ADB report: Fertiliser sector should get priority over power

Fertiliser plants on SNGPL network have received less gas than other sectors contrary to the government’s own policy

KARACHI:

In 2011 from  January 1 till Oct 31, fertiliser plants on the SNGPL network received the equivalent of only 3.5 days of gas per week relative to other sectors who received 4 to 5 days of gas a week. It is important to note here that gas is used by the fertiliser industry as a raw material without which plants cannot manufacture urea, whereas for other sectors it is used as a cheaper fuel which do have other alternative sources, albeit expensive sources, available. This according to a report prepared by International Resources Group for the Asian Development Bank and the Ministry of Planning and Development Government of Pakistan. “The System Level Economic Valuation indicates that reducing gas to the fertiliser sector costs the economy Rs196 million per mmscfd, while increasing gas to the power sector costs the economy Rs98 million per mmscfd,” says the report.

Thus, using natural gas for fertiliser has a higher savings relative to using it for power generation by Rs23 billion. This compares well with the value from the economic model, which for the use of 100 mmscfd in the fertiliser sector gives a net benefit of Rs19.6 billion.

In a fertiliser plant, 100 mmcfd of gas can yield 1.43 tons of fertiliser with 75% of the gas being feedstock and 25% being fuel for the process. The value of the fertiliser in the domestic market (price to the farmer) is Rs22.3 billion. The alternative for the farmer is imported fertiliser priced at Rs37,200 per ton including transport and distribution costs, which is a total cost of Rs51.7 billion, at the time the report was released. The savings from domestic fertiliser production versus imports is the difference, which is Rs29.4 billion.

In a 220MW thermal power plant, 100 mmcfd of gas generates 11.1GWh of electricity, which has a fuel cost of Rs3.5 billion based on natural gas priced at Rs394 per million Btu. A 220MW thermal power plant requires 0.22 million tons of heavy fuel oil priced to generate the same amount of electricity. At Rs44,680 per ton, the fuel oil plant has a fuel cost of Rs9.9 billion. The savings from using domestic natural gas rather imported heavy fuel oil is the difference, which is Rs6.4 billion.

Gas has a higher economic value for fertiliser production compared to power sector. The System Level Economic Valuation indicates that reducing gas to the fertiliser sector costs the economy Rs196 million per mmcfd, while increasing gas to the power sector costs the economy Rs98 million per mmcfd.

The plant level comparison shows that using 100 mmcfd for fertiliser saves Rs29.4 billion compared to fertiliser imports, while replacing 100 mmcfd for power saves Rs6.4 billion compared to heavy fuel oil imports. Thus, using natural gas for fertiliser has a higher savings relative to using it for power generation by Rs23 billion. This compares well with the value from the economic model, which for use of 100 mmcfd in the fertiliser sector gives a net benefit of Rs19.6 billion.

The report observes that gas diverted from fertiliser plants is partly used to increase power generation in existing plants, both utility and captive power, and is partly conserved for future use.

The government in order to avoid a urea crisis such as 2011’s should acknowledge that the only solution is to provide gas to all fertiliser plants in the industry. The other industries can import furnace oil which will be much more economical than importing urea. Otherwise sowing and harvesting targets will not be met and food inflation could arise.

The text of the entire report can be found here.

Published in The Express Tribune, May 7^th, 2012.