Short-term boost: Govt directs 60mmcfd of gas to Engro Fertilizers

Company receives a much-needed boost, but impact on EPS remains uncertain.

Meiryum Ali July 12, 2013
According to JS Global brokerage house, the extra gas will add 50,000 tons of fertiliser to Engro’s monthly production. PHOTO: FILE

KARACHI: The Ministry of Petroleum and Natural Resources has decided to provide Engro Fertilizers with 60 million cubic feet of gas per day.

In a statement issued to the Karachi Stock Exchange on Friday, Engro confirmed that the unutilised gas from Mari gas field, originally meant for the 747-megawatt Guddu power plant, will be used by Engro Fertilizers until the power plant goes online. However, certain procedural requirements are still pending.

This gas will allow Engro Fertilizers to run both of its fertiliser plants at 80-85% capacity. According to JS Global brokerage house, the extra gas will add 50,000 tons of fertiliser to Engro’s monthly production.

There may not be a long-term impact due to a spike in domestic gas prices, as feedstock gas prices may be increased to the level of fuel gas prices. So, if urea producers are to earn what they earned previously, they will have to increase urea prices.

But the hike cannot be too severe, since the producers have to compete with international urea. This means that not all cost is going to be recovered.

This unexpected windfall will not last long. Gas will only be provided until the Guddu power plant comes online, in which case the extra gas will be re-routed to Guddu.

“The gas flow is expected to start shortly but the Guddu may require this gas in a period of six months, therefore, the gas allocation is not permanent,” says JS Global analyst Naveed Tehsin.

A permanent solution would be ideal. While domestic consumption increases, natural gas production is projected to fall starting from 2014. In fact, the largest single train urea factory in the world, built by Engro in Pakistan, had to be shut down during parts of 2012 because of a shortage of gas.

That the government has offered to provide Engro this gas, even for a short period, is a move definitely welcomed by Engro.

Published in The Express Tribune, July 13th, 2013.

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