July 2 (Bloomberg) -- India’s demand for natural gas is set to increase as fertilizer makers spend as much as 50 billion rupees ($1 billion) in the next three years to boost capacity by 35 percent, an official said.

Fertilizer companies may need an additional 24 million cubic meters a day of gas to feed new plants and existing ones that are switching from using naphtha and fuel oil, Satish Chander, director-general of the Fertilizer Association of India, said by telephone from New Delhi.

“We would like to use more gas as it is a cheaper fuel,” Chander said. “We hope we can get this additional gas from Reliance Industries Ltd. and other domestic companies.” He didn’t say which fertilizer companies would increase capacity.

India needs additional fertilizer to increase food output as demand rises in the world’s second fastest-growing major economy. Using gas will lower the cost of making crop nutrients and may cut the subsidy paid to fertilizer companies.

Urea producers have a combined capacity of 20 million tons a year and use 42 million cubic meters a day of gas, Chander said yesterday. Supply of about 15 million cubic meters a day of the fuel comes from the country’s largest gas field, which started production in April. The remainder is bought from Oil & Natural Gas Corp., the nation’s biggest energy exploration company, and from overseas, Chander said.

The government asked Reliance to sell gas to fertilizer- makers and power producers on priority at $4.2 per million British thermal units. Reliance signed agreements with 12 fertilizer companies in March for supplies from KG-D6 field, located off India’s east coast.

‘Assured Prices’

“Buying gas from Reliance would mean assured prices,” Chander said. “Naphtha and fuel oil prices keep varying according to international prices.”

Still, the Fertilizer Association of India has written to the fertilizer ministry seeking reconfirmation of the contracted volumes of gas after the Bombay High Court ordered Reliance Industries to honor a 2005 agreement to supply gas to Reliance Natural Resources Ltd., Chander said.

The order last month was for the supply of 28 million cubic meters a day of gas for 17 years, according to Mukul Rohatgi, counsel for Reliance Natural Resources, which procures fuel for the Anil Dhirubhai Ambani Group’s power projects.

The court restrained Reliance Industries in June last year from selling gas to companies other than Reliance Natural and state-owned NTPC Ltd., which has a contract for the supply of 12 million cubic meters of gas from the KG-D6 field. The ban was temporarily lifted before production started at the field.

Reliance Natural and NTPC together have contracts for 40 million cubic meters a day of the gas, or half of the estimated 80 million cubic meters when production at the Reliance Industries field peaks by December.

“It is not an immediate worry,” Chander said. “We only want to be assured once again.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

Last Updated: July 1, 2009 21:00 EDT