REPORT
OF
THE COMMITTEE
ON
EFFICIENT
ENERGY LEVELS ETC.
FOR
UREA UNITS
MAY, 2003
Index
S.No. Topic Page Nos.
I. Introduction 1 - 2
II. Recommendations of ERC 2 - 3
III. Constitution of the Committee 3 - ...
DOF‟s OM dated 30.1.2003
V. Annexure-III
List of 32 urea units under different
groups
72
VI. Annexure-IV to IX
Data regard...
FOREWORD
I have great pleasure in writing the foreword to the Report of the
Committee which was appointed by the Departmen...
I would be failing in my duty if I do not place on record, my deep
appreciation of the participation in the deliberations ...
I. INTRODUCTION
The objective of providing fertilizers to farmers at affordable prices, while
simultaneously ensuring an a...
report, inter alia, delineated the contours of a new urea pricing policy in detail and
even gave a vision of the goal to b...
(ii) Second Phase
In the second phase, beginning April1, 2002, the concession rates are
reduced to reflect the possibility...
norms for each group, including the gas based units. This Committee was
accordingly constituted to give its recommendation...
 Examination of the report of the ERC titled „Rationalizing Fertilizer
Subsidy‟ to serve as the backdrop for formulation ...
(iii) The Government‟s decision on the new pricing policy for urea units to
replace the RPS is now available and the Gover...
efficiency in the use of energy and cannot be expected to be as energy
efficient as the post-1992 plants unless they under...
Group-I Pre-92 Gas based plants 6
Group-II Post-92 Gas based plants 7
Group-III A Pre-92 Naphtha based plants 8
Group-III ...
proformae on FICC pattern and as furnished to FICC earlier. The data collected
from the units and their group-wise analysi...
Group Outlier plants
Group
specifi
c
energ
y
consu
mptio
n
(5 years’
weighted
average)
(Gcal/MT
Urea)
Percentage
deviation...
The Committee worked out the following six alternative scenarios for all
the six groups (Please refer Annexure-IV to Annex...
Groups Case-I Case-II Case-III Case-IV Case-V Case-VI
5 years’
average
(1997-98
to
2001-02)
5 years’
average
excludin
g
ou...
all the urea units for Stage-I on the pattern of the current practice under
RPS.
VI. PRESET ENERGY LEVELS FOR STAGE-II:
In...
Group Energy levels for Stage-II (Gcal/MT Urea)
Recommended
by ERC
Based on
Actual data
(3 years’
weighted
average
energy
...
to take a commercial decision about continued operations. However, the
specific energy consumption norm for both the years...
pertaining to their specific energy consumption. It is also due to the
differences in the composition of the different gro...
GNFC has adopted Texaco Process technology with two gasifiers while
other plants have adopted Shell Gasification Process w...
Group-IIIA
3 years‟ average
0.00 62.91 18.03 12.40 6.66
Group-IIIB
3 years‟ average
0.74 88.09 6.42 4.39 0.36
Group-IV
3 y...
adoption of notional fuel mix of the group which would entail
significant weightage for naphtha/FO, which is costlier than...
While recommending the energy levels for Stage-II, the Committee has
kept in view the energy levels being achieved interna...
Naphtha based
plants
Ammonia 9.25 9.28
Urea 6.76 6.43
FO based plants Ammonia 10.92 11.45
Comparison with 25% most efficie...
naphtha, and FO/LSHS as the case may be. The ERC had also advocated that
escalations/de-escalations should be sanctioned b...
The Committee also explored the possibility of using Wholesale Price
Index (WPI), for naphtha for purposes of escalation/d...
Price Index, may be more scientific and objective. The Government may take
appropriate decision on this after an in-depth ...
b) Rate of energy (Rs/Gcal)
Base rate of energy (B) and actual rate of energy (C) for the unit shall be
calculated from th...
It has been envisaged by ERC that all the non-gas based plants shall
modernize and switchover to LNG by end of Stage-II. T...
of the 10th
Plan. An important observation made by the Ministry of P&NG is as
follows:
“The critical requirement of succes...
legitimately expect the announcement of the policy well in time to enable it to
take such initiative. The assumption with ...
To achieve the benchmark energy norms, the existing urea units will have
to carry out extensive modification/revamp involv...
The targets recommended above are in the nature of milestones to be
reached at the end of Stage-II. However, in view of th...
(c) to direct any designated consumer to furnish to the designated
agency (any agency designated to coordinate, regulate a...
i) Pre - 92 Gas based plants
ii) Post - 92 Gas based plants
iii) Pre - 92 Naphtha based plants
iv) Post -92 Naphtha based ...
Group-I 6.07
Group-II 5.80
Group-IIIA 7.77
Group-IIIB 6.21
Group-IV 10.07
Group-V 7.10
For outlier plants on the higher si...
level, for working out base concession for Stage-II as well as for escalation/de-
escalation.
e) Raw material mix of input...
parity price or the refined Wholesale Price Index before the end of the first
year of Stage-II and the Government may acco...
Group-IIIB 5.81
Group-IV 9.97
Group-V 6.71
The Committee feels that these targets are relevant as milestones to
achieving ...
(A.V. Gokak)
Chairman
***
Chairman’s comments on certain issues raised by two members
I have gone through the dissenting note (enclosed), which was ...
calculation and did not envisage recognition of actual or norm, whichever is
lower. In a normative system, it is inherent ...
plants as gas based or mixed feed), it would seriously jeopardize the viability of
such a unit by continuing it in the gas...
beginning. The relevant data has been with us for over eight months and neither
DOF nor FICC has pointed out any inaccurac...
other units. Incidentally, this is in keeping with the new pricing scheme of the
Department of Fertilizers, under which un...
single years performance, excluding outliers, but on three years performance so
that such fluctuations are evened out and ...
Shri Manoj Kumar has further stated that the aim of recommending energy
efficiency norms for urea units and addressing all...
For stage-II for stage III onwards
I 6 4 5
II 7 4 6
III A 8 5 7
III B 2 1 1
IV 6 3 4
V 3 2 2
_____________________________...
The Committee has, after careful consideration, come to the conclusion
that at the present juncture, determination of norm...
Recommendations of Shri R.N. Choubey Joint Secretary (Plan Finance II),
Department of Expenditure
(i) As far as the revisi...
average as consumption norm. Most of the units have shown an
improvement in the past few years in the consumption norms. A...
Annexure-I
Executive Summary
Background and Objectives
1. Fertilizer subsidies have grown dramatically and continue to inc...
are given 120 Kgs. of fertilizers at subsidized prices and
(b) Expansion of Employment Guarantee Scheme and rural works pr...
the spirit of the recommendations of the HPRC. The transition however has to be
gradual.
12. The transition begins with th...
revision in issue price to farmers however, should be done every season rather
than every three months.
(ii). In the secon...
Gas
Pre 1992
Post 1992
Naphtha
FO/LSHS
Mixed
feed stock
1300
2900
8400
6400
4000
0
0
1900
3250
600
1300
2900
6500
3150
340...
(g) The Commission has recommended a price increase of 7 % in real terms per
annum from 1.4.2001, reaching Rs.7000 on 1.4....
adjusted, as advised by the Ministry of Agriculture to ensure the desired NPK
balance. It will be useful if government cou...
20. The Commission wishes to emphasize that the suggested scheme to take the
fertilizer industry to a liberalized competit...
Annexure-II-A
No. 12019/14/2002-FPP-II
Government of India
Ministry of Chemicals & Fertilizers
Department of Fertilizers
…...
feedstock/technology based efficient energy levels and possible milestone in
terms of achieving international standards.
3...
Copy to:
1. All members of the Committee
2. Guard File
Copy also to:
1. PS to Minister (C&F)
2. PS to MOS(C&F)
3. Sr. PPS ...
Annexure-II-B
No. 12019/14/2002-FPP-II
Government of India
Ministry of Chemicals & Fertilizers
Department of Fertilizers
…...
4. Dr.G.B. Purohit, Former Advisor, Department of Fertilizers, N-25, D-Saket,
New Delhi.
5. Shri V.K. Bali, Executive Dire...
No. 12019/14/2002-FPP-II
Government of India
Ministry of Chemicals & Fertilizers
Department of Fertilizers
….
Shastri Bhaw...
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
Energy norms for urea units gokak 2003
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Energy norms for urea units gokak 2003

  1. 1. REPORT OF THE COMMITTEE ON EFFICIENT ENERGY LEVELS ETC. FOR UREA UNITS MAY, 2003
  2. 2. Index S.No. Topic Page Nos. I. Introduction 1 - 2 II. Recommendations of ERC 2 - 3 III. Constitution of the Committee 3 - 4 IV. Deliberations of the Committee 4 – 12 V. Pre-set energy levels for Stage – I 12-13 VI. Pre-set energy levels for Stage – II 13 – 17 VII. Raw material mix of inputs 17 -19 VIII. International energy levels 19 – 21 IX. Mechanism for computation of escalation/de-escalation 21 - 25 X. Switchover of non-gas based units to Gas/LNG in Stage – III. 25 -28 XI. Energy level benchmarking (beyond Stage – II) 28 – 31 XII. Recommendations 31 – 37 XIII. Chairman‟s comments on certain issues raised by two members 38-48 Annexures I. Annexure-I Executive Summary of ERC recommendations 49-56 II. Annexure-II-A DOF‟s OM dated 25.6.2002 57-59 III. Annexure-II-B DOF‟s OMs dated 28.8.2002, 23.3.2003 and 1.4.2003. 60-66 IV. Annexure-II-C 67-71
  3. 3. DOF‟s OM dated 30.1.2003 V. Annexure-III List of 32 urea units under different groups 72 VI. Annexure-IV to IX Data regarding energy levels and raw material mix of inputs for urea units in different groups 73-113 VII. Annexure-X International energy levels. 114-120
  4. 4. FOREWORD I have great pleasure in writing the foreword to the Report of the Committee which was appointed by the Department of Fertilizers to suggest energy norms for urea units and other related matters, keeping in mind the need to do away with individual unit based Retention Pricing Scheme and introduce a Group Concession Scheme. The Committee met on eleven occasions in Delhi and had the benefit of interaction with the representatives of the industry. The data was collected from the industry on the pattern of F.I.C.C. The Committee has made its recommendations after taking into account the developments that have taken place since the submission of the report by the Expenditure Reforms Commission. The Committee noted during the deliberations that the heterogeneity of the industry is a major constraint in evolving any model based on uniform norms. There are significant differences even within the same group or category. The Committee, however, has made an earnest effort to bring about as much uniformity as possible, despite this handicap. The Committee has also noted that the enactment of the Energy Conservation Act, 2001 has introduced a qualitative change in the situation. The declaration of the fertilizer industry as an energy intensive industry under the Act and the constitution of the Bureau of Energy Efficiency are significant developments. Now that the Act has came into force, the major decisions in regard to the subject matter of the Committee can be taken only by the newly created/designated agencies, which are sure to initiate such action as they deem fit under the Act.
  5. 5. I would be failing in my duty if I do not place on record, my deep appreciation of the participation in the deliberations of the Committee, of Ms. S.K. Sekhon Executive Director, FICC, Shri Sudhir Krishna Joint Secretary (Fertilizers) and Shri S. Chandra, Joint Adviser, Department of Fertilizers. Indeed the richness of their experience has contributed greatly in formulating its recommendations. The Committee is also grateful to the Chairman, Vice- Chairman and the Director General, Fertilizers Association of India and the Chief Executives of HFC, NFL, MFL, SFCL, RCF and FACT for making presentations before the Committee and Shri S. Nigam, Economic Adviser, Ministry of Commerce and Industry for attending a meeting of the Committee as a special invitee. I am also deeply grateful to all the members of the Committee but for whose meaningful participation in the deliberations, it would not have been possible to finalize the Report. I also appreciate the assistance I got from Shri Manoj Kumar, Director in the Department of Fertilizers, who is also Member Secretary of the Committee. I also thank Shri S.P.S. Tomar, SO Department of Fertilizers for providing backup support and efficient secretarial assistance. Finally, the Committee would like to thank FACT, RCF and IFFCO for making available their premises at New Delhi for holding most of the meetings of the Committee. ( A.V. Gokak ) Chairman
  6. 6. I. INTRODUCTION The objective of providing fertilizers to farmers at affordable prices, while simultaneously ensuring an adequate return on investment to the entrepreneurs has been the aim of the fertilizer pricing policy of the Government. The introduction of the Retention Price Scheme (RPS) w.e.f. 1st November, 1977 has been one of the early initiatives in this direction. Under the Scheme, the difference between the statutorily notified sale price and the retention price (cost of production as assessed by the Government plus a reasonable return on net- worth) is paid as subsidy. The retention prices are determined unit-wise based on a combination of norms and actuals pertaining to the project cost, capacity utilization, cost of raw materials and such other factors. Presently, the RPS is operating in respect of urea manufacturing units only. Though, the RPS has, over the years achieved, to a remarkable degree, its professed objectives of increasing investment in the fertilizer industry and thereby creating new capacities and enhanced production along with increasing use of chemical fertilizers especially, nitrogenous fertilizers, some of the deficiencies of the Scheme have also become too obvious; nor is the Scheme any longer in tune with the current trend of deregulation and decontrol. There have been many attempts in the past to remove the deficiencies of the RPS. Some of the most prominent ones are incorporated in the recommendations of the High Powered Committee (HPC) of Secretaries on RPS in 1986, HPC on Fertilizer Consumer Prices, 1987, Joint Parliamentary Committee in 1991, study of the Bureau of Industrial Costs and Prices (BICP), 1992 and the High Powered Review Committee in 1998. The last major attempt to suggest a viable alternative to the RPS for urea units was made in September, 2000, in the report of the Expenditure Reforms Commission (ERC), headed by the former Finance Secretary, Shri K.P. Geethakrishnan. The recommendations of the ERC were all encompassing in nature and covered almost all the vital issues pertaining to the urea industry. The ERC
  7. 7. report, inter alia, delineated the contours of a new urea pricing policy in detail and even gave a vision of the goal to be reached in a none too distant future, i.e. eventually bringing fertilizer prices charged to farmers to the level of import parity price; protecting the real incomes of the small farmers, maintaining food security and promoting a balanced use of N, P & K. The executive summary of the recommendations of the ERC on „Rationalising Fertilizer Subsidies‟ is given in Annexure-I to this Report. II. THE ERC RECOMMENDATIONS In brief, the ERC report envisages dismantling of the control system in a phased manner, leading at the commencement of the fourth phase, to a decontrolled fertilizer industry which can compete with imports albeit, with a small level of protection and a feedstock cost differential compensation to naphtha/LNG based units to ensure self-sufficiency. The ERC postulated four phases in the proposed new pricing policy for urea units, beginning with the discontinuance of the RPS w.e.f. February 1, 2001, along with the introduction of the group based concession scheme. The scheme of ERC was as follows: (i) First Phase (a) In this phase, beginning February 1, 2001, the existing units are to be grouped into five categories – pre-1992 gas based units; post-92 gas based units; naphtha based units, FO/LSHS based units and mixed feedstock based units. (b) Individual retention price scheme will be scrapped and in its place a urea concession scheme with a fixed amount of concession for each of these groups will be introduced. (c) The distribution control mechanism will be done away with, though the maximum retail price arrangement will be continued. (d) The sale price of urea in real terms to be increased by 7 per cent every year w.e.f. 1.4.2001.
  8. 8. (ii) Second Phase In the second phase, beginning April1, 2002, the concession rates are reduced to reflect the possibility of reasonable improvement in feedstock usage efficiencies and reduction in capital related charges (CRC). (iii) Third Phase The third phase will begin on April 1, 2005 and reflects the feasibility of all non gas based plants to modernize and switch over to LNG. For plants which do not switch over to LNG as feedstock, only the level of concession that the unit would have been entitled to if it had switched over to LNG, would be allowed. (iv) Fourth Phase The fourth phase begins on 1.4.2006, when the industry is decontrolled. The farm gate prices will reach Rs. 6903 by 1.4.2006, a level at which the industry can be freed from all controls and be required to compete with imports, with variable levy ensuring availability of such imports at the farm-gate at Rs. 7,000 per tonne of urea. While no concessions will be necessary from this date onwards for gas based, FO/LSHS and mixed feedstock plants, existing naphtha plants converting to LNG as also new plants and substantial additions to existing plants will be entitled to a feedstock differential with that for LNG plants serving as a ceiling. III. CONSTITUTION OF THE COMMITTEE The ERC, in addition to recommending a group concession scheme for urea manufacturing units, had also envisaged improvement in the energy efficiency in Phase-II. The report had also indicated certain energy consumption norms for the non gas based units. While examining the proposals of ERC, the Department of Fertilizers (DOF) decided to work out pre-set energy consumption
  9. 9. norms for each group, including the gas based units. This Committee was accordingly constituted to give its recommendations on the following issues concerning the urea industry, keeping in view, the recommendations of the ERC: i) Efficient energy levels for the urea manufacturing units, keeping in view the existing norms and the norms which the modern plants are expected to achieve. This exercise was to be undertaken also by examining the desirability of feedstock/technology based efficient energy levels and possible milestones in terms of achieving international standards. ii) Mechanism for determining the escalation and de-escalation in the feedstock cost for various units/groups. iii) Mechanism for feedstock differential cost in respect of various non-gas based units after Stage-II keeping in view the likely scenario about availability, pricing and infrastructure required for the LNG. iv) Mechanism for treatment of substitution of feedstock due to non-availability of gas/LNG etc. A copy each of the Department of Fertilizers‟ Office Memoranda dated 25th June 2002 and 28th August, 2002, 24th March, 2003 and 1st April 2003 issued in this regard is placed at Annexure-II-A and II-B respectively. IV. DELIBERATIONS OF THE COMMITTEE In deliberating on the issues covered by the terms of reference of the Committee, a composite approach was followed, comprising, inter-alia, the following:-  Collection of actual operating data for last five years, (1997-98 to 2001-02) from all the thirty-two urea-manufacturing units and its classification in analyzable components.
  10. 10.  Examination of the report of the ERC titled „Rationalizing Fertilizer Subsidy‟ to serve as the backdrop for formulation of its recommendations.  Interaction with representatives of fertilizer industry and the Fertilizer Association of India (FAI), the apex body of the fertilizer industry.  Analysis of background notes, suggestions and notes/memoranda submitted by the members of the Committee and by the representatives of the industry. In all, the Committee met in New Delhi eleven times between July, 2002 and March, 2003 before finalizing its recommendations. The Committee has also taken cognizance of the following developments that have taken place after the ERC submitted its report: (i) ERC had assumed that the fertilizer industry would be able to obtain naphtha and Fuel Oil/LSHS at import parity prices. However, the fertilizer industry could not meet the expectation largely on account of the non-availability of the required infrastructure for handling import of naphtha and FO/LSHS. The necessary infrastructure was available only with the oil companies and they were generally unwilling to permit the fertilizer industry to make use of the same. The significant saving that the ERC had expected on account of import of naphtha and FO/LSHS at import parity prices has, therefore, not accrued. (ii) The ERC had estimated that LNG would be adequately available in the country to facilitate conversion of non-gas based plants to LNG by the year 2004. This assumption has not materialized. The recent discovery of gas in deep waters of Krishna Godavari offshore and in Rajasthan is still to be further appraised to determine firm reserves in the area from the point of view of commercial production. As of now, it is difficult to get a firm idea about either the quantum or timing of availability of gas in different locations to facilitate conversion of non- gas based fertilizer plants to gas for feedstock.
  11. 11. (iii) The Government‟s decision on the new pricing policy for urea units to replace the RPS is now available and the Government of India, Department of Fertilizers have vide their OM dated 30.1.2003 announced the new pricing policy for urea units which would be implemented from 1.4.2003. A copy of DoF‟s O.M. dated 30.1.2003 is appended as Annexure-IIC. The Committee noted that the new pricing policy for urea units is group based in sharp contrast to unit-specific Retention Price Scheme. a) Stages considered in the Report The Committee has considered the same stages for its recommendations as considered by the Government for its new Group Concession Scheme for urea units, namely: I. Stage-I – 1.4.2003 to 31.3.2004 II. Stage-II – 1.4.2004 to 31.3.2006 III. Stage-III – 1.4.2006 onwards. b) Grouping of plants i) Gas based plants: Gas based plants have been divided into two groups, namely, i) Pre-92 Gas based plants and ii) Post-92 Gas based plants, in line with the recommendations of ERC. ii) Naphtha based plants: Naphtha based plants have been divided into two groups namely i) Pre-92 Naphtha based plants and ii) Post-92 Naphtha based plants. The naphtha based plants which were set up after 1992, have a larger size and are more energy efficient, but also entailed higher capital costs. On the other hand, the older plants i.e. pre-1992, had lower capital costs but are less energy efficient. These will have to make very intensive efforts in order to improve
  12. 12. efficiency in the use of energy and cannot be expected to be as energy efficient as the post-1992 plants unless they undertake substantial capital investments. Therefore, it was considered prudent to divide the naphtha based plants into two different groups i.e. pre-1992 and post-1992 naphtha based plants. iii) FO/LSHS based plants: FO/LSHS based plants have been kept in a single group in line with the recommendations of ERC. iv) Mixed Energy based plants: In line with the recommendations of the ERC, the Committee has considered such of the gas-based units to be in the mixed energy based group, whose consumption of naphtha/FO/LSHS is more than 25% of the total energy consumption. NFCL-II was included by ERC in this group as its consumption of raw material was assumed in the ratio of 30:70 for gas and naphtha, respectively. Simultaneously, ERC had observed that this ratio was likely to change in future in view of additional allocation of gas. The ERC had accordingly, recommended that the actual mix needs to be reviewed for this unit periodically at the time of grant of concession. The Committee has scrutinized the data pertaining to the NFCL-II unit and has found that this unit has been using less than 25% of non-gas energy in the last year taken up for analysis, i.e. 2001-02. Hence, NFCL-II has been included in the post-92 gas based group and not in the mixed energy based group. Based on the above definitions regarding grouping, all the plants have been divided into six groups as given below: Groups Description No. of plants
  13. 13. Group-I Pre-92 Gas based plants 6 Group-II Post-92 Gas based plants 7 Group-III A Pre-92 Naphtha based plants 8 Group-III B Post-92 Naphtha based plants 2 Group-IV FO/LSHS based plants 6 Group-V Mixed Energy based plants 3 Total no. of plants 32 The list of all the thirty-two urea plants is given in Annexure-III. Given the uncertainty about the availability of gas, at least in the near future, the extent of alternative fuel/feedstock is also likely to keep on changing. The Committee recommends that in case consumption of alternative feedstock/fuel in a gas based unit exceeds 25%, the classification of the unit should be shifted from gas based to the mixed energy group until the mix again changes warranting its inclusion in the gas based group. Likewise, the classification of a unit in the mixed energy group may also undergo similar change. The Committee recommends that this exercise should be undertaken on an annual basis. c) Collection of actual operating data: The data about energy consumption figures was collected for the last five years i.e. from 1997-98 to 2001-02 from all the thirty-two urea manufacturing units. Units were asked to furnish the break-up of energy consumption data in terms of various energy inputs used for the manufacture of urea. In order to maintain uniformity and comparability in the collection of data, proformae were devised and the units were requested to provide the data in the prescribed
  14. 14. proformae on FICC pattern and as furnished to FICC earlier. The data collected from the units and their group-wise analysis is enclosed as Annexure-IV to Annexure-IX. The Committee has based its observations and recommendations on the data so collected. The Committee noted that the basic figures as also the conversion calculations into Gcal of energy as given by each urea unit are liable to be scrutinized by the Government at its own level. d) Outlier Plants: During group-wise analysis of the five years‟ energy consumption data, it was observed that some plants were having too high or too low specific energy consumption than the average of the group. These variations arise, on the one hand, due to technological obsolescence, besides operational inefficiencies leading to high consumption of energy and, on the other hand, due to economies of scale and adoption of improved technology leading to lower energy consumption. The Committee felt that inclusion of such plants in calculating the average energy of the group would give abnormally high or low values for the group. In order to remove this aberration, the Committee decided that the plants having more than 20% deviation in weighted average specific energy consumption as compared to the weighted average specific energy consumption of the group for the five years under consideration (i.e. 1997-98 to 2001-02), shall not be considered for arriving at the group weighted average energy consumption and such plants shall be termed as Outlier Plants in the group. It was further decided that such Outlier Plants shall be dealt with separately. In order to identify such plants, all plants in a particular group, including outlier plants, were considered for calculating the weighted average specific energy consumption. Thereafter, the plants whose own weighted average specific energy consumption was having a deviation of more than 20% from the group weighted average, i.e., outlier plants were excluded while re-computing the weighted group average. Based on above, the group-wise list of Outlier Plants is given below:
  15. 15. Group Outlier plants Group specifi c energ y consu mptio n (5 years’ weighted average) (Gcal/MT Urea) Percentage deviation from 5 years’ weighted group average Name of the plant Energy consumption (5 years’ weighted avg.) (GCal/MT Urea) Group-I i)HFC, Namrup-III* ii)RCF, Trombay-V 17.291 10.433 6.665 159.43 56.53 Group-II - - 5.857 - Group-III A FACT 11.320 8.116 39.48 Group-III B - - 6.263 - Group-IV i)FCI, Sindri ii)NLC, Neyveli iii)GNFC, Bharuch 17.459 16.259 8.170 10.426 67.46 55.95 (-) 21.64 Group-V - 7.129 - * The Namrup units of the erstwhile HFC now constitute a separate company namely, the Brahmaputra Valley Fertilizer Corporation Limited. e) Analysis of data:
  16. 16. The Committee worked out the following six alternative scenarios for all the six groups (Please refer Annexure-IV to Annexure-IX for details): - Case-I Weighted average specific energy consumption of all the plants of the groups considering last five years‟ operating data (1997-98 to 2001-02). Case-II Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering last five years‟ operating data. Case-III Weighted average specific energy consumption of all the plants of the groups considering last 3 years‟ operating data (1999-2000 to 2001-02). Case-IV Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering last 3 years‟ operating data. Case-V Weighted average specific energy consumption of all the plants of the groups considering only last year‟s operating data (2001-02). Case-VI Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering only last year‟s operating data. Group-wise weighted average specific energy consumption (Gcal/MT urea) for all the six alternative scenarios is given below (please refer Annexure- IV to Annexure-IX for details):
  17. 17. Groups Case-I Case-II Case-III Case-IV Case-V Case-VI 5 years’ average (1997-98 to 2001-02) 5 years’ average excludin g outliers 3 years’ average (1999- 2000 to 2001-02) 3 years’ average excluding outliers Last year’s average (2001-02) Last year’s average excluding outliers Group-I 6.665 6.110 6.566 6.066 6.267 5.970 Group-II 5.857 5.857 5.796 5.796 5.734 5.734 Group-IIIA 8.116 7.915 7.964 7.773 7.787 7.732 Group-IIIB 6.263 6.263 6.206 6.206 5.902 5.902 Group-IV 10.426 10.190 10.163* 10.067* 9.546 9.982 Group-V 7.129 7.129 7.103 7.103 7.032 7.032 * For NFL Bhatinda, the lowest specific energy consumption of 10.210 Gcal/MT urea and urea production of 567367 MT, achieved during the year 1997-98 have been considered for each of the three years for calculation of three years‟ group average for group-IV. This is because in the remaining years, the consumption of energy in this plant was significantly higher, and the inclusion of these figures would have unduly inflated the group weighted average. V. PRE-SET ENERGY LEVELS FOR STAGE-I: The recommendations for pre-set energy levels for Stage-I (1.4.2003 to 31.3.2004) are not one of the specific terms of reference of the Committee. The ERC has also not given any normative pre-set energy level for this stage but has only considered the actual energy consumption levels of each group for Stage-I. The Committee, therefore, does not wish to recommend any efficiency norms for various groups for this stage. Moreover, this stage begins from April 1, 2003 and urea units do not have any time to adjust to any new norms. It is recommended that the FICC may calculate escalation/de-escalation in the variable cost for
  18. 18. all the urea units for Stage-I on the pattern of the current practice under RPS. VI. PRESET ENERGY LEVELS FOR STAGE-II: In analyzing the last five years‟ actual operating data of the urea plants of different groups, the Committee observed that in line with the trend over the last three years, most of the plants achieved the lowest energy consumption figures in the last year considered, i.e. 2001-02. However, for recommending the preset efficient energy levels for Stage-II for the urea units in different groups (including units considered outliers), the Committee has not considered the performance of that one year only, i.e. 2001-02. This is because analysis of the data reveals wide fluctuations from year to year. It may be emphasized that a single year‟s data may not be true representative of a performance that can be sustained over a long period as the same is influenced by internal as well as external factors: internal factors like on-stream days achieved depending upon, among others, whether annual turn around was taken or not and external factors like availability of feedstock, particularly gas. Unlike plants located in other parts of the world, gas based plants in India do not have 100% assured supply of gas and this has in fact forced some of the units to install dual feed facility so that they may be able to make up for this shortfall of gas by naphtha, whenever it is necessary. The level of production and consequently, efficiency of operation also depends on demand influenced by seasonal condition etc. It is against this background that the norms for Stage-II have been worked out on the basis of three years‟ weighted average, (1999-2000 to 2001- 02), excluding outliers. Based on the above, the recommended preset energy levels for Stage- II along with those recommended by the ERC are given below:-
  19. 19. Group Energy levels for Stage-II (Gcal/MT Urea) Recommended by ERC Based on Actual data (3 years’ weighted average energy consumptio n including outliers) Based on Actual data (3 years’ weighted average energy consumpti on excluding outliers) Recommended by the Committee Group-I 6.62 6.566 6.066 6.07 Group-II 5.93 5.796 5.796 5.80 Group-IIIA 7.0 7.964 7.773 7.77 Group-IIIB 7.0 6.206 6.206 6.21 Group-IV 9.75 10.163 10.067 10.07 Group-V 7.0 7.103 7.103 7.10 It has to be emphasized that the outliers on the higher side face a number of problems - technical, managerial and financial - which affect their techno- economic viability in the short run as well as in the long run. The percentage of deviation from the weighted average of the concerned group is nothing but a symptom of deeper malaise that plagues them. Only one year is not enough for such units to equip themselves to tackle this problem. The Committee is, therefore, of the view that these plants deserve a separate treatment for the first year of Stage-II (i.e., 1.4.2004 to 31.3.2005) in order to prepare them to attain the efficiency driven group energy consumption norms. The Committee, therefore, recommends that the specific energy consumption norms for these outlier plants on the higher side, for the first year of Stage-II should be the same as considered by the FICC in respect of these units for the 8th pricing period and thereafter respective group energy norms should be made applicable in respect of these outlier units also. This, in addition to giving the outlier plants reasonable time to rectify their deficiencies, would also enable them
  20. 20. to take a commercial decision about continued operations. However, the specific energy consumption norm for both the years of Stage-II for GNFC, Bharuch, which is an outlier on the lower side in the FO/LSHS group, should be the same as considered by the FICC for the 8th pricing period in order to avoid any undue gain to it in adopting the principle of group energy consumption norm for the outlier plants in the second year of Stage-II. In view of the recommendations for the pre-set energy norms for Stage-II as given above, the Committee recommends that the concession rates for the urea units for Stage-II may be reworked by the FICC taking into account the recommended pre-set energy norms for Stage-II. The Committee recommends that in order to reward efficiency in energy consumption as also to offer incentive to all urea units to attain the pre-set levels of energy consumption in each group during Stage-II, the pre-set group energy consumption norms may be taken for all the urea units in the group, excluding the outliers (which have been dealt in the preceding paragraph) irrespective of their individual energy consumption level, for working out base concession for Stage-II as well as for escalation/de-escalation. Note 1: The energy levels in all the groups have been recommended as the weighted group average of the last three years‟ actual energy consumption excluding the outliers but limited to two decimal places. Note 2: The last three years‟ weighted average energy consumption level for groups II, IIIB and V does not show any variation both with or without outliers as there are no outliers in these groups. Note 3: While the energy consumption levels recommended by the ERC for Stage-II have guided the Committee in its deliberations, the Committee has not been able to follow the ERC recommendations in their entirety. This is mainly due to the ready availability of the actual operating data of all the urea units for the last three years‟ (1999-2000 to 2001-02)
  21. 21. pertaining to their specific energy consumption. It is also due to the differences in the composition of the different groups as proposed by ERC and as considered by the Committee. It can be seen that for the groups I, II and IIIB, the recommended preset energy consumption levels are lower than those recommended by the ERC. However, in the case of groups IIIA, IV and V, the recommended pre-set energy consumption levels are higher than ERC recommendations. Note 4: The naphtha based group of the ERC report has been split into two groups, namely, group IIIA and IIIB and the weighted average of the specific energy consumption has been calculated separately for both the groups. Group IIIA, which consists of pre-92 naphtha based plants, shows higher weighted average group energy consumption level than ERC recommendation whereas group IIIB comprising post-92 naphtha based plants shows lower weighted average group energy consumption level than ERC recommendation. However, the combined weighted average energy consumption of groups IIIA and IIIB is comparable to the recommendations of the ERC for this group as a whole. Note 5: In group IV (FO/LSHS), the weighted average group energy consumption works out to be higher than that recommended by the ERC. This is due to the fact that GNFC, Bharuch, included in this group, has been considered an outlier on the lower side by the Committee in determining the weighted average energy consumption level in this group as per the actual operating data for the last three years. This is due to the fact that GNFC plant differs significantly from NFL units at Bhatinda, Panipat, Nangal Expansion and FCI‟s Sindri Modernization, both in respect of size and technology. GNFC plant capacity is 1350 MT ammonia per day while the capacity of other plants is 900 MT ammonia per day.
  22. 22. GNFC has adopted Texaco Process technology with two gasifiers while other plants have adopted Shell Gasification Process with three gasifiers. Note 6: The weighted average group energy consumption level of group V (mixed energy) works out to be higher than ERC‟s recommendation for this group as NFCL-II which was included in group V by the ERC and whose weighted average specific energy consumption is lower than the weighted average of the group, i.e. group V, has been placed in group II, i.e., post-92 gas based. VII. RAW MATERIAL MIX OF INPUTS: In view of the Government‟s decision to adopt a group based urea pricing policy to replace the RPS, the Committee considered the possibility of recommending group wise weighted average specific energy consumption norm per tonne of urea based on percentage mix of inputs for the last three years‟ (i.e. 1999-2000 to 2001-02) for each group, excluding outliers. This is on the same basis as adopted for recommending total energy consumption. In line with the above, the Committee considered last three years‟ (1999- 2000 to 2001-02) weighted average energy consumption figures (excluding outliers) for computing the raw material mix of inputs in each group as given below: Group % Raw material mix (Based on energy) Gas (NG, AG) Naphtha (Naphtha, NGL) Fuel Oil (FO, LSHS, HSD) Coal Purchased power Group-I 3 years‟ average 89.39 9.38 1.18 0.00 0.05 Group-II 3 years‟ average 89.72 10.23 (-) 0.02 0.00 0.07
  23. 23. Group-IIIA 3 years‟ average 0.00 62.91 18.03 12.40 6.66 Group-IIIB 3 years‟ average 0.74 88.09 6.42 4.39 0.36 Group-IV 3 years‟ average 0.00 0.75 55.42 39.78 4.03 Group-V 3 years‟ average 60.63 30.03 6.03 0.00 3.30 The Committee initially considered the desirability of recommending normative energy mix for various groups, but later dropped the idea after envisaging the following distortions: (i) For Gas based units under groups I and II, some of the units could be compelled to use naphtha for their feed/fuel requirements due to short supply of gas which may continue for considerable period of time. As naphtha costs four times compared to natural gas per million Kcal, the liquidity and the cost structure of the units would be affected adversely if significant fluctuations/changes occur in the supplies of gas. (ii) For mixed energy based units under group V, the mix of feed/fuel used by each unit varies widely with respect to other units in the group. Therefore, pre-set mix, if applied, for these plants shall lead to undue losses and gains. (iii) As far as group IIIA is concerned, the Committee noted that some of the units particularly SFC-Kota, IFFCO-Phulpur-I and DIL- Kanpur, use significant quantities of coal as fuel for generation of power and steam. Though coal is a less efficient fuel as compared to naphtha/FO, the average total cost of energy per MT of urea is far less in case of these units as compared to other units in this group using naphtha/FO for generation of power and steam. The Committee noted that such units would benefit considerably by
  24. 24. adoption of notional fuel mix of the group which would entail significant weightage for naphtha/FO, which is costlier than coal in terms of equivalent energy. However, if their actual energy mix is taken into account, these units will suffer significant financial loss as, on one hand, their overall consumption would be reduced to the group norm, they also would not get any weightage for use of cheaper energy source like coal (which, in turn increases the energy consumption per tonne of urea). The Committee also noted that the remaining units in group IIIA, which do not use coal at all, would also suffer undue loss on the basis of preset energy mix as to that extent their usage of naphtha/FO would be artificially suppressed. The Committee, therefore recommends as follows: i) In case of three plants in group-IIIA, namely, SFC-Kota, IFFCO- Phulpur-I and DIL-Kanpur, their energy consumption and raw material mix as recognized for 8th pricing period should continue to be recognized even in Stage-II so that these units do not suffer either undue loss or get undue benefit; ii) In respect of other units in group III A as well as all units in other groups, within the recommended group energy consumption norm, the actual raw material mix of each unit should be taken while working out base concession as well as escalation/de-escalation. Any change in the raw material mix of each unit should be continuously monitored by the FICC and adjusted on annual basis. This system would ensure that the actual mix of energy is reflected thereby eliminating any chances of manipulation between different sources of energy unlike the alternative of preset energy mix. VIII. INTERNATIONAL ENERGY LEVELS:
  25. 25. While recommending the energy levels for Stage-II, the Committee has kept in view the energy levels being achieved internationally for various feedstocks. While making the international comparisons in this regard, one has to note that the fertilizer plants in India do not depend on one single feedstock/fuel unlike their counterparts elsewhere in the world. The differences in methodology of computation may not always give a like to like comparison. Notwithstanding the above, the Committee carried out comparison of energy consumption figures of ammonia and urea plants of the three largest producers in the world namely, USA, China and India on the basis of published data and found that Indian plants compare favourably with plants outside India in terms of the specific energy consumption. The detailed analysis carried out by the Committee is attached as Annexure-X. The results are summarized below: Comparison with plants in USA Feed Product Specific energy consumption (Gcal/MT of urea) USA India Gas based plants Ammonia 9.94 9.16 Urea 7.27 6.63 Comparison with plants in China Feed Product Specific energy consumption (Gcal/MT of urea) China India Gas based plants Ammonia 8.77 8.51 Urea 6.29 6.10
  26. 26. Naphtha based plants Ammonia 9.25 9.28 Urea 6.76 6.43 FO based plants Ammonia 10.92 11.45 Comparison with 25% most efficient plants in the world Particulars Average energy consumption (Gcal/MT of urea) World India 25% most efficient Indian ammonia plants 8.49 8.41 25% most efficient Indian urea plants 6.22 6.06 Note: - There is a slight difference in the figures quoted in the above tables. This is because, as indicated in Annexure-X, the data in various tables has been taken from different published sources. While the international comparison does reveal that the Indian fertilizer industry compares favorably with international energy consumption levels, the improvement in the efficient use of energy is an ongoing process. As per the new pricing policy for urea units as announced vide DoF‟s letter dated 30.1.2003, there shall neither be any reimbursement of the investment made by a unit for improvement in operations nor will there be any mopping up of gains of the units as a result of operational efficiency. The fertilizer industry in the country will, therefore, have to keep abreast of the state of the art technology in this regard. IX. MECHANISM FOR COMPUTATION OF ESCALATION/DE- ESCALATION The ERC had recommended that escalations/de-escalations should be given only in relation to main feedstock of the concerned group namely, gas,
  27. 27. naphtha, and FO/LSHS as the case may be. The ERC had also advocated that escalations/de-escalations should be sanctioned based on import parity price of naphtha and FO/LSHS. As has been pointed out earlier, the ERC had assumed that the industry would be able to procure naphtha and FO/LSHS at import parity price. This assumption has, however, not materialized. The Committee noted that though the Government have decided to dismantle the Administered Price Mechanism (APM) for the petroleum sector, the decision has not been fully implemented in as much as the price of natural gas still continues to be administered by the Government. Further, though the price of naphtha and FO/LSHS is determined on the basis of import parity based formula, there are substantial differences of perception between the fertilizer industry and the supplying oil companies over the nuances of pricing of naphtha. Attempts made in the past by the Ministry of Petroleum & Natural Gas to resolve the matter in consultation with the other concerned Ministries have not borne fruit so far. In fact, it is understood that the Ministry of P & NG have taken the stand that fertilizer companies should deal directly with oil companies with regard to pricing of naphtha and that after the dismantling of the APM, the Ministry would not intervene in the matter. Of now, the oil companies are determining the price of naphtha and FO/LSHS on their own and communicating the same to the concerned fertilizer units. In the absence of a full-fledged regulator for the petroleum sector as yet, it would not be possible to determine the disputes between the two parties on the pricing methodology unless Government chooses to intervene or there is judicial adjudication. In view of the above, the Committee feels that there is no level playing field for the fertilizer industry vis-à-vis the suppliers of naphtha and FO/LSHS who have so far not been willing to permit the fertilizer industry to make use of their infrastructure for import of naphtha and FO/LSHS. Therefore, the Committee does not recommend escalations/de-escalations on the basis of import parity price in respect of naphtha and FO/LSHS.
  28. 28. The Committee also explored the possibility of using Wholesale Price Index (WPI), for naphtha for purposes of escalation/de-escalation. It, however, found that the application of the formula based on WPI would at times, result in large overpayment to some units and at other times, in significant underpayment. The methodology for computation of WPI was discussed at length with Economic Advisor of the Ministry of Industry, who agreed that there was scope for further improvement in the computation of the index so that it may reflect the variations in the price of naphtha and FO/LSHS in a more realistic manner. Similar problems exist when the WPI is sought to be applied to other feedstock/fuel. As the fine-tuning of WPI would take some time, the Committee does not find it possible to place any reliance on this index for according escalation/de-escalation in the price of naphtha/FO/LSHS in the immediate future. In view of this, the Committee recommends that escalation/de- escalation in respect of feedstock/fuel should be determined on the basis of existing methodology followed by the FICC for the first year of Stage-II. It should be possible to take a final decision with regard to the formula for escalation/de-escalation based either on import parity price or the refined Wholesale Price Index before the end of the first year of Stage-II. The Committee is of the view that the option of indexing to the import parity price (FOB) should not be ruled out as the prices of other feedstock/fuels are fixed largely on import parity pricing principle and the petroleum sector cannot be insulated from the international economy beyond a certain period. Even the price of indigenous natural gas which is administered by Government now is proposed to be linked to market/international prices. The Committee is of the view that the methodology recommended by it requires constant monitoring. The methodology based either on import parity pricing formula, after such modifications as may become necessary in the light of the policy decisions to be taken by the Government on the pricing of natural gas, or the refined Wholesale
  29. 29. Price Index, may be more scientific and objective. The Government may take appropriate decision on this after an in-depth study of the matter. The formula given by the Committee, thus, is purely an interim one. Accordingly, the Committee recommends that for the 1st year in Stage- II, the formula for escalation/de-escalation in the price of feedstock/fuel be determined as follows: (i) (a) Escalation/De-escalation on variable cost should be worked out based on specific energy consumption of the group. (b) Escalation/De-escalation should be calculated on quarterly basis. (c) The sales tax on inputs should be calculated and paid separately to each unit on actual basis. (d) Escalation/De-escalation is to be calculated for each unit in respect of variation in the prices of some components of the variable cost namely feedstock, fuel and purchased power only. (ii) Escalation/De-escalation for variation in the cost of inputs: a) Escalation/De-escalation factor Escalation/De-escalation factor (Rs./MT urea) = A x ( C – B ) A = Base weighted average specific energy consumption of the group (Gcal/MT of Urea) B = Base rate of energy for the unit (Rs/Gcal) C = Actual rate of energy for the unit (Rs/Gcal)
  30. 30. b) Rate of energy (Rs/Gcal) Base rate of energy (B) and actual rate of energy (C) for the unit shall be calculated from the base data (base energy, actual mix of raw materials and base/actual rates) as shown below: Input Base percent mix of input, % Actual percent mix of input,% Base rate of input (Rs/Gcal) Actual rate of input (Rs/Gcal) Base rate of energy (Rs/Gcal) Actual rate of energy (Rs/Gcal) a b c d e = (axc)/100 f = (bxd)/100 NG Naph tha Fuel Oil Coal Purch ased power Total B C c) Calculation of Escalation/ De-escalation i) Base/ Actual rate of energy for the quarter shall be calculated for each unit. ii) Escalation/De-escalation factor shall then be calculated as Rs/MT urea separately for each unit. X. SWITCHOVER OF NON-GAS BASED UNITS TO GAS/LNG IN STAGE- III
  31. 31. It has been envisaged by ERC that all the non-gas based plants shall modernize and switchover to LNG by end of Stage-II. The terms of reference of the Committee included suggesting a method for working out the differential cost of feedstock for non-gas based units after Stage-II. Furthermore, the likely scenario of the availability, pricing and infrastructure for LNG was also to be considered by the Committee. LNG is likely to become available in a phased manner depending upon the infrastructure for distribution of LNG, plant technology and geographical location of the urea units. However, the scenario about availability and pricing of LNG is not very clear at present. In the discussions held with fertilizer industry and FAI, it was revealed that there was no appreciable progress with regard to supply and availability of LNG in the country and that a clear picture may emerge by year 2006. The representatives of some of the pre-1992 naphtha based as well as FO/LSHS based urea units expressed the view that even if LNG becomes available, switchover to LNG may not necessarily be a cheaper option considering the initial heavy capital investment as well as the supply prices indicated by the prospective suppliers of LNG. The projection made by the Ministry of P&NG with regard to the supply and demand for petroleum products and natural gas indicate that while the surplus availability of naphtha may increase from 1.0 MMT to 4.1 MMT during the 10th Plan Period, the deficit in respect of FO/LSHS may increase from 0.5 MMT to 5.6 MMT. In so far as LNG is concerned, the projections reveal that 3 to 4 LNG terminals, those at Dabhol, Dahej and Hazira are under construction, out of 15 which have been sanctioned, and the one at Cochin can be considered to belong to the mature category. The Dabhol terminal is expected to commence market gas sales from 2004-05 onwards. The other terminals appear to be doubtful starters. On the assumption that 3 to 4 terminals will get commissioned during the 10th Plan Period, it has been assessed that the overall potential for imports of LNG would be in the range of 40 to 50 MMSCMD by the terminal year
  32. 32. of the 10th Plan. An important observation made by the Ministry of P&NG is as follows: “The critical requirement of successful implementation of LNG projects is the identification and aggregation of linked bankable projects which can pay for expensive LNG on long term basis. Hence, existence of a robust market is a pre-requisite for LNG imports. In India, since power sector would be the anchor market for LNG terminals, the present structure and pricing/tariff of the Indian electricity sector may have dampened the efforts to create new power generation capacity and thereby the demand for fuel. Under this scenario the outlook for various LNG initiatives at this stage is difficult to establish”. (Source: Para 8.5.8 of „Report of the Working Group on Petroleum and Natural Gas for the Tenth Five Year Plan, Government of India, Planning Commission‟) The projected demand-supply position of natural gas at the end of the 10th Plan almost balances at the level of supplies in the range of 140-145 MMSCMD which are inclusive of LNG supplies (50 MMSCMD) and commencement of the pipeline gas imports (10 MMSCMD). Further, most of the incremental domestic supplies are expected, not from ONGC and OIL, but from the fields/discoveries of private and joint venture companies. There are recent reports about discoveries of large reserves of natural gas in the Godavari basin, but their authenticity is not yet known. It is possibly in view of the above that the Govt. of India O.M. on pricing policy for urea units dated 30.1.2003 stipulates that the modalities of Stage-III would be worked out after review of the implementation of Stage-I and Stage-II. The Committee is of the view that the Government should announce the broad features of the policy for the Stage-III at the earliest, as the industry, especially the FO/LSHS based units, have to make substantial capital investment, if they decide to switch over to LNG. While the construction of LNG terminals would no doubt be a critical factor, bankable projects for LNG would be an important pre-requisite for LNG imports for which the initiative has to come from the industry. However, the industry can
  33. 33. legitimately expect the announcement of the policy well in time to enable it to take such initiative. The assumption with regard to imports of natural gas through the pipeline may not materialize. It is, therefore, suggested that the Government may announce its policy for the Stage-III by 1.1.2004, by which time a clear picture should emerge about availability, pricing etc. of LNG/NG, so that the industry may initiate necessary steps to come up with bankable projects, based on its commercial judgment. It is not clear as to why the power sector is considered to be anchor market for LNG by the Ministry of Petroleum & Natural Gas. The fertilizer sector too, is an important player. It would be advisable to ascertain the logic behind this perception and see that the fertilizer industry‟s case does not go by default. XI. ENERGY LEVEL BENCHMARKING (BEYOND STAGE-II) In fixing the preset energy level for each group for Stage-II, the Committee has considered the weighted average group energy consumption level (excluding outliers) arrived at on the basis of the actual operating data of the urea units in each group pertaining to the last three years (i.e., 1999-2000 to 2001-02). For benchmarking, it is recommended that the lowest weighted average energy consumption level attained by a urea unit in each group in the above 3 years‟ be considered as target energy norm beyond Stage-II for all the units in that group. The Committee recommends that the urea industry should aspire to achieve these target energy figures as a benchmark of efficiency. However, the benefits that accrue to the urea units as a result of higher efficiency due to capital investment should not be mopped up and the urea units in each group should continue to get the concession rates based upon the energy norms fixed for the group under Stage-II.
  34. 34. To achieve the benchmark energy norms, the existing urea units will have to carry out extensive modification/revamp involving considerable investments and import of equipment. The Committee notes that the new policy of the Government allows the industry to retain the gains in operational efficiency that accrue to the units due to capital investments etc. This should enable the units to attain the most efficient energy consumption level attained by a urea unit in each group in the three years‟ considered above. It was brought to the notice of the Committee that financial institutions are unwilling to entertain proposals for substantial capital investments in the fertilizer industry in the absence of clear-cut and well-defined long term policy for the fertilizer sector. The Committee would urge the Government to come out with such a policy at the earliest. The Committee recommends following target energy figures beyond Stage-II for each group: Group Lowest energy in the group (3 years’ weighted average energy consumption excluding outliers) (Gcal/MT urea) Target Energy levels recommended (Gcal/MT urea) Group-I 5.83935 5.84 Group-II 5.49325 5.49 Group-IIIA 7.35303 7.35 Group-IIIB 5.81048 5.81 Group-IV 9.96856 9.97 Group-V 6.71407 6.71
  35. 35. The targets recommended above are in the nature of milestones to be reached at the end of Stage-II. However, in view of the Government‟s decision neither to take cognizance of capital investments made by the units nor to mop up the gains that accrue to them from such investments, the targets may appear to be irrelevant. On the relevance or propriety of indicating these targets, it could be stated that these are relevant in the larger macro-economic context and especially in view of the increasing importance being attached to the conservation and efficient use of energy in the country. In fact, very recently, the Energy Conservation Act, 2001 (No. 52 of 2001) has come into force. The Energy Conservation Act, 2001 is relevant for the fertilizer industry on account of the following provisions it contains: (i) The fertilizer industry is included in the schedule appended to the Act, which gives the list of energy intensive industries and other establishments specified as “designated consumers”. (ii) The Central Government shall appoint the Bureau of Energy Efficiency by a notification which will act as the eyes and ears of the Central Government and enable the latter to discharge its responsibilities under the Act. (iii) The Central Government is authorized inter-alia, under the Act (a) to establish and prescribe such energy consumption norms and standards for different designated consumers having regard to such factors as may be prescribed (Section 14-g), (b) to direct the energy intensive industries included in the schedule to get energy audit conducted by an accredited energy auditor in such manner and intervals of time as may be specified by regulation (Section 14-h),
  36. 36. (c) to direct any designated consumer to furnish to the designated agency (any agency designated to coordinate, regulate and enforce provisions of the Act within the concerned State) the information with regard to energy consumed and action taken on the recommendation of the accredited energy auditor, and, (d) to direct any designated consumer to designate or appoint energy manager in-charge of activities for efficient use of energy and its conservation and also submit a report at the end of the financial year to the designated agency. The fertilizer industry would therefore, be very much subjected to the directions and control of the Central Government in matters relating to energy conservation and efficient use of energy. The targets that have been indicated would therefore be relevant as milestones on the road to achieve the national goal of energy conservation, notwithstanding the treatment these may receive under the pricing formula. XII. RECOMMENDATIONS To recapitulate in a nutshell, the Committee recommends the following: a) Stages The Committee has considered the following stages for its recommendations: I. Stage-I – 1.4.2003 to 31.3.2004 II. Stage-II – 1.4.2004 to 31.3.2006 III. Stage-III – 1.4.2006 onwards. b) Grouping of Plants Existing urea units shall be grouped into the following six groups based on feedstock and vintage:
  37. 37. i) Pre - 92 Gas based plants ii) Post - 92 Gas based plants iii) Pre - 92 Naphtha based plants iv) Post -92 Naphtha based plants v) FO/LSHS based plants vi) Mixed Energy based plants In case consumption of alternative feedstock/fuel in a gas based unit exceeds 25%, the classification of the unit should be shifted from gas based to the mixed energy group until the mix again changes warranting its inclusion in the gas based group. Likewise, the classification of a unit in the mixed energy group may also undergo similar change. This exercise should be undertaken on an annual basis. c) Pre-set Energy Levels for Stage-I No recommendations on any efficiency norms for various groups during this Stage are made. The FICC should calculate escalation/de-escalation in the variable cost for all the urea units for Stage-I on the pattern of the current practice under RPS. d) Pre-set Energy Levels for Stage-II The following pre-set energy levels at Stage-II for each group have been recommended based on weighted average group consumption figures of energy (excluding outliers) for the last 3 years (i.e., 1999-2000 to 2001-02): Group Energy levels for Stage-II (Gcal/MT Urea)
  38. 38. Group-I 6.07 Group-II 5.80 Group-IIIA 7.77 Group-IIIB 6.21 Group-IV 10.07 Group-V 7.10 For outlier plants on the higher side in the relevant groups, the Committee recommends a separate treatment for the first year of Stage-II (i.e., 1.4.2004 to 31.3.2005) in order to prepare them to attain the efficiency driven group energy consumption norms. It is therefore, recommended that the specific energy consumption norms for these outlier plants for the first year of Stage-II should be the same as considered by the FICC in respect of these units for the 8th pricing period and thereafter respective group energy norms would be made applicable in respect of these outlier units also. However, the specific energy consumption norm for both the years of Stage-II for GNFC, Bharuch, which is an outlier on the lower side in the FO/LSHS group, should be the same as considered by the FICC for the 8th pricing period in order to avoid any undue gain to it in adopting the principle of group energy consumption norm for the outlier plants in the second year of Stage-II. The concession rates for the urea units for Stage-II may be reworked by the FICC taking into account the recommended pre-set energy norms for Stage- II. In order to reward efficiency in energy consumption as also to offer incentive to all urea units to attain the pre-set levels of energy consumption in each group during Stage-II, the pre-set group energy consumption norms may be taken for all the urea units in the group, excluding the outliers (which have been dealt with in the preceding paragraph) irrespective of their individual energy consumption
  39. 39. level, for working out base concession for Stage-II as well as for escalation/de- escalation. e) Raw material mix of inputs The recommendations are as follows: (i) In case of three plants in group-IIIA, namely, SFC-Kota, IFFCO-Phulpur-I and DIL-Kanpur, their energy consumption and raw material mix as recognized for 8th pricing period should continue to be recognized even in Stage-II so that these units do not suffer either undue loss or get undue benefit; (ii) In respect of other units in group III A as well as all units in other groups, within the recommended group energy consumption norm, the actual raw material mix of each unit should be taken while working out base concession as well as escalation/de-escalation. Any change in the raw material mix of each unit should be continuously monitored by the FICC and adjusted on annual basis. f) Mechanism For Computation Of Escalation/ De-escalation Escalation/de-escalation in respect of variation in the prices of some components of the variable cost namely feedstock, fuel and purchased power only may be worked out based on pre-set specific energy consumption of the group on a quarterly basis and should be linked to the actual cost, of inputs net of sales tax, for each unit for first year of Stage-II. The sales tax on inputs should be calculated and paid separately to each unit on actual basis. The Committee recommends that escalation/de-escalation in respect of feedstock/fuel should be determined on the basis of existing methodology followed by the FICC for the first year of Stage-II. The Committee feels that it should be possible to take a final decision with regard to the formula for escalation/de-escalation based either on import
  40. 40. parity price or the refined Wholesale Price Index before the end of the first year of Stage-II and the Government may accordingly take appropriate decision on this after in-depth study of the matter. g) Switchover of non-gas based units to Gas/LNG in Stage-III The Committee does not have any specific recommendation to make about Stage-III because of the uncertainty prevailing about availability, pricing etc. of LNG/NG. It is suggested that the Government may announce its policy for Stage-III by 1.1.2004, by which time a clear picture should emerge about availability, pricing etc. of LNG/NG so that the industry may initiate necessary steps to come up with bankable projects, based on its commercial judgment. h) Energy Level Benchmarking (Beyond Stage-II) The lowest weighted average energy consumption level attained by a urea unit in each group in the 3 year period i.e., 1999-2000 to 2001-02 be considered as target energy norm beyond Stage-II for all the units in that group. The Committee recommends that the urea industry should aspire to achieve these target energy figures as a benchmark of efficiency. However, the benefits that accrue to the urea units as a result of higher efficiency due to capital investment shall not be mopped up and the urea units in each group should continue to get the energy figures fixed for the group under Stage-II. The Committee recommends following target energy figures beyond Stage-II for each group: Group Target Energy levels (Gcal/MT urea) Group-I 5.84 Group-II 5.49 Group-IIIA 7.35
  41. 41. Group-IIIB 5.81 Group-IV 9.97 Group-V 6.71 The Committee feels that these targets are relevant as milestones to achieving the national goal of energy conservation as enshrined in the Energy Conservation Act, 2001. i) General Recommendation Whereas, the Committee has taken every care to analyze the various issues related to its terms of reference, it realizes that the calculation of concession to be paid to the urea units in different groups during Stages-I and II is a complex exercise and may involve consideration and calculation of innumerable factors which it has not been possible to cover in this Report. It is, therefore, suggested that in case of any anomaly or any calculation not specifically recommended in or covered by the Report, the FICC, in consultation with the Department of Fertilizers may take appropriate decision in the matter. (Pratap Narayan) (C. Ramaswamy) (G.B. Purohit) Member Member Member (V.K. Bali) (R.N.Choubey) (Manoj Kumar) Member Member Member Secretary
  42. 42. (A.V. Gokak) Chairman ***
  43. 43. Chairman’s comments on certain issues raised by two members I have gone through the dissenting note (enclosed), which was received on 2nd May, 2003 from Shri R.N. Choube, who was earlier a member of the Committee, in his capacity as Joint Secretary (Plan Finance-II), Department of Expenditure. It may be emphasized that the draft report of the Committee was circulated to the members earlier on 31.1.2003, much in advance of the next meeting on 14.2.2003 and the last meeting on 12th March., 2003. Neither any written comments were received nor was the meeting attended by Shri R.N. Choubey or his successor. I wish either Shri Choube or his successor had attended the meeting as it would have facilitated a better appreciation of every body‟s point of view at the final stage of deliberations. I have given careful consideration to the points raised by Shri Choube. In fact, most of the points raised by him were discussed in the course of the Committee‟s deliberations. The basic thrust of Shri Choube‟s note appears to be that if actual consumption is below the norms proposed by the Committee, the actuals should be recognized as otherwise it would lead to inefficiency and no reduction in subsidy due to unintended benefit accruing to such units. I would like to deal with this major issue first before dealing with the specific points raised in his note. In this context, the merits and demerits of pricing, based on both normative basis or actual cost basis have to be considered. The former has the advantage of increasing efficiency as any improvement over norm improves profitability, and discouraging inefficient performance, as the same results in lower profitability or even loss. Pricing on actual cost basis, however, does not offer any incentive for improved performance (as gains get mopped up) nor discourages inefficient performance due to recognition of actual cost. The concept of recognizing norm or actual, whichever is lower, conveys a wrong signal to the units that it does not pay to improve performance. Even ERC, which brought in the Group Pricing Concept, recommended a common norm for its
  44. 44. calculation and did not envisage recognition of actual or norm, whichever is lower. In a normative system, it is inherent that once the norm is fixed on a reasonable efficiency level, more efficient units are rewarded by better profitability while inefficient units are penalized by way of lower profitability or even loss. Another important consideration is that, under normative pricing mechanism, it has to be taken as a package; while there may be advantage under certain items, there is also disadvantage under certain other items and the loss and gain have to be taken together. If only gain under certain items is taken, ignoring loss under certain other items, it renders administered pricing mechanism irrational and un-remunerative to the industry. The points raised above become all the more relevant when a conscious effort is made to move away from individual unit based retention pricing scheme to a group pricing scheme. On this major issue, I have not been able to pursuade myself to the point of view expressed by Shri Choube. I now come to the specific points raised by Shri Choube. (I) Annual Review of Consumption Pattern: Shri Choube has opposed the recommendation of the Committee to annually review the placement of an individual unit in a particular group depending upon change in consumption pattern. This recommendation has been misunderstood by him. It is well known that that due to inadequate availability of gas, plants in Groups I, II and V (Pre-92 and Post-92 gas based and mixed energy group plants) are required to use alternative feed and fuel like Naphtha; and the pattern of usage changes from year to year. Naphtha energy is four times costlier than energy through gas. If a gas based plant does not get adequate supply in the event of shortage of gas, and its usage of naphtha goes up beyond 25% (which has been taken as a cut off level for classification of
  45. 45. plants as gas based or mixed feed), it would seriously jeopardize the viability of such a unit by continuing it in the gas based group. Conversely, if increasing gas supply is available to a mixed feed plant, and its usage of naphtha goes below 25%, it would get undue gains if it continues to be classified as a mixed feed plant. This point is well illustrated by NFCL-II case. It was commissioned as a naphtha based plant and was also treated as such by ERC in its grouping. However, due to subsequent higher availability of gas, increasing gas quantities have been used and, therefore, the Committee has included it under group II (Post-92 gas based plant). But there is yet no long term commitment of gas for this plant; the present availability is mainly due to default of other users in their off-take of allocated gas. If the situation reverses, the Committee considers it appropriate to take it back to the mixed feed stock group so that the unit does not suffer unintended loss. Similarly, when LNG becomes available, it is likely that some naphtha based units may change over to LNG. At that stage, such units will neither fit in naphtha nor gas group because of differential capital as well as variable cost structure and it may be necessary, to put such plants in a separate group depending upon vintage. The Committee, therefore, considers it appropriate to make a provision for annual review so that neither the units suffer unintended loss nor get unintended profit due to changing pattern of gas availability. (II) Validation of Data by Government: As regards the need for validation of the data by the Government, I would like to emphasize that the entire data collected by the Committee was through Department of Fertilizers. ED, FICC and Joint Advisor, Department of Fertilizers have also been associated with the Committee as special invitees from the very
  46. 46. beginning. The relevant data has been with us for over eight months and neither DOF nor FICC has pointed out any inaccuracy and the Committee cannot be expected to make its recommendations on doubtful data. Nonetheless, the Committee itself has, at the end of part IV(C) noted that “the basic figures as also conversion calculations in Gcal of energy as given by each urea unit are liable to be scrutinized by the Government at its own level” (III) Regarding Outliers: While Shri Choube has agreed to the exclusion, as outliers, of units having energy consumption higher than 20% over the weighted average for the group in recommending the norm, he has opposed exclusion of GNFC in Group IV whose energy consumption is lower by more that 20% than the weighted group average. The concept of excluding „outliers‟ is to ensure that too high or too low consumption does not vitiate a reasonable norm determination. Consistency demands that either, the weighted average of all units can be taken or all „outliers‟ having too low or too high consumption be excluded. That apart, as has been pointed out in Note 5 at page 15 of the Report, there are other reasons that justify treatment of GNFC as an outlier. There is significant difference in the size (offering benefit of economies of scale) in case of Ammonia Plant (1350 TPD single stream) of GNFC as compared to other units (900 TPD or lower) in the FO/LSHS Group. Further, the units included in the Group have adopted technologies that were available at the relevant points of time. GNFC uses Texaco process, which operates at a much higher pressure while NFL and Sindri plants are based on Shell Gassification process which operate at a lower pressure. Liquid oxygen is used in Texaco process against compressed gaseous oxygen in shell process. These major technological features result in significant differential energy usage in favour of GNFC. Hence, inclusion of a unit having extremely low consumption in working out the Group norm would have rendered it totally unrealistic not capable of achievement by
  47. 47. other units. Incidentally, this is in keeping with the new pricing scheme of the Department of Fertilizers, under which units whose retention prices deviate by plus minus 20% are treated as outliers while working out the group concessions. However, to ensure that neither the outliers gain fortuitous benefit nor suffer heavy loss, the Committee has recommended a transition period upto the first year of Stage-II (giving them two years time) during which the existing norms as under 7th and 8th pricing periods should continue as these are supposed to have been fixed on a normative basis. From the second year of Stage-II, all units are expected to fall in line with the recommended group-wise norm. (IV) Taking best consumption of last three years as norm instead of three years’ weighted average: Shri Choube is misinterpreting the Committee‟s rationale in taking 3 years weighted average of energy consumption (excluding outliers) while recommending the group norm. As has been clearly brought out in para VI, a single year‟s data may not be true representative of a performance that can be sustained over a long period as the same is influenced by internal as well as external factors (some of which have been explained) and availability of feedstock, particularly gas, is only one of the factors and not the only factor. The analysis of the data revealed wide fluctuations from year to year as clearly mentioned in this para. A perusal of the data presented in the Annexures will show that the year in which the best weighted average consumption was achieved does not necessarily mean that every plant in the group had the best performance. For instance in case of Group-III A (pre-92 naphtha based plants), the lowest average energy consumption was achieved in the year 2001-02, both including and excluding outliers. However, out of 8 plants in the Group, in case of 5 plants the energy consumption in the preceding year (2000-01) was lower while in case of only 3 plants it was lower during 2001-02 bringing down the weighted average. That is why the Committee did not base its recommendations on a
  48. 48. single years performance, excluding outliers, but on three years performance so that such fluctuations are evened out and realistic norms are fixed. (V) Regarding adopting actual during 2002-03 or group norm, whichever is lower, in Stage-II: Shri Choube has suggested that instead of adopting group consumption norm for all the units excluding outliers recommended by the Committee, the group energy norm or the actual achieved by the unit in 2002-03 (which, in any case, is not relevant to the deliberations of Committee) whichever is lower, should be adopted. I am afraid I am unable to agree to this approach for the reasons already mentioned earlier in this note. Apart from the dissenting note of Shri Choube, Shri Manoj Kumar, Member Secretary of the Committee has pointed out that generally the benefit of increased efficiency due to capital investment without mopping it up is given to an industry when it has shown motivation and resolve to attain some pre-set goals. In the present case, the Committee has taken this goal, for the period beyond Stage-II, to be the energy consumption level fixed for Stage-II only. Now, this energy consumption level for Stage-II itself is not a normative goal to be achieved by all the urea units in any particular group for the simple reason that it is the weighted average group energy consumption level (excluding outliers) arrived at on the basis of the actual operating data of the urea units in each group pertaining to the last three years. As such, there are many urea units which are even today (on the basis of the energy consumption data of the last year analyzed i.e. 2001-02) showing more efficient energy consumption than the weighted average group energy consumption level fixed for Stage-II for the period 1.4.2004 to 31.3.2006. To recommend that even beyond Stage-II (i.e. beyond 31.3.2006), they should be given the group energy levels recommended for Stage-II would not only be against the present ground realties but would also result in extra financial gains to many units without making any extra efforts to be more efficient than their performance in the year 2001-02.
  49. 49. Shri Manoj Kumar has further stated that the aim of recommending energy efficiency norms for urea units and addressing allied issues under the New Pricing Policy for urea units on the basis of the recommendations of the Committee is not only to motivate urea units to increase their energy efficiency and to become more competitive internationally but also to function in an economic environment which results in a decrease in the subsidy burden on the Government. Therefore, the target energy consumption level for the urea units beyond Stage-II (i.e. beyond 31.3.2006) should be somewhat lower than the mere adoption of the norms fixed for Stage-II. If the urea units are to be allowed to retain the benefits of energy efficiency in this stage , then it should be only with reference to further reduction in energy consumption than what has already been achieved in 2001-02. On the observations of Shri Manoj Kumar, the general reasons given at the beginning of this note are applicable with equal force in this case also. Even on merits, this does not present a complete picture. While it is true that some units have already achieved lower energy consumption, than the norm recommended by the Committee for Stage-II, it is also true that much higher number of units have higher energy consumption than the norm. Also for Stage- III and beyond, as many as 25 units out of 32 will have to improve their energy efficiency to come up to the benchmark level recommended by the Committee. This again will entail investment and that is why the Committee has recommended continuation of energy norms of stage-II in stage-III onwards also and at the same time non-recognition of investment. The following table will clearly illustrate the loss/gain in respect of units in each group: - Group Total no. Number of units with energy consumption Of units Above norm Above benchmark Recommended norm recommended
  50. 50. For stage-II for stage III onwards I 6 4 5 II 7 4 6 III A 8 5 7 III B 2 1 1 IV 6 3 4 V 3 2 2 _________________________________________________ Total 32 19 25 In the circumstances, I would like to reiterate the recommendation that the dispensation suggested for Stage-II (including in respect of consumption for 3 units in group III-A where the total energy cost is lower, as compared to other units, despite higher energy consumption due to use of inefficient but cheaper source of energy in the form of coal) should be continued in Stage-III also. This would bring stability in the pricing mechanism and at the same time provide strong incentive to the industry to further improve efficiency, serving the overall national goal of energy conservation. This apart, it is not correct to assume that a unit which has already achieved the norm at the beginning of Stage-II will not strive to improve its efficiency. Each unit will try to improve its competitive advantage in the aftermath of the government‟s declared policy of lifting distribution controls initially and eventually moving towards total decontrol. The policy of neither recognizing the investment nor moping up the gain would also motivate the units to strive for keeping their competitive advantage in tact. Moreover with the coming into force of the Energy Conservation Act, 2001 the competent authority under that Act would also ensure that the larger issue of energy efficiency is taken care of and that no complacency creeps in, in the future.
  51. 51. The Committee has, after careful consideration, come to the conclusion that at the present juncture, determination of norms at a level lower than those recommended by the Committee would be beyond the realm of feasibility, especially in view of the extremely heterogeneous nature of the industry and the different technologies it has adopted.
  52. 52. Recommendations of Shri R.N. Choubey Joint Secretary (Plan Finance II), Department of Expenditure (i) As far as the revision in the groups due to change in the feedstock consumption pattern is concerned, there is no need to undertake it on an annual basis, as proposed. The groupings may be reconsidered only after the position of availability of gas improves considerably and at that stage, groupings for the Group Based Concession Scheme as well as these groupings would need to be reconsidered. That may well be the stage III itself. (ii) The entire data upon which the report is based needs to be validated by Department of Fertilizer. (iii) The proposed group energy norms for Stage II have been derived through a statistical process. In this process the units whose consumption norms are +/- 20% from the group-weighted average have not been considered for calculation of group average. Consumption norms are meant to promote efficiency. Leaving out outliers i.e. those whose consumption is more than 20% of the group average is agreed to. However, in Group IV i.e. FO/LSHS group, GNFC has been treated as the outlier simply because its consumption is on the lower side of the group average. Methodology of treating units whose consumption norms are (-) 20% from the group average as outlier is not acceptable. This will only promote inefficiency. (iv) The preset energy levels for State II have been fixed on the basis of three years average excluding the outliers. The main argument for doing so is non-availability of gas. The gas scenario has not changed appreciably during the last couple of years. The position of shortage has been there for the past few years. Therefore, non- availability of gas cannot be a ground for taking up three years
  53. 53. average as consumption norm. Most of the units have shown an improvement in the past few years in the consumption norms. An averaging of three years negates this advantage and thus increases the subsidy burden. Taking up three year‟s average amounts to building inefficiency into the norms. As an alternative the best consumption of the last three years may be taken as consumption norm for Stage II. (v) It has been recommended that the group norm may be applied for all the units in the group irrespective of their individual energy consumption levels. This gives an unearned benefit to those units who are already below the group energy norm. It is suggested that the group energy norm or the norm attained by the company during the year 2002-03 whichever is lower would be made applicable and should continue till group norms are reviewed again. This would take away unearned benefits that a company might earn, at the same time it would permit a company to keep its efficiency gains.
  54. 54. Annexure-I Executive Summary Background and Objectives 1. Fertilizer subsidies have grown dramatically and continue to increase rapidly. The green revolution technology is now widely accepted and the need to subsidize fertilizers to induce farmers to increase their usage has gone down. 2. The Retention Price Scheme (RPS) has led to the development of a large domestic industry and near self-sufficiency. However, the unit wise RPS is a cost plus scheme. It results in high cost fertilizers, excess payments to industry and provides no incentives to be cost efficient. Moreover, it is extremely difficult, if not impossible, to administer it without these disadvantages. 3. The fertilizer policy needs to be reformed. The goal of new policy should be to eventually bring fertilizer prices charged to farmers to the level of import parity price. It should protect small farmers‟ real incomes, should not lead to a slump in food production and promote a balanced use of N, P and K. At the same time, the RPS needs to be dismantled and replaced by an easily enforceable system that provides incentives to manufacturers to be cost efficient, and ensures a desired level of self-sufficiency with minimal support from the government. 4. A sudden increase in farm-gate price of urea to import parity price, without increasing procurement prices, could lead to a fall of 13.5 million tonnes of foodgrains production. This is thus, not a feasible option. Protecting Small farmers 5. If procurement prices are raised along with farm-gate prices of fertilizers, the fall would be much smaller. However, small and marginal farmers for whom self consumption is a large part of their output, would suffer a loss in their real incomes. They should be protected. Two possible ways are: (a) Introduction of a dual price scheme under which all cultivator households
  55. 55. are given 120 Kgs. of fertilizers at subsidized prices and (b) Expansion of Employment Guarantee Scheme and rural works programmes to provide additional incomes to small farmers. If such rural programmes are directed towards improvement of land and development of minor irrigation schemes, they will in addition to providing wage income, increase productivity of land and income to farmers even when fertilizer prices are increased. From RPS to Competitive Self-reliance Urea 7. A complete decontrol of producer price for urea would have been possible, were all our plants based on natural gas as feedstock. Unfortunately, only 56 percent of domestic capacity is gas based, 22 percent naphtha based, 9 percent fuel oil based and 12 percent is mixed feedstock based mostly naphtha and natural gas. 8. A sudden freeing of the urea industry could lead to most naphtha based units having to close down, as even their short run variable costs would be higher than the import price. The resultant surge in the demand for imports would push up import prices to levels which would lead to much higher quantum of subsidy than now, if the demand is to be maintained at 21 million tonnes of urea. 9. Since availability of natural gas is limited, a good proportion of the production has to be based on other feedstock if a certain level of self-sufficiency is to be maintained. These plants would have to be compensated for their higher cost of feedstock. 10. The best possible alternative at present is imported liquefied natural gas (LNG). 11. In the circumstances, the Commission recommends the dismantling of the control system in a phased manner, leading at the commencement of fourth stage, to a decontrolled fertilizer industry which can compete with import albeit with a small level of protection and a feedstock cost differential compensation to naphtha/LNG based units to ensure self-sufficiency. The scheme envisaged is in
  56. 56. the spirit of the recommendations of the HPRC. The transition however has to be gradual. 12. The transition begins with the discontinuation of the RPS with effect from February 1, 2001, and introduction of a group-wise concession scheme. The number of groups is reduced from five to two by April 1, 2006. At this stage all units except those that are based on naphtha/LNG would be viable at a price of about Rs. 7000 per tonne of urea. For naphtha/LNG based units a Feedstock Differential Cost Reimbursement (FDCR) of Rs. 1900 per tonne of urea will be given. The details of the various stages are as follows: (i) In the first phase beginning February 1, 2001, the following will be done: (a) The existing units will be grouped into 5 categories – pre-1992 gas based units, post 1992 gas based units, naphtha based units, FO/LSHS based units and mixed feedstock units. The individual retention price scheme will be scrapped and in its place a Urea Concession Scheme with a fixed amount of concession for each of these groups will be introduced. At the same time, plants would be free to get feed stock from wherever they want including imports. (b) The distribution control mechanism will be done away with. (c) The maximum retail price arrangement will be continued, the concessions for each group being so calibrated as to enable the units to sell at the stipulated maximum retail price. (d) Having regard to the large fluctuations in the import prices of feedstocks, it will be necessary to redetermine the concession to these groups of units every three months with reference to the prevailing import prices. When there is a reduction in the import parity prices of these feedstocks, the concession payable to the units would go down. It may be noted that this, however, is done only group-wise and not plant-wise. Whenever there is an increase in the import parity prices of these feedstocks, the additional costs should be passed on to the consumers through a suitable increase in the maximum retail price so that the total amount payable by way of concessions does not go up significantly. The
  57. 57. revision in issue price to farmers however, should be done every season rather than every three months. (ii). In the second stage, beginning 1st April 2002, the concessions are reduced to reflect the possibility of reasonable improvement in feedstock usage efficiencies and reduction in capital related charges. (iii). The third phase will begin on 1st April 2005 and reflects the feasibility of all non gas based plants to modernize and switch-over to LNG. For plants which do not switch over to LNG as feedstock only the level of concession that the unit would have been entitled to if it had switched over to LNG would be allowed. (iv). The fourth phase begins on 1.4.2006 when the industry is decontrolled. The Commission recommends a 7 % increase in the price of urea in real terms every year from 1.4.2001. This way the open market price will reach Rs. 6903 by 1.4.2006, a level at which the industry can be freed from all controls and be required to compete with imports, with variable levy ensuring availability of such imports at the farm-gate at Rs. 7000 per tonne of urea. While no concessions will be necessary from this date onwards for gas based, FO/LSHS and mixed feed stock plants, existing naphtha plants converting to LNG as also new plants and substantial additions to existing plants will be entitled to a feedstock differential with that for LNG plants serving as a ceiling. 13. The schedule of concessions are shown in the Table 1: Table 1 : Schedule of concessions Feedstock Ist Stage concession (Rs./MT) IInd Stage IIIrd Stage IVth Stage Based on existing RPS and domestic Price of Inputs Savings at import Parity Price Net concession 1.2.2001 to 31.3.2002 1.4.2002 to 31.3.2005 (Rs./MT) 1.4.2005 to 31.3.2006 from 1.4.2006 1. 2. 3. 4. 5. 6. Natural
  58. 58. Gas Pre 1992 Post 1992 Naphtha FO/LSHS Mixed feed stock 1300 2900 8400 6400 4000 0 0 1900 3250 600 1300 2900 6500 3150 3400 1050 2450 5800 2200 3000 800 2000 3900 2200 2450 0 0 1900 0 0 New Plants : For non gas based new plants or substantial additions to existing plants would be given appropriate feedstock differential subject to the feedstock differential for LNG plants acting as the ceiling. Notes: (a) The concessions in column (1) are so determined that along with the net receipt of Rs.4000 from the farm-gate price of Rs.4600, the concession gives nearly the weighted average retention price to each group. (b) Column (3) shows the savings that can result in stage I, if feedstocks are at import parity prices. Freeing of imports will ensure that plants get feedstock at such prices by February 1,2001. (c) The reduction in column (4) compared to column (3) reflects change in feedstock use efficiency in stage II. Modest achievable targets have been assumed and plants are expected to attain them by 31st March, 2002. (d) Column (5) reflects the concession in the third stage, incorporating the further reduction on account of non gas based units switching over to LNG as feedstock. (e) Column (6) reflects the concession, by way of feedstock differential only in the fourth stage commencing 1.4.2006 when the industry is decontrolled and the imports are made available at Rs.7000 per tonne at the farmgate. (f) In all the three stages the final concession levels, as determined also take into account the progressive reduction in capital recovery charges.
  59. 59. (g) The Commission has recommended a price increase of 7 % in real terms per annum from 1.4.2001, reaching Rs.7000 on 1.4.2006. To the extent of price increase in earlier years, the concession indicated in columns 3,4 and 5 would stand reduced. 14. The schedule of subsidy outlay under various stages is given in Table 2. Table 2 : Urea subsidy outlay in different phases (Rs.Crores/year) 2000- 01 2001- 02 2002-05 2005-06 April 1, 2006 onwards a) No increase in Issue price Farm-gate price - Rs./mt of urea 4,600 4,600 4,600 4,600 4,600 Concession to industry 9,155 7,204 6,159 4,656 5,837 b) Increase in issue price @ 7 % p.a. Farm-gate price - Rs./mt of urea 4,600 4,922 5,267 to 6030 6,452 7,000 Concession to industry (net) 9,155 6,556 4,817 to 3,280 927 1,004 c) Cost of coupon system : Coupons to 105 million farmers At 80 Kgs. of urea per family to be supplied At Rs.4,600 per Mt 270 560 to 1201 1,556 2,016 Phosphatic and Potassic Fertilizers: 15. The farm-gate prices of nitrogenous, phosphatic and potassic fertilizers should be set to promote a desired balance of fertilizer use. In the circumstances the ERC will only suggest that once urea price is re-determined every six months, the prices of potassic and phosphatic fertilizers should be suitably
  60. 60. adjusted, as advised by the Ministry of Agriculture to ensure the desired NPK balance. It will be useful if government could announce in advance the formula to be adopted for fixing the prices of P & K fertilizers with reference to a given urea price. 16. Phosphatic fertilizers are already decontrolled and operated with a concession scheme. With one more unit commissioned last year for the manufacture of 1.5 million tonnes of DAP based on imported rock phosphate and sulphur, the proportion of DAP manufactured, based on imported ammonia and imported phosphoric acid will go down sharply. The appropriateness of continuing with the present arrangement of giving a uniform rate of subsidy to all the units, with reference to cost of production of DAP based on imported ammonia and imported phosphoric acid needs to be examined preferably by the Tariff Commission. General 17. The arrangements for the payment of concessions to industrial/importing firms need to be streamlined so as to ensure payment of the amounts due to the units within three to four weeks from the time of sales. Once such arrangements are in place, then in the case of urea also the payment of concessions could be shifted from „despatch‟ to „sales‟. 18. As it is basically a question of dealing with industrial units – at least in the case of DAP – these subsidies should appropriately be administered by the Ministry of Chemicals and Fertilizers, along with the concessions for the urea units. The Ministry of Agriculture will continue to have a major role in the fixation of the maximum retail/indicative prices for all types of fertilizers, be it N or P or K. 19. The Commission recommends that if a state government imposes any additional burden, by way of excessive levies on the inputs or on finished fertilizers manufactured/sold in the state then these costs should be passed on to the farmers in that state. To Conclude:
  61. 61. 20. The Commission wishes to emphasize that the suggested scheme to take the fertilizer industry to a liberalized competitive set up : - Retains self sufficiency - Preserves viability of existing units - Protects small farmers - Reduces subsidy outlay and - Is implementable.
  62. 62. Annexure-II-A No. 12019/14/2002-FPP-II Government of India Ministry of Chemicals & Fertilizers Department of Fertilizers …. Shastri Bhawan, New Delhi 25th June, 2001. Office Memorandum Subject: Constitution of a Committee to examine the recommendations made by the Expenditure Reforms Commission – regarding The Expenditure Reforms Commission (ERC), while recommending Group Concession Scheme for urea manufacturing units, has envisaged improvement in the energy efficiency in the Stage-II of the proposed scheme. The report has indicated certain energy consumption norms for the non-gas based units. The Department of Fertilizers, however, proposes to announce the pre-set energy consumption norms for each Group, including the gas based units. It has been decided to constitute a committee consisting of the following: 1. Shri A.V. Gokak, former Secretary, DOF, Chairman. 2. Shri Pratap Narain, former DG, FAI, Member 3. Shri Ramaswamy, former Chief Adviser, BICP Member 4. Shri V.K. Bali, ED(Tech.), IFFCO Member 5. Dr. G.B. Purohit, former Adviser (F), DOF Member 6. Shri M.R. Sharma, DS, DOF Member Secretary 2. The Committee will suggest efficient energy levels for the urea manufacturing units keeping in view the existing norms and the norms which the modern plants are expected to achieve. The Committee may also refer to the energy consumption levels suggested by ERC. The Committee, while recommending the energy levels, would also examine the desirability of
  63. 63. feedstock/technology based efficient energy levels and possible milestone in terms of achieving international standards. 3. The Committee will suggest mechanism for determining the escalation and de-escalation in the feedstock cost for various units/groups. 4. The Committee will suggest mechanism for feedstock differential cost in respect of various non-gas based units after the Stage-II keeping in view the likely scenario about availability, pricing and infrastructure required for the LNG. 5. The Committee will suggest the mechanism for treatment of substitution of feedstock due to non-availability of gas/LNG etc. 6. The Committee will start functioning from 1.7.2002 and give its report by 31.8.2002. 7. A sitting fee of Rs. 1000/- per day will be paid to non-official members of the Committee. 8. TA/DA will be regulated as per extant Government rules. 9. Secretariat assistance to the Committee will be provided by the Department of Fertilizers. Shri S. Chandra, Joint Adviser, Department of Fertilizers shall also be associated with the Committee for technical assistance. 11. This issues with the approval of Internal Finance Division vide their Dy. No. C-190/FA/2002 dated 24.6.2002. Sd/- (Balvinder Kumar) Joint Secretary to the Government of India Tel: 23388481
  64. 64. Copy to: 1. All members of the Committee 2. Guard File Copy also to: 1. PS to Minister (C&F) 2. PS to MOS(C&F) 3. Sr. PPS to Secretary (F) 4. ED, FICC
  65. 65. Annexure-II-B No. 12019/14/2002-FPP-II Government of India Ministry of Chemicals & Fertilizers Department of Fertilizers …. Shastri Bhawan, New Delhi 28th August 2002 Office Memorandum Subject: Constitution of a Committee to examine the recommendations made by the Expenditure Reforms Commission – regarding In continuation of this Department‟s OM of even number dated 25.6.2002 constituting a Committee under the chairmanship of Shri A.V. Gokak, former Secretary (Fertilizers), inter-alia to suggest efficient energy levels for urea units during Stage-II of proposed Group Concession Scheme keeping in view ERC recommendations, and the mechanism for determining the escalation and de- escalation in the feedstock cost for various units/groups etc., Shri R.N. Choubey, Joint Secretary (PF-II), Department of Expenditure, Ministry of Finance, is nominated as member of the above-mentioned Committee with immediate effect. -sd (Manoj Kumar) Director Copy to: 1. Shri A.V. Gokak, Former Secretary, Department of Fertilizers, 525-Meera Cottage, 11th Cross Rajmahal, Villas Extension, Sadashiv Nagar, Bangalore. 2. Shri Pratap Narayan, Former Director General, Fertilizer Association of India, 59-B, Friends Colony East, Western Avenue, New Delhi-110065. 3. Shri C. Ramaswamy, Former Chief Advisor, BICP, EA-28, SFS Flats, Maya Enclave, Hari Nagar, New Delhi.
  66. 66. 4. Dr.G.B. Purohit, Former Advisor, Department of Fertilizers, N-25, D-Saket, New Delhi. 5. Shri V.K. Bali, Executive Director (Technical), Indian Farmers Fertiliser Cooperative Ltd., IFFCO House, 34, Nehru Place, New Delhi. 6. Shri R.N. Choubey, Joint Secretary (PF-II), Department of Expenditure, Ministry of Finance, North Block, New Delhi. 7. Shri Srichandra, Joint Adviser(F), DOF Copy also to: 1. Shri C.S. Rao, Secretary, Department of Expenditure, Ministry of Finance, North block, New Delhi. 2. PS to M(C&F) 3. PS to MOS(C&F) 4. SrPPS to Secretary (F) 5. JS(F) 6. ED, FICC -sd (Manoj Kumar) Director
  67. 67. No. 12019/14/2002-FPP-II Government of India Ministry of Chemicals & Fertilizers Department of Fertilizers …. Shastri Bhawan, New Delhi 24th March 2003 Office Memorandum Subject: Constitution of a Committee to examine the recommendations made by the Expenditure Reforms Commission – regarding In continuation of this Department‟s OM of even number dated 28.8.2002 nominating Shri R.N. Chaubey, the then Joint Secretary (PF-II), Department of Expenditure, Ministry of Finance, as member of the Committee constituted under the chairmanship of Shri A.V. Gokak, former Secretary (Fertilizers), inter-alia to suggest efficient energy levels for urea units during Stage-II of proposed Group Concession Scheme keeping in view ERC recommendations, and the mechanism for determining the escalation and de-escalation in the feedstock cost for various units/groups etc. and consequent upon Shri Chaubey‟s appointment as Joint Secretary in the Finance Commission, Shri Vivek Rae, Joint Secretary (PF-II), Department of Expenditure, Ministry of Finance, is nominated as member of the above-mentioned Committee with immediate effect in place of Shri R.N. Chaubey. -sd (Manoj Kumar) Director Copy to: 1. Shri A.V. Gokak, Former Secretary, Department of Fertilizers, 525-Meera Cottage, 11th Cross Rajmahal, Villas Extension, Sadashiv Nagar, Bangalore. 2. Shri Pratap Narayan, Former Director General, Fertilizer Association of India, C-47, Friends Colony East, New Delhi-110065.

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