The GoM headed by finance minister Pranab Mukherjee recommended to the Cabinet that the government provide subsidy on gas price within the range of $6.5-$14 mmBtu. The ministry has proposed that the government compensate companies if gas price exceeds $14 mmBtu

New Delhi: A Group of Ministers (GoM) on Friday approved a new urea investment policy that promises incentives on natural gas price to fertiliser companies for reviving, expanding and setting up of new plants, to boost domestic production, reports PTI.

The GoM headed by finance minister Pranab Mukherjee recommended to the Cabinet that the government provide subsidy on gas price within the range of $6.5-$14 million metric British thermal units (mmBtu).

The policy aims at giving urea manufacturers a minimum 12% post-tax return on capital.

“The policy on urea has been approved with caveats,” petroleum minister Jaipal Reddy told reporters here after the GoM meeting.

Although the GoM has cleared the policy, it asked the fertiliser ministry to place its pending issues before the Cabinet, sources said.

The ministry has proposed that the government compensate companies if gas price exceeds $14 mmBtu. It also suggested changes in the method of calculating the price of delivered gas to fertiliser units, the source said.

In 2008, the government had announced a ‘New Investment Policy’ to boost urea production, but the scheme failed to attract fresh investment in the sector.

With widening demand-supply gap of urea, the government in 2010 decided to frame a new policy. Last year, the Committee of Secretaries (CoS), headed by Planning Commission member Soumitra Choudhary, was set up to frame a new policy on urea.

To make the investments financially viable and at the same time limit the profits, the CoS suggested higher floor and ceiling price (domestic cost of production) for greenfield and brownfield projects as compared to the 2008 policy that failed to attract fresh investment in the sector.

The CoS has suggested the government to give incentives for setting up of greenfield (new plants), brownfield (expansion of existing plants) and revamp facilities.

With gas being the main feedstock of urea and accounting 80 per cent of the cost of manufacturing, the committee suggested that the government should bear the entire cost of gas till $14 per mmBtu.

In case of using gas of higher price, urea price will go up by $20 per tonne for every dollar increase in the fuel cost, it added.

According to experts, the country would save around Rs4,800 crore if six expansion plants with a capacity of over six million tonnes are set up following this new policy.

Fertiliser companies did not offer any immediate comment on the approval of the new policy.

According to the new policy, based on the cost of imported urea, which is known as import parity price (IPP), floor and ceiling prices for greenfields are fixed at $310 a tonne and $340 a tonne, respectively.

For brownfield investments, floor price is fixed at $290 a tonnes, while ceiling price at $320 a tonne.

For revamping of projects, the floor price is fixed at $250 a tonne and ceiling price is $290 a tonne. However, the gas price in this case will be fully subsidised between $7.5-$14 per mmBtu.

Currently, global price of urea is ruling at $425-$472 per tonne.

A source said, “The units will continue to earn a minimum of 12% post tax returns considering a scenario of high cost of delivered gas price in India and global price falling below the ceiling price or even the floor price.”

Under the present investment policy, implemented in September 2008, the floor and ceiling prices of urea have been fixed at $250 and $425 per tonne, respectively.

The new policy provides for differential IPPs. The production from revamped projects is proposed to be provided with 85% of IPP subject to floor and ceiling prices.

Similarly, the production from expansion of these units will receive 90% and revival of closed units in public sector will get urea price equivalent to 95% of IPP.