Outlook: India Natural Gas and Fertilizer Sector

Sep 27, 2016

India’s gas industry is in a state of transition.  The country faces a broadening gap between indigenous supply and demand.  Thanks to India’s rising population and the ongoing quest to provide a better standard of living for its people, the country’s outlook for energy demand growth is robust.  The role of gas in the country’s energy mix, however, is hard to determine.  Today, gas occupies less than seven percent of India’s primary energy mix.  Because the ability of end-users’ to pay high prices for gas-fired power generation and/or gas as a fuel or feedstock is limited, India’s future demand growth is contingent on several factors.  These include, but are by no means limited to, government backing for indigenous gas production and equitable pricing for upstream producers; New Delhi’s continued support for gas allocations to the fertilizer sector; and (in light of the country’s growing import dependency), the price of India’s broadening portfolio of imported liquefied natural gas (LNG).

India’s gas demand is dominated by the power, industrial, and non-energy use sectors, as shown in Figure 1.  The latter covers gas used for ‘non-energy purposes’, namely the fertilizer and petrochemical sectors, where gas is used as a feedstock.  In recent years, constrained supplies have affected the country’s gas industry.  Filling this gap, however, has not been easy.  Indigenous production has been on the decline, thanks in no small part to dwindling output from mature fields and the disappointing performance of the Reliance-operated KG-D6 block.  Although India has no less than four LNG import terminals serving the western and southern parts of the country, robust oil prices through 2014; a supply-tight global LNG market between much of 2011 and 2014; and the post-2009 switchover in the pricing terms of Petronet LNG’s 7.5 million tons per annum LNG supply contract with Qatar’s RasGas combined to yield correspondingly high imported prices.  The fertilizer and power sectors serve a large section of India’s predominantly low-income agricultural population, and cannot absorb high natural gas prices.  This concomitant of factors resulted in a degree of gas demand destruction in India between 2012 and 2014.  This is also shown in Figure 1.

Figure 1 – India’s Historic Gas Demand By Sector, 2010-2015

For the fertilizer industry, access to reasonably-priced natural gas is a key concern.  Given the conversion of the country’s urea manufacturing plants from naphtha to natural gas, access to competitively-priced feed gas is essential for fertilizer producers, especially since fertilizer production is an integral part of New Delhi’s emphasis on food production security.  This explains why the fertilizer sector receives priority access to domestically-produced gas. 

Following a few years of consecutive declines, India’s natural gas supply and demand outlook is changing.  This is attributable to two factors. The first is the promulgation of new upstream and domestic gas pricing policies, which is conducive to higher domestic gas production in the medium to long-term. India’s domestic gas pricing was reformed in late 2014, with the partial aim of boosting the price of gas paid to India’s upstream producers.  In the recent past, dwindling upstream production and a lack of investment in new petroleum fields was partially attributable to a lack of financial incentives for upstream producers.  This initiative was followed up with a March 2016 initiative by the Indian Ministry of Petroleum and Natural Gas allowing producers in “challenging” areas to sell gas under a special pricing regime.  The effects of these policies may take some time to materialize, but in the longer run, they bode well for increased indigenous gas output.  The second factor is New Delhi’s enactment of a so-called “gas pooling policy” in March 2015.  This policy ensures the supply of gas at a uniform delivered price to all fertilizer plants on the gas grid for ammonia and urea production.  The policy was enacted because of uneven gas procurement prices for urea producers, where prices were contingent on whether the gas was sourced from the domestic or import market, or varying combinations of both. 

Figure 2 – India’s Historic and projected gas balance, 2005-2025

Based on these supply and demand policy responses by the Indian government, the country’s overall gas consumption is forecast to rise through 2025.  But projected domestic production growth will be unable to keep abreast of consumption increases, as shown in Figure 2.  This will result in growing LNG import dependency for India. Based on current global LNG market dynamics, however, spot LNG import prices are tipped to be competitive over the next several years.  This is the result of an oversupplied market stemming from the startup of new projects in Australia and North America, and indifferent demand prospects in key consuming markets like Japan, Korea and (in the short-term), China.  Access to competitively-priced sources of imported gas likewise bodes well for increased Indian gas consumption going forward, especially for the nitrogen fertilizer/ urea sector.

Behind China and the United States, India is the third-largest ammonia consumer in the world, with an estimated demand of about 15 million tons in 2015.  About 15 percent of India’ ammonia requirements - over 80 percent of which is used for urea production - are met via imports, mainly from the Middle East.  In the past, India’s ammonia/urea facilities have been forced to temporarily suspend operations due to gas shortages.  However, the recent fall in natural gas prices and the introduction of India’s gas pooling policy for the fertilizer sector has boosted ammonia and urea supply growth of late.  In 2015, FACT re-opened a mothballed 0.2 mmtpa ammonia facility in Kochi, Kerala.  The plant was shut down in January 2014, when delivered LNG prices reached $24 per MMBtu.  However, a drop in crude oil prices; a fall in oil-indexed LNG prices to $10.9 per MMBtu (excluding value added tax; VAT); and the government of India’s VAT waiver in the first half of 2015 all combined to help FACT restart its ammonia plant.  Looking ahead, India’s ammonia imports are expected to decline slightly as domestic output increases.  These increases, which are illustrated in Figure 3, are the result of new gas or coal based units entering service; the ongoing conversion of naphtha based units into gas-based feedstock; and improvements in operating efficiencies.  

Figure 3: India’s Ammonia Supply Demand Outlook

In 2015, India produced a record 24.5 million tons of urea, increasing output by 2 million tons from 2014, and operating at close to 100 percent of nameplate capacity.  This improved performance is attributable to the government’s new urea policy and the National Democratic Alliance (NDA) government’s reform-oriented action plan.  Urea is strongly favored over other nitrogenous, phosphatic and potassic fertilizers due to a subsidy scheme that promotes urea consumption.  Farmers in India tend to heavily favor urea, as it is cheaper and highly subsidized compared to phosphorous and potassium fertilizers.  Indeed, this has resulted in the over-use of urea, which in turn has adversely affected soil quality and crop yield in many regions.  

To address the environmental implications of urea over-use, and prevent the diversion of urea to the industrial sector, the government has mandated that least 75 percent of the nation’s urea production be coated with neem.  Neem-coated urea offers the benefit of the slow release of nitrogen; consequently, smaller quantities for soil application are required relative to un-coated urea.  Despite the enactment of this policy, forecast population growth and India’s ever-growing agricultural requirements ultimately translates to rising urea demand, albeit at a slower rate relative to historic levels.  Nexant believes that the nation’s urea demand will increase by about seven million tons between 2015 and 2025.  India’s anticipated urea demand growth has grabbed the government’s support for new domestic urea manufacturing capacity, especially in light of the government’s emphasis on agricultural self-sufficiency.

More than a dozen ammonia/urea projects, based on gas as well as coal, are under consideration.  For example, Coal India Limited (CIL) and National Thermal Power Corporation (NTPC) have recently entered into a joint venture to revive Fertilizer Corporation of India’s fertilizer plants in Sindri and Gorakhpur.   Feedgas will be sourced from GAIL’s proposed Jagdishpur-Haldia pipeline.  Meanwhile, Indian Oil has formed a joint venture with Coal India Limited and NTPC, called Hindustan Urvarak, to undertake the revival of closed fertilizer plant at Sindri in Jharkhand province.  It is also considering investing in the ammonia-urea plant at Barauni and urea plant at Gorakhpur in Uttar Pradesh.  In addition, ONGC and CFCL are planning to build a gas based ammonia/urea facility in Tripura.  Further, Adani Group has signed a Memorandum of Understanding (MoU) with the government of Chhattisgarh, India to develop a coal to poly-generation (CTP) plant that will include an ammonia/urea and substitute natural gas (SNG) complex.  This is just one of the ten proposed coal based fertilizer plants which were announced by the government in 2015, as a step to make India self-sufficient in fertilizer production.

Figure 4 – India’s Urea Net Imports vs Domestic Production

Though numerous projects and plans have been announced, securing capital investment is a major hurdle. None of the above-mentioned plants have achieved financial closure.  The huge backlog of government subsidies, which stood close to $8 billion for urea fertilizer in Fiscal year 2015, may deter private sector company investment in the fertilizer sector.  The estimated unpaid fertilizer subsidy carried forward has been rising from less than $2 billion in Fiscal Year 2011 to $8 billion in Fiscal year 2015.  Some companies are also considering the possibility of manufacturing urea overseas, in low cost locations such as Iran, and importing into India. Of the more than dozen new projects under consideration, Nexant believes that only 3 or 4 new world scale urea plants will come on-stream by 2025. Chambal Fertilizers and Chemicals’ proposed gas based ammonia-urea complex in Kota, Rajasthan is in a fairly advanced stage (vs. other projects in India) and has a higher likelihood of materialization. Nevertheless, the capacity growth rate is expected to be much slower than that of demand, thereby increasing the trade deficit in the country, as shown in Figure 4.

To conclude, the outlook for growing gas use in India across the board is promising, but a key determining factor is price.  This point is especially crucial in light of India’s growing dependency on imported gas.  Pricing and ongoing government support in the form of volume allocation and sectoral subsidies both are crucial for the expansion of India’s nitrogen fertilizer sector.  New Delhi appears optimistic that the country will be self-sufficient in the production of nitrogen fertilizers, but given India’s gas price sensitivity, the slow pace of new project development, a convoluted bureaucracy, and a large outstanding subsidy balance, Nexant believes that current government projections are overly optimistic. 

For further insights into the global gas and fertilizer markets, please visit us at: thinking.nexant.com