Energy 34 (2009) 954961

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Energy
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Natural Gas requirement by fertilizer sector in India

Jyoti Parikh, C.R. Dutta Biswas*, Chandrashekhar Singh, Vivek Singh
Integrated Research and Action for Development (IRADe), 50 Asian Games Village, Khelgaon, New Delhi 110049, India

a r t i c l e i n f o
Article history: Received 26 September 2008 Received in revised form 8 January 2009 Accepted 19 February 2009 Available online 28 May 2009 Keywords: Natural gas Urea demand projection Agriculture Government fertilizer policy

a b s t r a c t
Natural Gas is one of the important fossil fuel energy resources in India. Anchor customers of natural gas are the power sector and nitrogenous fertilizer. It is the cleanest form of energy derived from the fossil fuel basket. Because of clean combustion characteristics, natural gas is the fuel choice for many sections of Indian industry. The demand for natural gas will grow with time. Currently natural gas accounts for 7% of the primary energy consumption of India. The Government of India has its commitment to food security and energy security. The policies are directed toward greater allocation of natural gas on a priority basis to fertilizer and the power sector. Natural gas is the main and preferred feedstock for urea manufacture. This paper analyzes and estimates projected demand of natural gas in the next two decades. The demand projections have been reviewed in the context of changing government policies regarding the fertilizer industry, such as farm gate price regulation and self-sufciency level of indigenous urea production. The current growth plan of natural gas supply and evolving supply scenario in the future are also considered in the study. 2009 Elsevier Ltd. All rights reserved.

1. Introduction In the last couple of years India has emerged as a rapidly growing economy with annual growth rate varying between 8% and 9%. Corresponding growth in consumption and production are also to be anticipated. The high economic growth coupled with rising prices of conventional fuels and increasing environmental concerns is expected to drive the quest for a more competitively priced and cleaner source of energy. Natural Gas (NG) has the potential to emerge as a fuel of choice for many sections of Indian industries. The Indian gas market is predominantly used by the three major sectors: electricity, fertilizer followed by other industries (Petrochemicals & Chemicals, Iron & Steel, Cement, Automobiles, Textiles etc). This paper has worked out demand projection of gas by the fertilizer industry up to the year 2025 in the wake of changing government policy toward the fertilizer industry and rising demand for fertilizer by the agriculture sector. The likely course of policy measures taken by the government in future to regulate the industry is to curb subsidy outow (burden on state exchequer) and to make industry more competitive is also taken into account.

2. Natural Gas: A global perspective Natural Gas is the third most consumed fuel in the world after oil and coal, with a 24% share in the world energy consumption. The Russian Federation, Iran and Qatar collectively account for more than 55% of the total world proven reserves. By the end of 2006, production of Natural Gas worldwide had gone up to 2865 billion cubic meters (BCM) as against 2228 BCM in the year 1997 [1]. China, India and other developing countries would be the future potential markets for Natural Gas. Natural Gas consumption in this region will grow at a rapid pace in the coming years on account of high economic growth and consequent energy needs. 3. Indias energy basket India ranks fth in the world with 423 MTOE (million tonnes of oil equivalent) of total energy consumption. However, this is a mere 3.9% of the world total, with 16% of the worlds population [1]. Presumably with the countrys rapid economic growth, the energy consumption will rise quickly in future. Indias per capita primary energy consumption in 2003 was only 439 kgoe (kg oil equivalent) as compared to 1090 kgoe in China, 7835 kgoe in USA and 1688 kgoe of the world average, and is among the lowest in the world [2]. The share of Natural Gas in total energy is 8% as against the world average of 24%. There is therefore a high growth potential for the Natural Gas market in India (see Fig. 1) [7].

* Corresponding author. Tel.: 91 11 2649 0126; fax: 91 11 2649 5523. E-mail address: cdbiswas@irade.org (C.R.D. Biswas). 0360-5442/$ see front matter 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.energy.2009.02.013

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955

Indian Energy Basket

Nuclear Energy Hydro Power 1 6 Oil 28 Coal 57 Natural Gas 8
Fig. 1. Indian energy basket, 2007: Percentage share of different energy mix in Indias total energy. Source: British Petroleum Statistical Review of World Energy.

exploration of gas in the domestic gas eld have gained momentum. An investment of around $340 million has been made during the rst phase of exploration in NELP-I blocks up to September 2000; this exceeded the envisaged expenditure of $250 million. For the second and third phase of optional work program, the estimated expenditure is about $913 million [3]. Signicant oil and gas discoveries have been made in the deep waters of Krishna-Godavari Basin in the blocks awarded under NELP. 5.1. Indigenous resources In the past several years, there have been major changes in the Indian Natural Gas sector. Apparently, the high success rates of relatively small international players have attracted the major international oil and gas explorers to look at Indian sedimentary basins for investment. The Government of India (GOI) took the unprecedented step of unlocking the sector for private and foreign players. Earlier, Indian public sector oil and gas majors did not have strong nancial muscle to pour in such substantial investment to explore the basins in India. To draw the attention of private and foreign investment into the Indian exploration sector, GOI came up with the New Exploration Licensing Policy in 1997 [4]. According to Oil & Gas Journals estimates (as on January 1, 2006), India is ranked 24th among the gas producing nations with 1100 BCM Natural Gas reserves (see Fig. 2). The country accounts for only 0.6% of total Natural Gas reserves of the world [4]. The situation for gas reserves was not exciting before 2001 until the nding made by Reliance in Krishna-Godavari basin. By the year 2000, domestic gas reserves stood at 760 BCM, which has now grown to 1101 BCM in 2006 [2]. The production of Natural Gas in the country was 32.2 BCM in 200506 as against 17.99 BCM in 199091 (see Fig. 3). During the period, the production has achieved a compound annual growth rateof 4% [3,5]. 5.1.1. LNG import Petronet LNG Limited was the pioneer company to import Liqueed Natural Gas (LNG) to India, in the year 2004. Previously, it had a contract with Ras Gas, Qatar to supply 2.5 Million Metric Tonnes per Annum (MMTPA) gas to the regasication terminal at Dahej, Gujarat. The terminal capacity has been further expanded up to 5 MMTPA. Shell has also built its terminal at Hazira, on the west coast of Gujarat, with a capacity of 2.5 MMTPA [5]. However, it has not made a long-term contract with any other supplier or dedicated to its own reserves. Still, it is importing the LNG on a short-term basis and is utilizing its full regasication capacity. Also, at times, GAIL brings the LNG into the country as spot cargos. It could be said that 7.5 MMTPA of LNG is being imported to the country on a regular basis [3]. Cumulative LNG import capacity at Hazira and Dahej amounted to 10.2 BCM/Year in year 2005 [13].

4. Characteristics of Natural Gas and role in the energy system Natural Gas burns cleaner than other fossil fuels. It is used as fuel in various industries as well as feedstock/raw material for other products. Prime constituent of Natural Gas is methane, which is used as fuel and feedstock in fertilizer units and as fuel in power plants. Other higher fractions like ethane and propane are used in the production of petrochemicals while butane is used for the production of LPG (liqueed petroleum gas). Propane and other higher fractions are used for the production of solvents and chemicals. Natural Gas offers various benets like higher thermal efciency, minimal gestation period, higher plant load factor, lower capital costs and has the least emission for local and global environment. It is lighter than air, therefore is a safe fuel to use. Absence of sulfur makes it the best option as a transportation fuel. Use of Natural Gas reduces the manpower requirement. At the same time, installation of ash precipitators and related equipment are not required. It spares storage space but has to be delivered by pipeline. These distinct characteristics of Natural Gas give it a clear supremacy over other fossil fuels. It is yet to be seen how soon this fuel proves its domination compared to other substitutes. However, the share of Natural Gas in Indias energy mix has increased in the past several years, while the technology of Natural Gas has to mature and is yet to become the fuel for future. 5. Availability of Natural Gas In India and other developing countries the market for Natural Gas is yet to mature. Until now the Indian gas market was dependent mainly on imported gas, but now with the enactment of the New Exploration Licensing Policy (NELP) in 1997, discovery and

Natural Gas Researves (Reserves)

1200 1000 800 600 400 200 0 1990 2000 2001 2002 2003 2004 2005 2006

Fig. 2. Natural gas reserves in India (19902006): Onshore and offshore gas reserves. These gures include the estimates of Reliance, but exclude the large sized discoveries made by Gujarat State Petroleum Corporation (GSPC) and Oil & Natural Gas Corporation of India (ONGC). However, the companies assert their discoveries to be even larger, but this is yet to be certied by Director General of Hydrocarbon (DGH). Source: Ministry of Petroleum and Natural Gas, 2007.

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Natural Gas Production (BCM) 35 30 25 20 15 10 5 0 1990-91

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

Fig. 3. Natural gas production (19902006). Source: Ministry of Petroleum and Natural Gas, 2007.

5.2. Issues pertaining to the Indian gas market However the NELP has brought a considerable difference to the Indian exploration sector, there is still a long way ahead for major discoveries to materialize. Only a limited area has been well explored and offered under NELP. The majority of the areas are either inadequately explored or completely unexplored.. For that matter, private sector companies should be encouraged to invest extensively and bring in superior technologies. The supply of gas is nowhere near the potential demand. The gas production has maintained a steady growth in the last couple of years. From 2009 the production scenario of gas might see a drastic change if some recent discoveries lead to commencement of production. Various new technologies need to be investigated and employed to increase the production from depleting and aging elds. To achieve higher production from high depth offshore elds, super-critical technologies are needed. A mature market for Regasied LNG (RLNG) is yet to evolve in India. However, for the medium term, it is accepted by the energystarved nation. If the recent discoveries deliver results and with the commencement of a transnational pipeline, the requirements of LNG projects may be reduced. 6. Demand of Natural Gas Natural Gas is preferred over all available (coal and oil) fossil fuels as it is convenient to transport and environmentally friendly. Natural Gas is used as a fuel as well as a feedstock/raw material for urea manufacture, substituting other feedstock, as mentioned above. There are three major sectors which are major users for Natural Gas: (i) The Power Sector; (ii) the Fertilizer Sector; and (iii) the Industries Sector. Around 32% of the net gas produced is supplied to the fertilizer sector, 41% to power, 4% to sponge iron, and the balance 23% (including shrinkage) goes to other sectors. The demand is driven by economic growth, environmental considerations, convenience of use and ease of transportation.

According to the Integrated Energy Policy document, in the year 203132 the range of requirement for oil is 350486 (million tonnes, Mt) and for natural gas it is 100197 (MTOE), which translates into 111218 BCM. Meanwhile across various scenarios worked out in the National Energy Map, the range of requirement of oil is 522 (Mt) to 1158 (Mt) and that of natural gas is 145 BCM [2].

6.1. Natural Gas and the fertilizer industry Natural gas is the most preferred feedstock for the production of fertilizers because it has the highest hydrogen to carbon ratio (hydrogen is used for production of ammonia, and thereafter urea is manufactured with the reaction of ammonia, withcarbon dioxide also produced during the process). Hydrogen as weight percent in methane is 25% as compared to 15% in naphtha. The net caloric value of methane is 50,050 KJ/Kg while that of naphtha is around 41,868 KJ/Kg and that of coal (100% basis) 32,787 KJ/Kg [2].

6.2. Fertilizer and agriculture For national food security, food grain production should increase in tandem with population growth. Considering the constraint of availability of agricultural land (scarce resource), use of high yield verities of seeds, better irrigation techniques, increased number of cropping and application of higher doses of fertilizer should be followed to obtaina higher yield of food grain from the available piece of land. The constraint of the available agricultural land necessitates intensive farming. Intensive cropping patterns extract nutrients from the soil, which have to be replenished by the higher and higher doses of fertilizer that will preserve soil fertility and make agriculture production sustainable. There are three important soil nutrients (N, P and K). Addition of a proper mix of these three nutrients to the soil is to be expected for better yield as well as to preserve soil quality. Urea contains 46% nitrogen. In India urea is used extensively to fulll nitrogenous requirement of soil; around 82% of total nitrogenous requirement of the soil comes from urea alone [6].
Table 2 The energy requirement in Gcal/Mt urea. 1 2005 2010, 2015, 2020, 2025 6.16 6.16 2 5.67 5.67 3 7.74 5.67 4 9.26 6.00 5 6.96 5.67 6 5.25 5.25

Table 1 Projection of fertilizer consumption by Alag Committee and FAI. Year 200607 200708 200809 200910 201011 Alag Committee (Miltion Mt) 21.1 21.9 22.70 23.5 24.4 FAI (Miltion Mt) 24.30 25.30 26.20 27.10 27.90

Source: FAI and Alag Committee [6].

Source: Fertilizer statistics, 2006 [8].

J. Parikh et al. / Energy 34 (2009) 954961 Table 3 Unlimited APM gas availability and constant farm gate urea price. Year 2005 Constant farm gate price of urea (Rs/Mt) Total domestic Urea demand (,000 tonnes) Required indigenous urea production (,000 tonnes) Required urea import (,000 tonnes) Effective gas price ($/MMBTU) Demand for gas (BCM) Source: Authors analysis. a Actual gas consumed by the fertilizer industry. 4830 29373 27904 1469 1.98 8.17a 2010 4830 35642 33860 1782 1.98 21 2015 4830 42681 40547 2134 1.98 25 2020 4830 46976 44627 2349 1.98 27

957

2025 4830 51639 49057 2582 1.98 30

6.3. Fertilizer demand projection The production of fertilizer is a continuous process, whereas the demand for fertilizer is seasonal. It is a constant endeavor of the government to ensure the supply of fertilizer to farmers at the right time in sufcient quantity, which would be conducive for agricultural growth and imperative for the well being of farmers. To fulll this basic objective, a proper demand estimation of fertilizer in along with (region wise, district wise and crop season wise) distribution breakup is essential. The estimation will help to remove the mismatch in demandsupply and at the same time will reduce the storage and transportation costs of fertilizer. In addition, it will also help to plan for the supply of feedstock and other raw materials for other sectors. A realistic model will enhance the overall efciency of the sector. Putting in perspective the fundamental of a realistic demand estimation model of fertilizer, several committees constituted by the government and industry (private and government undertakings) have projected the demand for fertilizer in India for different crop seasons. The projected demand of fertilizer as estimated by the Alagh Committee and Fertilizer Association of India (FAI) is summarized in Table 1 [6].

is the farm gate price of fertilizer at any time t. F symbolizes the amount of fertilizer used to get the desired level of crop Y. Crop yield is a quadratic function of dose of fertilizer used, yield increases with increased use of fertilizer with decreasing rate, i.e. initial dose of fertilizer increases crop yield signicantly but as we keep on increasing the dose of fertilizer, the rate of consequent increase in crop yield decreases. Use of fertilizer is a function of farm gate price of fertilizer, availability of irrigation facility and rainfall. Prot of farmers from agriculture is negatively related to the price of fertilizer, i.e. a higher fertilizer price will bring down the farmers prot. Availability of irrigation facilities is also an important determinant of fertilizer dose to be used. A better irrigation facility will promote use of high yielding varieties (HYV) of seeds, which require a higher dose of fertilizer. Rainfall also determines the dose of fertilizer. A higher rainfall in a particular year will induce a higher dose of fertilizer (as the rainfall is a good substitute for better irrigation facility) and consequently lead to higher fertilizer consumption in the same year. Maximize farmers objective function.

ProfitPti

t Py Y Pft f

(1)
dropping t for

6.4. Estimation of demand for fertilizer: Methodology To estimate the per hectare demand for fertilizer, we used 26 years (from 197879 to 200304) of data on the per hectare consumption of fertilizer,1 ination adjusted price of fertilizer,2 rainfall index3 and ratio of gross irrigated and gross sown area (in million hectares). To make the model simple, only fertilizer cost is assumed as a proxy for the cost of production, which farmers will take into account for the calculation of their prot from farming. It is further assumed that the farmers will be able to receive a constant4 market price for their produce; the same price is taken for the selfconsumed food also. Prot from farming is calculated as the difference between values5 of output and input. We use Pti to denote the prot of an individual farmer i from farming at any time t. Pyt denotes price of output, which is the same for all the crops irrespective of type and quality. Y stands for the output quantity. Pft

(Value of output Value of input), where convenience

a bf mf 2 ,G Airrig =Asown

(1a) (1b)

f F Pf =Py ; Airrig =Asown ; R

1 Ratio of total fertilizer (Ministry of Fertilizer, Government of India) in the country and gross sown area (agriculture census). 2 Farm gate Price of (Ministry of Fertilizer, Government of India) fertilizer in Rs per quintal divided by agriculture GDP deator. Agriculture GDP deator is dened as the ratio of agriculture GDP at current price and agriculture GDP at 1991 price (Central Statistical Organization, New Delhi) [7]. 3 As percentage of normal rainfall, economics survey of India, 200506 [8]. 4 Same price is taken for all the crops. Price will be same through out the spatial jurisdiction and across time in real terms- after adjusting. 5 Market Price multiplied by quantity.

By differentiating Eq. (1a) with respect to fertilizer dose f we get Y0 and setting Y0 equal to zero we get (1b). By differentiating Y0 with respect to f we get Y00, a negative factor which shows Y increases with increasing f at a decreasing rate. We use f t to denote the per hectare demand for fertilizer in the t country in year t, Pft =Pagr stands for the real price of fertilizer in year denotes the ratio proportion of gross irrigated and t, At =At sown irrig gross sown area in year t and Rt denotes rainfall index. The estimated equation then reveals the proportional impact of all these variables on the per hectare demand for fertilizer f t in year t. We then estimated the following equations (gures in parentheses of rst and second rows below each coefcient show the estimated t-statistics and standard errors respectively, corresponding to each variable).6

6 Auto regression time series model was estimated by taking 26 (from year 197879 to 200304) data points. Since the error term was auto-correlated, Cochrane orcutt iteration procedure was used to estimate the suitable model. 14th iteration gives the good result with d-statistic 1.107. The R-square for the model is 0. 557 and the standard error of estimate for the model is 0.034.

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60 50 C

35 30 25

Urea (MT)

40 30 20 10 0 2005 2010 2015 2020 2025 A B Urea Demand Gas Demand

NG (BCM)

20 15 10 5 0

Year
Fig. 4. Urea and Natural Gas demand under reference scenario. Source: Authors analysis.

Lnf t 5:111 0:124 7:936 0:644

  t Ln Pft =Pa 1:050 1:715 0:073

  Ln At =At sown 0:206 irrig 3:076 0:341

Ln Rt 4:319 0:048

(2)
To further estimate the gross sown area a separate model is constructed. Gross sown area depends on the availability of gross irrigated area and the expectation of rainfall in the same year.7 We use At sown to denote gross sown area in million hectares in year t, At irrig indicates the available gross area having irrigation facility in year t and Rt denotes the rainfall index in year t. The estimated equation then shows an econometric relation of gross irrigated area and rainfall with gross sown area (gures in parentheses of rst and second rows below each coefcient show the estimated t-statistics and standard errors respectively, corresponding to the each variable).8

  3:793 0:198 Ln At sown 30:722 0:123

  Ln At 0:129 irrig 8:680 0:023

Ln Rt 6:016 0:021 (3)

the respective groups are the weighted mean of unit energy consumption of all the plants in groups. Total energy requirement of a group of a specied capacity in a given year is the product of the total capacity of the concerned group and its unit energy consumption. All energy requirements are calculated in British Thermal Units (BTU).10 Further, total gas requirement in a year is calculated by using another conversion factor (1 mm BTU 27.8 standard cubic meters) [2]. It is assumed that the existing gas based indigenous urea plants will keep producing in the future using the currently available set of technology, therefore their energy efciency level (Pre 92 and Post 92 group 25.78 GJ/tonne and 23.73 GJ/tonne respectively) will remain the same in the future. However, the plants running on any other feedstock will switch to Natural Gas and energy efciency of these new plants (Switched from naphtha and mixed energy feedstock to Natural Gas) should match the present level of energy efciency of Post 92 gas groups, i.e. 23.73 GJ/tonne of urea. While the average energy efciency of fuel oil plant group is assumed at 25.11 GJ/tonne urea,11 for the additional capacity to be added, whether from a green eld plant or else from a brown eld, the average energy efciency is assumed to be 21.97 GJ/tonne urea [9].

6.5. Estimation of Natural Gas demand: Methodology Projected demand for N (in ,000 tonnes) using the Urea Demand Estimation Model is used for computation of Gas Requirement and Subsidy burden for the corresponding future years. The N demand has been converted to urea demanddusing assumption (1a) urea contains 46% N (see Table 2). It is assumed that by the year 2010, and onwards, all the urea production units will be operating on Natural Gas feedstock only. The switchover to Natural Gas will lead to a decline in energy consumption and new energy consumption parameters have been used for further computation. The demand for Natural Gas has been calculated on the basis of energy efciency9 of the various groups. The energy efciencies of

6.6. Estimation of gas demand by Indian fertilizer industry under changing government policy to the industry Gas demand is subjected to a wide uctuation corresponding to the indigenous urea production target and government policy toward the fertilizer industry. This paper has estimated future likely gas demand in congruence of this different government policy options, summarized as follows. Structural reforms consist of prescribing a self sufciency (a mechanism in which quantum of fertilizer demand is satised from indigenous production and imports) level for fertilizer production and policy measures (NPS, New Pricing Scheme) to rationalize subsidy to the sector to achieve the desired goal. Currently India is following the NPS (New Pricing Scheme) [10,11] to regulate the fertilizer subsidy and to bring about efciency in the industry. In the present paper, we have assumed NPS will continue but all the plants running on naphtha and low sulfur heavy stock/furnace oil (LSHS/FO) feedstock will switch to Natural Gas feedstock by 2010. For self sufciency, following probable scenarios has been considered.

7 Farmers decision to sow crop is dependent on the expected rainfall in the year. Though rainfall has a signicant implication on the crop selection, expectation of higher rainfall will tilt cropping pattern in favour of those crops, which require a better irrigation system. 8 Auto regression time series model was estimated by taking 26 (from year 197879 to 200304) data points. Since the error term was auto-correlated, Cochrane orcutt iteration procedure was used to estimate the suitable model. 3rd iteration gives the good result with d-statistic 1.779. The R-square for the model is 0.865 and the standard error of estimate for the model is 0.012. 9 Energy efciency reveals the energy requirement by a plant to produce 1 tonne of urea.

Conversion factor (1 kcal3.968 Btu) is taken into consideration. Sourcr: Report of the working group on Fertilizer Industry for the Eleventh Plan 200708 to 201112, Department of Fertilizer, Ministry of Chemicals and Fertilizers, Government of India.
11

10

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959

35 30 25 S1 S2 S3 S4 15 10 5 0 2005 2010 2015 2020 2025

Gas (BCM)

20

Year
Fig. 5. Natural gas demand projection (200525): Projection is done using authors dened gas projection model under different scenarios. S1: 95% self sufciency and constant farm gate urea price Rs4830/tonne. S2: 70% self sufciency and constant farm gate urea price Rs4830/tonne. S3: 95% self sufciency and farm gate urea price rises by 1.67% effectively every year. S4: 70% self sufciency and farm gate urea prices rises to $250/tonne in parity to international FOB urea price ($1 Rs45). Source: Authors analysis.

Table 4 Unlimited APM gas availability and 70% self sufciency. Year 2005 Constant farm gate price of urea (Rs/Mt) Total domestic urea demand (,000 tonnes) Required indigenous urea production (,000 tonnes) Required urea import (,000 tonnes) Effective gas price ($/MMBTU) Demand for gas (BCM) Source: Authors analysis. 4830 29373 20561 8812 1.98 8.17 2010 4830 35642 24949 10693 1.98 16 2015 4830 42681 29877 12804 1.98 19 2020 4830 46976 32883 14093 1.98 20 2025 4830 51639 36147 15492 1.98 22

6.7. Scenarios denition I I1 I2 P P1 Imports: Two scenarios are considered here based on the government priorities. 95% self sufciency (95% of total demand will come from indigenous plants and rest 5% will be imported). 70% self sufciency level (70% of total demand will come from indigenous plants and rest 30% will be imported). Price reform. Current farm gate price (price paid by farmers) of Rs4830/ tonne of urea will continue in future, decit will come from budgetary provision. A cumulative constant rise of 10% at every interval of 5 years, i.e. an effective increase of 1.67% per annum in farm gate price. Farm gate urea prices rises to $250/tonne in parity to international free on board (FOB) urea price exchange rate considered ($1 Rs45).

P2

P3

Changing natural gas demand under different policy scenarios is shown in Fig. 5. 6.7.1. Constant farm gate urea price (Rs4830/tonne) Under this scenario (Table 3), all the fertilizer plants are assured a full supply of APM12 gas. The GOI has set a 95% self sufciency target, i.e. 95% requirement of urea will come from indigenous

plants and only 5% will be imported. The existing NPS13 will be in the operation but all the plants running on any other feedstock than NG will switch to NG by the year 2010. If the urea farm gate price is maintained at a constant level of Rs4830 per tonne until 2025, domestic demand for urea fertilizer rises from 29 Mt to 51 Mt, an increase of 75% in two decades. This rise in domestic urea demand leads to a rise in domestic urea production requirement from 27 Mt to 49 Mt for the same period. Natural Gas demand by the domestic fertilizer industry is a function of domestic urea production requirement, which rises from 8.17 BCM to 30 BCM, a rise of 267% in two decades. Total subsidy burden rises from Rs84 billion to Rs179 billion during the same period. Change in urea farm gate price results in the change in urea demand and consequently gas demand and subsidy to various agents. Demand for gas is increasing with the same slope as the demand for area except during the transition period (AB, Fig. 4). A rapid increase in gas demand during this period is taking place on account of fuel switch by the plants running on other feedstock than NG but after the transition phase NG demand by industry is increasing with a constant slope. 6.7.2. Unlimited APM gas and 70% self sufciency (Table 4) All plants receive unlimited supply of APM gas. Import restriction is liberalized under this scenario; only 70% domestic urea demand will be ensured from indigenous plants and 30% will be imported. NPS will continue until 2025 and all plants will be

12 APM (Administered Price Mechanism) under which gas is allocated on the priorities basis to the priorities sector at the managed price. Price of gas is decided by the government rather than by the interaction of market forces, i.e. by demand and supply mechanism.

13 NPS (New Pricing Scheme) under which subsidy to the urea plants are calculated based upon the mean cost of production of group plants. Plants are segregated under six different groups depending upon feed stock used and vintage.

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Table 5 Unlimited APM gas availability and increasing farm gate urea price. Year 2005 Increased farm gate price of urea (Rs/Mt) Total domestic urea demand (,000 tonnes) Required indigenous urea production (,000 tonnes) Required urea import (,000 tonnes) Effective gas price ($/MMBTU) Demand for gas (BCM) Source: Authors analysis. 4830 29391 27904 1487 1.98 8.17 2010 5313 34936 33189 1747 1.98 21 2015 5844 41007 38957 2050 1.98 24 2020 6429 44685 42451 2234 1.98 26 2025 7072 48632 46200 2432 1.98 28

Table 6 Unlimited APM gas availability and urea price at $250/tonne. Year 2005 Constant farm gate price of urea (Rs/MT) Total domestic urea demand (,000 tonnes) Required indigenous urea production (,000 tonnes) Required urea import (,000 tonnes) Effective gas price ($/MMBTU) Demand for gas (BCM) Source: Authors analysis. 11250 24533 17173 7360 1.98 8.17 2010 11250 29178 20425 8753 1.98 15 2015 11250 34251 23175 10275 1.98 15 2020 11250 37323 26127 11197 1.98 16 2025 11250 40214 28149 12064 1.98 18

converted to NG feedstock only by 2010. Urea farm gate price will remain the same until 2025. Reduction of self-sufciency level decreases indigenous production target and hence domestic demand for NG. Domestic NG demand for 2025 is 22 BCM compared to 30 BCM of reference scenario. 6.7.3. Increased farm gate urea price Keeping the rest of the assumptions constant as mentioned in Section 6.7.1, the demand for urea and NG is calculated (Table 5). In this scenario, farm gate urea price is increased by 10% at the interval of every 5 years. It can be seen that the price elasticity of the demand for urea is not very signicant. A rise in price by 46% from Rs4830 per Mt (reference scenario) to Rs7072/Mt for the year 2025 leads to a fall in demand by a mere 6%. This fall in demand results as a fall in NG demand by the indigenous fertilizer sector from 30 BCM to 28 BCM. 6.7.4. Policy mix (urea price Rs11,250/tonne and 70% self sufciency) Under this scenario (Table 6), impact of managed import and dismantling of NPS leading to increase of urea farm gate price to Rs11,250 per tonne are analyzed for the demand of NG by the industry and the subsidy to the different agents. Gas is supplied at APM price. Managed import coupled with the high farm gate price reduces subsidy burden as well as NG demand by the fertilizer industry substantially. This scenario also assigns a larger proportion of subsidy outow to subsidized imported fertilizer with the most vulnerable section (farmers) not getting anything in subsidy. Even producers subsidy component is nil under ensured unlimited supply of NG to the fertilizer industry but the situation changes a bit when gas supply at different prices to industry changes. Gas demand by the industry under this scenario reduces to 18 BCM in the year 2025 compared to 30 BCM as stated under the reference scenario. 7. Conclusion The government directive for fuel and feedstock switch from naphtha and FO/LSHS by all the urea manufacturing plants to

Natural Gas will lead to a sharp rise in NG demand for the fertilizer sector. The consumption level of Natural Gas will rise from 8.27 BCM in 2005 to 21 BCM in 2010 (projected). This switch is expected to be complete by the year 2010. Subsequently, the demand of NG for the fertilizer sector is proportional to the projected demand of urea that will be produced in the country. Analysis of urea demand for the previous 25 years indicated that the variable (consumption of urea) is sensitive to the real price of urea, level of irrigation, and rainfall index. Employing analytical equations and using these variables, urea demand, gas demand and subsidies are calculated up to the year 2025. The demand for urea has been projected for the next two decades for different farm gate prices and analyzed for two different self-sufciency levels of 70% and 95% of domestic urea production. The demand for urea has been used to evaluate Natural Gas demand from the fertilizer sector. In the year 2025, reference scenario farm gate price is Rs4830/Mt and projected urea demand and NG demand for 95% self sufciency are 52 Mt and 30 BCM, respectively. However, a marginal increase in farm gate price of urea effectively by 1.97% every year reduces urea and gas demand to 49 Mt and 28 BCM, respectively. Increase in urea price by a small margin does not lead to a signicant impact on urea demand but making the urea price equivalent to import parity price ($250/ tonne FOB price) reduces urea demand to 42 Mt and corresponding Natural Gas demand to 23 BCM.

Acknowledgments The authors would like to acknowledge the nancial support from PESD (Programme on Energy and Sustainable Development), Stanford University, USA for the nancial support to carry out this project. The authors are extremely thankful to Professor David Victor, who made enormous contribution as a leader of the Natural Gas Project, and Dr. Mike Jackson, for his contribution in designing of the scenarios. A special thank-you is due to Dr. Kirit Parikh, Member, Planning Commission, Government of India for his valuable comments and suggestions.

J. Parikh et al. / Energy 34 (2009) 954961

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