea industry under the modified New Pricing

Scheme-III (NPS-III), which is applicable currently. Under NPS-III, urea units are classified amongst six

groups depending on their feedstock and technological vintage. Each of these units has a pre-set energy

consumption norm depending on their group average and performance of the individual units. Subsidy for

each unit primarily varies as per their actual energy consumption vis-a-vis the pre-set norm. Energy

savings that the unit generates vis-a-vis the pre-set norm are reimbursed at the rate of weighted average

energy cost. Higher the energy savings, higher the profitability generated by the unit. These norms, which

have been applicable since October 2006 based on the energy consumption of these units in 2002-03, are

now being tightened for the period FY16-FY18, which will reduce subsidy outgo for the GoI besides

incentivising the industry to compete on the basis of their energy efficiency. While positive for the GoI, it is

marginally negative for the urea industry as they will not be able to get the same quantum of energy

savings as they were getting in the past. Nevertheless, ICRA notes that most of the companies in the urea

space have been able to improve their energy consumption levels in the past few years through energy

savings and / or replacement of machinery under debottlenecking projects. Besides, the prevailing

technology enables manufacturers to lower their energy consumption further and hence, many of the units

have been undertaking or will undertake energy savings projects to reduce their energy consumption

levels. These units may be able to generate healthy energy savings under the NUP-2015 as well despite

tightening of the norms. Further, by becoming more competitive globally, the units should be able to

compete against imports if gas is available at reasonable prices. It may be noted that any unit getting

higher energy savings than earlier can only result from higher reduction in energy consumption vis-à-vis the

tightened norms.

The framework of keeping similar feedstock and vintage based units in groups has also been altered

significantly. The new groups have been formed on the basis of their energy efficiency, since most of the

units are now based on natural gas as feedstock and are relatively old. The policy seems to provide a

direction to homogenise the energy efficiency and feedstock parameters for the industry to lower the

complexity of implementation of existing policies.

A significant change in the policy has been with regard to the production beyond re-assessed capacity.

Based on the current policy, production beyond re-assessed capacity (RAC) is entitled to 85% of the import

parity price (IPP). Besides, for production between 100% to 110% of the RAC, 65% of the gain is shared

with the GoI, while the unit retains all gains beyond 110% based on urea realisations of 85% of IPP. Since



international urea prices have declined significantly in recent years and domestic units have faced high gas

costs, production beyond RAC was becoming unviable – this resulted in shutdowns of various units during

2014-15 post production of 100% of RAC leading to lower production of domestic urea and higher imports.

The GoI has now changed the policy for production beyond re-assessed capacity, for which units will be

entitled for their respective variable cost (energy cost, bags, electricity and water cost primarily) and the

uniform per MT incentive equal to the lowest of the per MT fixed costs of all domestic urea units (currently

at Rs. 2,300/MT). However, this realisation would be subject to a cap of the import parity price plus

weighted average of other incidental charges (transportation and handling charges, etc.), which the GoI

incurs on imported urea on its account. This policy is beneficial to both the industry and the GoI. If the

industry is able to compete against imports, they are now free to do so and earn reasonable, albeit fixed

contribution on the same. Although this contribution will be lower than what some of the urea units were

earning over the past few years due to high international urea prices and access to low cost domestic gas,

it would still provide them reasonable profits despite the low prevailing and expected international urea

prices. Higher production also leads to better energy efficiency, so there will be an indirect positive impact

in the form of energy savings on urea production up to cut-off quantity2 as well based on this policy.

Neem coated urea: The GoI had decided in January 2015 to allow urea producers to produce neem

coated urea to the extent of 100% of production and make it mandatory to produce a minimum of 75% of

domestic urea as neem-coated. On May 25, 2015, the GoI made it mandatory for all indigenous producers

of urea to produce 100% of the total production of urea as neem-coated urea. Neem coating leads to more

gradual release of urea, helping plants gain more nutrient and resulting in higher yields, apart from lower

underground water contamination due to leaching of urea. Besides, neem-coated urea cannot be diverted

for industrial use, which should help the GoI reduce subsidy to some extent. Further, since neem-coated

urea earns somewhat higher realisations, the profitability on neem-coated urea is marginally higher for urea

producers.

The following sections analyse the impact of the above three measures on the credit profile of the industry

players.

2 As per the Urea Investment Policy of August 2008, for units which undertook revamp projects, the urea produced from

existing units beyond their re-assessed capacity under New Pricing Scheme (NPS) or the maximum achieved capacity by a unit

for 330 days during 2003-2007, whichever is higher (cut-off quantity), is recognised as the production under revamp of the

existing unit. The realisation for this urea is at a rate of 85% of the import parity price (IPP) of urea (on a C&F basis) subject to a

floor of US$ 250/MT and a ceiling of US$ 425/MT as opposed to that on a retention price basis for urea below cut-off quantity.

The urea produced under revamp quantity is only eligible for these realisations once the total production crosses 105% of the

cut-off quantity or 110% of the re-assessed capacity, whichever is higher.



Gas Pooling

Importance of natural gas for the fertiliser sector

Natural gas is used as feedstock and fuel in the fertiliser sector. It is used as a feedstock in the production

of ammonia, which is an intermediate in urea production and certain NPK fertilisers. Urea is the main

fertiliser produced in the country, accounting for ~55-60% of domestic production and consumption of

fertilisers. Besides, natural gas is also used by certain fertiliser-chemical complexes to produce certain

chemicals, such as ammonia and its derivatives (ammonium nitrate, nitric acid, caprolactum and

ammonium bicarbonate), methanol and its derivatives (acetic acid, formic acid, methyl formate and methyl

amines), etc. ICRA notes that while the gas pooling policy addresses the demand of the urea sector, non-

urea sector has been excluded and those issues are being studied by the GoI separately as per media

reports.

India has 30 urea units, of which 27 are based on natural gas (except the three naphtha-based units of

Mangalore Chemicals & Fertilizers Ltd., Madras Fertilizers Ltd. and Southern Petrochemical Industries

Corp. Ltd.). Gas demand for the urea industry is currently estimated at ~45-46 mmscmd, while

consumption is around ~42.5 mmscmd. As of June 2014, ~28 mmscmd was being supplied through

domestic sources, while the rest was imported R-LNG.

Gas pooling mechanism

The pooling mechanism will come into effect from Q2 FY16. Pooling will be done for 25 gas-based urea

units (urea plants of Brahmaputra Valley Fertilizer Corp. Ltd. face technology obsolescence and will not be

included under the policy) and the three conversion units (depending on when they complete the feedstock

conversion project and / or pipeline connectivity is established) until FY18. From FY19 onwards, gas

pooling will be applicable for all the existing urea units and any brownfield / greenfield projects that will

come up. A weighted average price will be worked out for the industry and all units will get gas at a uniform

delivered price. A Empowered Pool Management Committee (EPMC) comprising of seven members from

the Ministry of Petroleum & Natural Gas, Departments of Fertilizers and Expenditure, Petroleum Planning &

Analysis Cell (PPAC), Fertilizer Industry Coordination Committee (FICC) and GAIL (India) Ltd. has been

constituted, which will approve the plant-wise gas supplies as well as purchase arrangements by the pool

operator and monitor utilisation of domestic gas and penalise fertiliser companies not making payments

within the due date. The pooling will be only on paper, which means existing gas supply arrangements will

continue to be in place and a Pool Fund Account (PFA) will be established. Companies getting gas at lower

rates than the pool price will need to deposit the rest of the amount in the PFA, while companies getting

gas at higher rates will be compensated from the PFA. GAIL (India) Ltd. has been designated as the pool

operator. It will manage the mechanism by collecting data on gas requirements, determining import

requirements, working out weighted average cost of gas and plant-wise delivered gas prices, declare

uniform delivered pooled gas price and maintain PFA in coordination with the DoF and FICC. The pool

price will be declared by the pool operator on a monthly basis while gas requirements will be estimated on

a quarterly basis.

Energy efficiency parameters to become critical to generate healthy profitability; lays down ground

for future decontrol

The major impact of the policy on the urea industry would be as follows:

Currently, gas costs for individual players are based on their own gas contracts, which were made at

different points in time and at different prices, leading to significant variations in cost structure. For

instance, a plant having an energy efficiency of 5.5 GCal/MT but using R-LNG to a large extent can

have an adverse cost structure compared to a plant having an energy efficiency of 7 GCal/MT but

using domestic gas to a large extent for production. However, since domestic gas is not available to be

supplied to the entire urea sector, the GoI has come out with a middle way to lower its subsidy outgo

over time while incentivising the industry to compete on the basis of energy efficiency. This will create

a level playing field and reduce the advantage enjoyed by units which had access to lower cost

domestic gas, particularly for urea production beyond re-assessed / cut-off quantity and working capital

borrowings. On the other hand, players who have faced the issue of high gas prices due to high

dependence on R-LNG will henceforth see their subsidy receivables and hence, working capital

borrowings reduce significantly. Subsidy receivables from the GoI have remained high in recent years,



necessitating high working capital borrowings by urea manufacturers. Gas pooling would allow the

industry to focus on the core business of urea manufacturing and improvement of energy efficiency of

individual units, while laying the onus of gas supply on LNG suppliers and gas pool operator GAIL

(India) Ltd.

Gas pooling also will help individual units raise production levels as gas will be available at the same

rate for urea production beyond RAC, unlike in FY15 when high price of imported gas and low

international urea prices led to production beyond cut-off quantity becoming unviable for many plants,

resulting in shutdown of these plants (such as Chambal Fertilisers, National Fertilizers, Indo Gulf

Fertilizers, etc.). These players should now be able to produce urea beyond the cut-off quantity

provided international urea prices remain at reasonable levels. Even if international prices of urea were

to decline significantly, the impact would be on an industry-wide basis and more particularly for high

cost / low energy-efficient units, instead of impacting even energy efficient players, who may not have

access to low cost gas at present, under the existing policy. Nevertheless, ICRA believes that the gas

pooling policy is a credit positive for domestic companies who have been looking to set up gas-based

brownfield / greenfield urea projects. While operational issues related to gas supply (such as pipeline

connectivity for some units) and high implementation risks of such large capital projects remain,

reasonable gas prices should ensure that the GoI may be able to give approval to 3-5 new projects

depending on pipeline connectivity and financial viability. The GoI is working on the revival of closed

plants of Fertilizer Corporation of India Ltd. (FCIL) and Hindustan Fertilizer Corporation Ltd. (HFCL) at

Gorakhpur (UP), Barauni (Bihar) and Sindri (Jharkhand), which are being considered to serve as

anchor load customers for the Jagdishpur-Haldia pipeline. ICRA notes that JVs of fertiliser sector PSUs

are already looking at revival of the Talcher (Odisha) and Ramagundam (Telangana) plants of FCIL.

Besides, twelve proposed brownfield / greenfield projects of private and public sector players are under

consideration.

Gas pooling lays the ground for possible decontrol of the sector in future. Going forward, the GoI can

import urea instead of domestic procurement if domestic production is not competitive against imports,

although ICRA believes that this practice will only be implemented for urea production beyond cut-off

quantity and for upcoming urea plants. Plants having a balance of high energy efficiency and low

capital costs will be better placed against plants having relatively weaker energy efficiency and / or

high capital costs and may generate better savings in the longer term when energy efficiency norms

may be normalised for the industry. Although it is quite likely based on GoI’s pronouncements that urea

retail prices will not be decontrolled over the next 3-4 years, gas pooling will provide common ground

for the industry for the introduction of NBS or decontrol in the sector over the longer term.

Pooled gas price may be in the range of US$ 9-10/mmbtu

Based on the calculations provided below, ICRA estimates that the pooled gas price for the fertiliser sector

may be in the range of US$ 9-10/mmbtu:

Exhibit 1 – Calculation of Pooled Gas Price

Gas category

Estimated

Supply

(mmscmd)^

Estimated Basic

Price

(US$/mmbtu)

Weighted

Average

APM / Non-APM 13.745 5.2 1.55

JV / Other Domestic Sources 1.965 5.2 0.22

RIL 11.50^ 5.2 1.30

R-LNG (Long-term / Mid-term) 8.05 13.5 2.36

R-LNG (Spot) 10.74 10.5 2.45

Total 46.00 7.89

^ Estimated based on industry sources and demand estimates, June 2014 supply data and prevailing price

estimates

The basic weighted average price based on current mix and prices is estimated at ~USD 7.9/mmbtu.

Adding transportation charges and taxes, etc. of ~USD 1-1.5/mmbtu, the estimated pooled price applicable

from June 2015 would be in the range of ~USD 9-10/mmbtu as per ICRA’s estimates. These prices may

change going forward based on semi-annual changes in domestic gas prices and R-LNG prices on a



monthly basis. ICRA notes that in a scenario of an increase in gas prices in the international markets,

domestic prices of gas will also increase due to linkage with international benchmarks as per the modified

Rangarajan Committee formula. On the other hand, in a scenario of international energy prices increasing,

international urea prices may also go up (unless coal costs remain low and Chinese supply provides a

lower floor to urea prices). Thus, this policy is likely to increase the correlation between domestic and

international cost of production of urea. On the other hand, by aggregating gas demand, gas suppliers may

be able to negotiate gas supplies more effectively, which may help the GoI reduce subsidy payout.

Diverse credit impact for individual units

While ICRA considers the policy a credit positive for the industry as it will rationalise cost of gas

procurement and level the same for various players, the impact on individual units will vary based on their

current cost of gas procurement. However, for some of the players who were able to get a higher

proportion of domestic gas, the impact on production up to cut-off quantity will be to increase the cost of

production, thereby resulting in an increase in the working capital borrowings on account of subsidy

receivables to that extent. The impact on cost of production of individual plants would be as follows:

Exhibit 2 – Broad impact of gas pooling on individual units (for production upto reassessed capacity)

Positive Impact

(Likely decrease in gas costs)

Negative Impact

(Likely increase in gas costs) Marginal / Neutral Impact

CFCL-Gadepan-II GSFC-Vadodara CFCL-Gadepan-I

GNFC-Bharuch IFFCO-Aonla-I, Kalol NFL-Vijaipur-I & II

IGF-Jagdishpur KRIBHCO-Hazira TCL-Babrala

IFFCO-Aonla-II KSFL-Shahjahanpur

IFFCO-Phulpur-I & II NFCL-Kakinada-I & II

KFCL-Kanpur RCF-Thal, Trombay-V

NFL-Bhatinda, Panipat, Nangal SFC-Kota

ZACL-Goa

^ Based on publicly available info regarding gas supplies and ICRA’s estimates

Should help increase production levels; lead players to implement energy savings projects

ICRA believes that the policy would enable the industry to focus on increasing production volumes and

lower cost of urea production by lowering the weighted average gas price for the industry. The domestic

industry produced 22.7 MMT urea in FY14; production is estimated to have declined to ~22.2 MMT in FY15

due to policy-related issues. ICRA believes that production levels from existing units can increase to ~24

MMT by FY17 and further going forward as the companies implement energy savings and debottlenecking

projects to increase urea volumes. This will gradually bring down energy consumption levels and make the

industry more competitive against imports. The DoF estimates that the policy will lead to additional

production of 3.7 MMT of urea in existing units during FY16-FY19, leading to reduced import dependence

to that extent and an estimated saving of Rs. 1,550 crore of subsidy over the period.

New Urea Policy 2015

Modified NPS-III: Current pricing policy for urea

Urea has been subsidised in India since the retention pricing scheme (RPS) was instituted by the GoI in

1977. While the contours of the policy have changed over time, the broad framework of the subsidy policy

remains largely the same. A brief description of the salient features of New Pricing Scheme-III (NPS-III) /

modified NPS-III and general information on the subsidy policy followed are provided below:

The subsidy policy theoretically guarantees a urea producer an assured post-tax return on equity of

12%. The GoI sets the farm gate price (FGP) of urea and the difference between the retention price

(RP) and the FGP constitutes the subsidy. Hence, total realisation on urea sale comprises of FGP and

subsidy.

The RP comprises of fixed costs and variable costs.

o Variable costs included feedstock cost and other utilities (power, water, etc.)



o Fixed costs belonged to two categories: (i) Capital related charges (ii) Conversion costs.

These costs were computed with reference to costing data of FY03 for NPS-III, but was

updated under modified NPS-III notified on April 2, 2014 based on costing data for FY13.

Capital related charges include depreciation, interest and 12% RoNW.

Conversion costs included, inter alia, wages and salaries, repairs and maintenance,

chemicals, consumables, overheads and selling expenses.

Exhibit 3 – Classification of Urea Units in Groups Under New Pricing Scheme

Group Name of Units

Pre-1992 Gas Based Units

BVFC Namrup-III

IFFCO Aonla-I

Indo Gulf Fertilizers Jagdishpur

KRIBHCO Hazira

NFL Vijaipur-I

RCF Trombay-V

Post-1992 Gas Based Units

CFCL Gadepan-I

IFFCO Aonla-II

KSFL Shahjahanpur

NFL Vijaipur-II

NFCL Kakinada-I & II

TCL Babrala

Pre-1992 Naphtha Based

Units

FACT Kochi

IFFCO Phulpur-I

KFCL Kanpur

MCF Mangalore

MFL Manali (Chennai)

SFC Kota (DCM Shriram Ltd.)

SPIC Tuticorin

ZACL Goa

Post-1992 Naphtha Based

Units

CFCL Gadepan-II

IFFCO Phulpur-II

FO / LSHS Based Units

GNFC Bharuch

NFL Bhatinda

NFL Nangal

NFL Panipat

Mixed Energy Based Units

GSFC Vadodara

IFFCO Kalol

RCF Thal

Source: DoF

While urea realisations under earlier policies were specific to the plant, they were replaced by a group-

based approach under NPS. The RP under NPS-III is derived based on the group under which the

plant is classified, which is dependent on its feedstock and technological vintage.

Capacity utilisation levels of 93% for pre-1992 naphtha and FO / LSHS based plants and 98% for the

other groups were considered for calculating base concession rates (base realisations) of urea units as

on March 31, 2003 for NPS-III. These were updated up to March 31, 2013 for modified NPS-III.

Subsidy is linked to the actual retention price (RP) of the units or the group average RP, whichever is

lower. Based on the pre-set norms given in NPS-III, variable costs were accounted for based on actual

prices of feedstock and fuel. On the base RP, energy savings that the unit generates vis-a-vis the pre-

set norm are reimbursed at the rate of weighted average energy cost. Hence, besides ensuring

conformance to its own energy consumption norm, the unit’s RP should also be equal to or lower than

the group average, else it will receive a realisation of the group average RP, which will be lower than

its own RP.



The respective pre-set energy consumption norm of each urea unit during NPS-II or actual energy

consumption achieved during 2002-03, whichever is lower, was recognised as the norm for NPS-III.

Saving on energy over the pre-set norms was paid as per the basic rate of the weighted average of

feedstock / fuel used during NPS-III.

The NPS-III policy was valid from October 1, 2006 to March 31, 2010 and group averaging was done

after updation of all costs up to FY03. NPS-III was provisionally extended till March 31, 2014, post

which modified NPS-III was made operational for FY15. As per modified NPS-III, fixed costs were

updated based on FY13 data.

No permission was to be required from the GoI for production beyond 100% of re-assessed urea

capacity (RAC) of the unit. 65% of the gains on all production between 100% and 110% of RAC was to

be shared with the GoI, with the realisation capped at the unit’s own concession rate. Units increasing

production beyond 110% may be compensated at their own concession rate subject to the overall cap

of the IPP. For procurement from units producing beyond 100% of RAC, a merit order based on least

cost was to be followed.

All functional naphtha and FO / LSHS based units had to be converted into natural gas post a certain

period. The GoI was not to subsidise high cost urea produced by non-gas based urea units and the

rate of concession of such units will be restricted to the lower of the prevalent IPP or their own rate

post the deadline. Prior to conversion, these units were allowed to produce at 100% of capacity with

penalties in case they do not agree to conversion. Further, to incentivise conversion to natural gas,

there was to be

no mopping up of

energy efficiency

for a period of

five years.

Capital subsidy

was to be

considered for

FO / LSHS

based units, for

which DoF

notified a

separate

scheme.

Urea FGP has been

increased at a much

slower pace since the

RPS was first

implemented as

compared to the cost

of production. Until

the beginning of the new millennium, domestic prices largely moved in line with international prices

depending on the domestic cost of production. Since then, the difference in RP has increased significantly

vis-a-vis FGP due to (i) increasing feedstock prices on account of strong energy prices over the major part

of the period (ii) rupee depreciation (iii) increase in imports since FY07 (iv) realisations being realigned vis-

a-vis international prices to some extent (for beyond cut-off quantity urea) with movement towards natural

gas as the preferred feedstock (whose prices are denominated in dollar terms) and (v) political

unwillingness to increase urea prices. This has led to high subsidy outgo for the GoI. As a result, controlling

the subsidy outgo while facing political compulsions of not being able to increase urea retail price has

become a priority for the government in recent years.

Salient features of NUP-2015

The salient features of NUP-2015 are as provided below:

Duration: NUP 2015 will be effective from June 2015 to March 2019. The provisions of the existing

modified NPS-III and New Investment Policy 2008 shall continue till May 31, 2015.

0

5000

10000

15000

20000

25000

FY86 FY90 FY94 FY98 FY02 FY06 FY10 FY14

Rs/M

T

Urea Price - International (Rs/MT) FGP (Rs/MT)

Exhibit 4 - Urea International Prices vs. Farm Gate Price

(Source: indexmundi.com, in.investing.com, ICRA Analysis; International prices based

on average forex rates for the year for illustrative purpose)



Grouping: The existing gas based urea units will be classified into three groups as given in the Exhibit

below. 25 units are covered under this classification while units currently operating on naphtha, viz.

MFL Manali, MCF Mangalore and SPIC Tuticorin are not covered under this scheme because these

units are not connected to the gas pipeline network in the country. Besides, BVFCL Namrup-II & III

units are proposed to be closed due to technology obsolescence and will be replaced by new higher

energy efficiency units, for which a separate restructuring proposal will be worked out. Till then, the

BVFCL units will function under the provisions of the modified NPS-III.

Exhibit 5 – Classification of Urea Units in Groups Under NUP 2015

Group Name of Units

Group-I (Pre-set norms

between 5 GCal/MT and 6

GCal/MT)

CFCL Gadepan-I & II

IFFCO Aonla-I & II

IFFCO Phulpur-II

Indo Gulf Fertilizers Jagdishpur

KRIBHCO Hazira

KSFL Shahjahanpur

NFCL Kakinada-I & II

NFL Vijaipur-I & II

TCL Babrala

Group-II (Pre-set norms

between 6 GCal/MT and 7

GCal/MT)

IFFCO Kalol

GSFC Vadodara

RCF Thal

GNFC Bharuch

Group-III (Pre-set norms more

than 7 GCal/MT)

NFL Nangal

NFL Bhatinda

NFL Panipat

ZACL Goa

SFC Kota

RCF Trombay V

IFFCO Phulpur-I

KFCL Kanpur

Source: NUP-2015

Energy norms: The 25 units grouped under the three groups as mentioned above will be eligible to

get the concession rate on the basis of the revised energy norms fixed for each group from June 1,

2015 to March 31, 2018. For FY19, energy norms will be tightened further.

o For FY16-FY18 (from June 1, 2015 onwards), the revised energy norms would be the simple

average of pre-set norms of NPS-III and the average actual energy consumption achieved

during the years FY12, FY13 and FY14 or the pre-set energy norms of NPS-III, whichever is

lower.

o For FY19:

Group-I will have energy consumption norm of 5.5 GCal/MT, except for TCL Babrala,

which will continue to have the existing pre-set norm of 5.417 GCal/MT.

Group-II will have energy consumption norm of 6.2 GCal/MT.

Group-III will have energy consumption norm of 6.5 GCal/MT.

For FO / LSHS based units which have completed feedstock conversion projects (NFL-Bhatinda,

Nangal & Panipat and GNFC Bharuch), the present provisions for conversion will continue.

For naphtha based units which have completed feedstock conversion projects (ZACL Goa and KFCL

Kanpur), savings on energy consumption over the pre-set norms of NPS-III to recover their investment

for conversion from naphtha to natural gas shall continue. The Department of Fertilizers in consultation

with the Department of Expenditure shall work out the period for which existing pre-set energy norms

will be allowed, which shall not be more than five years from the date of conversion so that each unit

may be in a position to recover the investment with interest thereon from energy savings.



The compensation for other variable costs – bags cost, water and electricity charges and fixed costs

will be determined in accordance with the existing provisions of NPS-III and modified NPS-III.

For production beyond re-assessed capacity, the units will be entitled for their respective variable cost

and a uniform per MT incentive equal to the lowest of the per MT fixed costs of all indigenous urea

units (currently at Rs. 2,300/MT) subject to import parity prices plus weighted average of other

incidental charges that the GoI incurs on imported urea (~USD 25/MT).

All other existing policy guidelines – escalation / de-escalation of concession rate, neem coated urea,

distribution and movement, import of urea and taxes on inputs for urea production and freight

reimbursement – will continue.

DoF, in consultation with the Department of Expenditure, can take a decision to modify the policy

without altering the basic framework due to operational issues related to pooling of gas and energy

efficiency targets such that it is financially beneficial to the GoI.

Exhibit 6 – Key Differences between NPS-III / Modified NPS-III and NUP-2015: Summary

Policy Framework NPS-III / Modified NPS-III NUP-2015

Duration NPS-III from Oct’06 to Mar’14

Modified NPS-III: Apr’14 to May’15 Jun’15 to Mar’19

Grouping of Urea Units 6 groups based on technological

vintage and feedstock

3 groups based on pre-set energy

norms

Energy Consumption Norms

Respective pre-set norm of each

urea unit during NPS-II or actual

energy consumption during FY03,

whichever is lower. Last tightened

in FY05 under NPS-II.

Simple average of (i) pre-set

norms of NPS-III (ii) average

actual energy consumption

achieved during FY12-FY14.

Tighter norms vis-à-vis NPS-III will

reduce retention price for many

units.

Feedstock conversion units

Provision for capital subsidy and

energy savings for feedstock

conversion projects

Same provisions to continue as in

NPS-III

Production beyond 100% of

re-assessed capacity (RAC)

Gains at unit’s own concession

rate. 65% of gain to be shared with

GoI between 100% and 110% of

RAC. Units beyond 110% to be

compensated at own concession

rate subject to IPP cap.

For units who undertook expansion

projects under Urea Investment

Policy 2008, realization = 85% of

IPP subject to cap of US$ 425/MT

and floor of US$ 250/MT

Realisation = (Variable Cost +

Uniform per MT incentive equal to

lowest of per MT fixed cost of

domestic units) subject to cap of

(IPP + weighted average incidental

charges on imported urea)

Impact on industry

Policy was meant to reimburse

subsidy for a heterogeneous

industry with diverse energy

consumption levels and feedstock,

while encouraging industry to move

to gas as feedstock and laying

ground for future reforms

Policy is meant to homogenise

industry into three broad groups,

as most plants are old enough to

be categorised based on energy

consumption levels and not

vintage. Coupled with gas pooling,

it provides framework for decontrol

or NBS for urea sector in the

longer term

Contribution for most units to reduce except for those who have just completed energy savings

project or those who will implement such projects going forward

ICRA studied the impact on energy consumption norms for various units under the NUP-2015. The decline

in pre-set norms during FY16-FY18 would be high for units with older vintage and technology, many of



whom have actually undertaken feedstock conversion and / or energy savings projects in the past and are

able to generate high profits from energy savings on this account.

Some of the plants which may lose out on energy savings going forward due to tightening of energy

parameters include RCF-Trombay, IFFCO-Phulpur-I & Kalol, RCF-Thal, SFC-Kota (DCM Shriram),

GSFC-Vadodara, GNFC-Bharuch and ZACL-Goa, although for the latter two, energy savings will still

continue to compensate for capital costs on the feedstock conversion projects. It may be noted that

these plants are some of the high vintage plants and have undergone feedstock conversion and / or

energy savings projects, which have resulted in lower energy consumption currently vis-a-vis their pre-

set norms. Their current energy consumption levels continue to be much lower than the new norms for

many of these units and hence, many of them would be able to continue to get reasonable profits from

energy savings, while the rest would need to undertake energy savings projects.

Energy consumption norms will be tightened by a modest amount for existing gas-based plants CFCL-

Gadepan-I & II, IFFCO-Aonla-I & II, IFFCO-Phulpur-II, IGF-Jagdishpur, KSFL-Shahjahanpur, NFCL-I &

II, NFL-Vijaipur-I & II and TCL-Babrala. These companies may see only a marginal reduction in their

retention price based on existing norms as they are some of the more energy efficient plants in the

urea industry.

Some of the plants for whom pre-set norms should continue to remain the same as under NPS-III

include KRIBHCO-Hazira and NFL-Nangal, Bhatinda & Panipat. The latter three plants will also

continue to get capital subsidy and energy savings for their feedstock conversion projects.

For BVFCL-Namrup-II & III, the technology of these plants has become obsolete and hence, a

separate restructuring package is proposed to be worked out for setting up a new plant. In the

meantime, they will continue to operate on modified NPS-III.

Naphtha-based plants MCF-Mangalore, MFL-Manali and SPIC-Tuticorin are expected to continue to

operate using naphtha until they are connected to gas pipelines. While MCF-Mangalore has already

completed the feedstock conversion project, the other two plants are expected to complete these

projects in the meantime. These projects would take at least two years to commence operations using

natural gas due to pipeline connectivity issues.

The direction of the new policy is to homogenise the industry into three broad groups based on energy

consumption norms. Urea pricing largely depends on energy consumption efficiency and cost of gas. The

latter has been addressed through gas pooling, while to incentivise the industry to work on the former, the

pre-set energy norms have been tightened. This will lower subsidy requirement for the GoI in the shorter

run, estimated at Rs. 2,618 crore by the DoF. Besides, the policy encourages higher production by efficient

units. By becoming more competitive globally, the units should be able to compete against imports

depending on gas prices. The DoF estimates that this should lead to import substitution-related subsidy

savings of Rs. 2,211 crore.

Industry can produce urea until realisations become more than what it costs the GoI to import urea

As per the NUP-2015, units producing more than its re-assessed capacity will be entitled to get their

respective variable cost and ~Rs. 2,300/MT (which is the uniform per tonne incentive equal to the lowest of

the per tonne fixed costs of all domestic urea units under the modified NPS-III). However, this realisation

would be subject to a cap of the import parity price plus weighted average of other incidental charges

(transportation and handling charges, etc.), which the GoI incurs on imported urea on its own account

(~USD 25/MT). Effectively, the GoI is encouraging domestic manufacture of urea until the time its subsidy

outflow does not exceed its opportunity cost of import of urea. This policy is beneficial to both the industry

and the GoI. If the industry is able to compete against imports, which most of the energy efficient plants

should be able to do under the pooled gas price mechanism, they are now free to do so and earn

reasonable albeit fixed contribution on the same.



ICRA notes that many of the units, who had

undergone expansion / de-bottlenecking

following the New Investment Policy for

Urea of 2008 (NIP-2008), were earning

healthy profitability on additional urea

production until FY13 due to high urea

international prices. NIP-2008 provided IPP-

linked realisation on urea subject to the floor

and cap of USD 250/MT and USD 425/MT.

Such units will not be able to enjoy similar

levels of profitability going forward, unless

international urea prices rise significantly

and pooled gas prices for the industry

remain low. However, the industry is not

likely to face the issue of plants being shut

down, unless international urea prices are

significantly lower than domestic urea, in

which case, the entire industry and particularly the low energy efficiency units may curtail urea production

volumes. Energy efficient plants should be able to compete against imports, as reflect in the Exhibit-7.

ICRA also notes that higher production also leads to better energy efficiency, so there will be an indirect

positive impact in the form of energy savings on urea production up to cut-off quantity as well based on this

policy.

Gain-sharing with GoI for production beyond re-assessed capacity removed

Under NPS-III and modified NPS-III, companies were required to share 65% of the gains from production of

urea between 100% and 110% of re-assessed capacity with the GoI and were entitled to get the entire

gains from production of above 110% of re-assessed capacity. In NUP-2015, the distinction has been

removed and units producing anything beyond 100% of re-assessed capacity will not be required to share

any contribution with the GoI. Since profitability from production beyond re-assessed capacity has reduced

considerably in recent years, the policy is favourable for producers and will help them save on profits to that

extent.

Some plants would necessarily need to undertake energy savings projects

While energy efficiency for most of the companies has improved substantially over the previous decade,

some units have relatively high energy consumption norms vis-a-vis other units due to technology or

vintage-related issues. Upon the implementation of the revised energy consumption norms from FY19,

these units will face significantly tighter norms. Consequently, these plants would need to necessarily

undertake energy savings projects going forward. Some of these units include KRIBHCO-Hazira, IFFCO-

Aonla-I and Phulpur-I, NFL-Vijaipur-I, Nangal, Bhatinda, Panipat, SFC-Kota, RCF-Trombay, ZACL-Goa. It

may be noted that units in Group-III (those having pre-set norms more than 7 GCal/MT) will particularly

need to implement energy savings projects to achieve the targeted group norms.

Positive impact on companies who have undertaken energy savings projects due to higher pooled

price; may mitigate negative impact

For some of the units (e.g. RCF-Thal and Trombay, KRIBHCO-Hazira, etc.), who have undertaken energy

savings / debottlenecking projects in recent years resulting in a decline in energy consumption but are

faced with an increase in gas prices, the increase in gas prices would be a positive as energy savings

would increase in proportion to the absolute increase in gas prices. Thus, while it appears counter-intuitive,

an increase in gas cost can be beneficial for companies despite reduction in energy savings in GCal/MT

due to higher absolute gas costs.

5.50 5.80 6.20 6.50 6.80 7.10

286 299

316 329 342 355

150

200

250

300

350

400

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50 U

SD/M

T

GC

al/M

T o

f U

rea

Energy Consumption - Urea Retention Prices - RHS

Exhibit 7 – Realisations vs. Energy Consumption Norms

(Source: ICRA Analysis; Key Assumptions: INR/USD = 64, Gas

rate = USD 9.5/mmbtu)



Exhibit 8 – Impact on Energy Savings Considering Pooling and NUP-2015: Example

Units

Prior to pooling

and NUP-2015

Post gas pooling

and NUP-2015

Capacity MMTPA 1

Currency Rate Rs/USD 64

Pre-set norm GCal/MT 5.70 5.60

Decline in pre-set norm GCal/MT 0.1

Energy consumption GCal/MT 5.50 5.45

Energy savings GCal/MT 0.20 0.15

Gas Rate USD/mmbtu 6.5 10

Energy Cost Rs/GCal 1,879 2,891

Energy Savings Rs/MT 376 434

Energy Savings Rs. Cr. 37.6 43.4

Increase in energy savings Rs. Cr. 5.8

(Source: ICRA Analysis)

Neem-coated urea

The GoI announced in January 2015 to allow urea producers to produce neem-coated urea up to 100% of

production and made it mandatory to produce a minimum of 75% of domestic urea as neem coated. It has

now been mandatory for all indigenous producers of urea to produce 100% of the total production of urea

as neem-coated urea. Neem coating leads to more gradual release of urea, helping plants gain more

nutrient and resulting in higher yields, apart from lower underground water contamination due to leaching of

urea. Besides improvement in terms of yields, neem-coated urea is not fit for industrial use, so chances of

illegal diversion to industries would be lesser resulting in subsidy savings to some extent. It will also aid

producers improve profitability marginally as neem-coated urea is sold at Rs. 268/MT more than normal

urea, although due to possible upward impact on cost of neem oil, contribution may reduce slightly

compared to existing levels. However, the issue of smuggling of urea to neighbouring countries, where

urea is sold at higher prices in the retail market, will continue to be an issue for the GoI.

Conclusion

ICRA believes that the decisions taken by the GoI are positive for the overall fertiliser industry. While

individual impacts of these decisions may vary, they are directionally positive: (i) Equalising the cost of gas

procurement for the industry (ii) Levelling energy consumption norms for the industry to the extent possible

(iii) Preventing subsidy pilferage through existing mechanisms. These decisions will be positive for the

industry, primarily to enable the industry to take up projects, which are urgently required to bridge the

demand-supply gap. Besides, they provide a firm base to the GoI to enable it to move to decontrol the

industry or enact a nutrient-based subsidy mechanism whenever it sees the opportunity, although it

appears unlikely in the next 3-4 years due to political compulsions. ICRA believes that tightening of energy

consumption norms will only be marginally negative for an industry which has already been implementing

energy savings projects. Most of the plants will continue to get reasonable energy savings even after

tightening of the norms.



Annexure-1: List of major ICRA-rated clients in the fertiliser industry

Exhibit 9 – List of major ICRA-rated companies

Company Name Outstanding

ICRA Rating

Chambal Fertilisers & Chemicals Ltd. [ICRA]A1+

DCM Shriram Ltd. (Shriram Fertilisers & Chemicals Ltd.) [ICRA]A+ (Stable)

[ICRA]A1+

Deepak Fertilisers & Petrochemicals Corp. Ltd. [ICRA]AA (Negative)

[ICRA]A1+

Greenstar Fertilizers Ltd. [ICRA]BB+ (Stable)

Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [ICRA]AA- (Stable)

[ICRA]A1+

Indo Gulf Fertilisers (Aditya Birla Nuvo Ltd.) [ICRA]AA+ (Stable)

[ICRA]A1+

Kribhco Shyam Fertilizers Ltd. [ICRA]A1+

Mosaic India Private Ltd. [ICRA]A1+

Paradeep Phosphates Ltd. [ICRA]BBB+ (Stable)

[ICRA]A2+

Rashtriya Chemicals & Fertilizers Ltd. [ICRA]AA (Stable)

Zuari Agro Chemicals Ltd. [ICRA]BBB+ (Stable)

[ICRA]A2+



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gas pooling & new urea policy 2015 - june 2015

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