1. GAS POOLING & NEW UREA POLICY 2015: CREDIT POSITIVE FOR
INDIAN UREA MANUFACTURERS
Analyst Contacts
K. Ravichandran
ravichandran@icraindia.com
+91-44-4596 4301
Pranav Awasthi
pranav.awasthi@icraindia.com
+91-124-4545 373
Ankit Deora
ankit.deora@icraindia.com
+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.
ICRARatingFeatureJune2015
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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
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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.
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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,
5. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
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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
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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.)
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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.
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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/MT
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)
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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.
10. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
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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
11. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
ICRA Rating Services Page 11
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.
12. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
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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
USD/MT
GCal/MTofUrea
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)
13. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
ICRA Rating Services Page 13
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.
14. ICRA Special Comment Gas Pooling & New Urea Policy 2015: Impact Analysis
ICRA Rating Services Page 14
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+
