Reliance Gas Delay Halts India's First Fertilizer Investments in a Decade

India’s fertilizer makers will need to increase imports after Reliance Industries Ltd. fell behind schedule to raise natural gas supply used in making crop nutrients. The companies say the lack of gas will delay plans to invest $5.9 billion in factories.

“We planned to set up a new plant about a year ago when we were told Reliance would increase gas production,” said K.L. Singh, director of technical services at the Indian Farmers Fertiliser Cooperative Ltd. Overseas purchases may rise to 7 million tons this fiscal year as food demand rises and domestic urea fertilizer output remains stagnant, he said.

India, the biggest importer of potash fertilizer, needs to boost farm output to feed its 1.2 billion people. Global population growth is driving demand for crop nutrients, prompting BHP Billiton Ltd.’s $40 billion hostile bid for Potash Corp. of Saskatchewan Inc., the world’s biggest fertilizer producer.

“Delays in Reliance’s production have had this ripple effect and expansion plans have been put off by a couple of years,” said Arvind Mahajan, executive director and head of energy and natural resources at KPMG Advisory Services Pvt. in Mumbai. “Fertilizer plants are affected the most.”

Mumbai-based Reliance’s gas discovery off India’s east coast in 2002 encouraged companies including the fertilizer cooperative, known as Iffco, and Rashtriya Chemicals & Fertilizers Ltd. to build six plants and reduce imports, increasing urea capacity for the first time in a decade. Reliance said July 27 that output at the KG-D6 block in the Bay of Bengal, the country’s largest gas field, will be below capacity while it reviews the reservoir and safety procedures.

Critical Component

The fertilizer companies are reducing the use of naphtha, an alternative feedstock derived from crude oil, to make urea. The cost of producing the nutrient with naphtha is more than double than with domestic gas, for which the government sets the price, currently below spot liquefied natural gas levels, and allocates supply.

“The plants can’t be built now because without gas commitments we can’t close finances,” Satish Chander, director- general of the Fertilizer Association of India, said by telephone from New Delhi. “Gas supply is the most critical part if imports are to be reduced.”

Using imported gas would be more expensive than domestic supply, said Mahajan of KPMG Advisory.

Reliance’s gas is sold at $4.20 per million British thermal units while imports from the spot market range from $5.40 to $9.40 per million Btu, Oil Minister Murli Deora told parliament Aug. 26.

Producing urea with domestic gas costs about $220 a ton, less than half the $500 a ton for using naphtha, Chander said.

Stagnant Output

Each of the six plants planned by the fertilizer companies would have an annual capacity of about 1 million tons and cost 45 billion rupees ($985 million), Chander said. Gas supply of about 2.2 million cubic meters is required to produce 1 million tons of urea, he said.

“Output is stagnant and we don’t have allocation,” said Iffco’s Singh. “We are still waiting.”

J. Kohareswaran, chairman and managing director of Rashtriya Chemicals, couldn’t be reached at his office in Mumbai for comment.

India could end urea imports if gas is made available, the fertilizer ministry said in its 2009-10 annual report. The country produces around 20 million tons of urea a year and imports 5 million to 6 million tons to meet demand, Chander said.

Reliance, controlled by billionaire Mukesh Ambani, expects to reach capacity output at the KG-D6 field as late as 2012, at least two years behind schedule, two people with knowledge of the plan said July 27. Production will stay at current levels until the reviews are complete, Reliance Chief Financial Officer Alok Agarwal said that day, declining to give a timeline for increasing output.

Gas Allocations

Additional inspections lasting six months are needed before raising output by 33 percent to 80 million cubic meters a day, the two people said at the time, declining to be identified because they aren’t authorized to speak to the media. Supplies from the field may reach capacity by the end of 2011 or early 2012, they said.

Manoj Warrier, a spokesman for Reliance, declined to comment.

Fertilizer producers have been allocated about 15 million cubic meters a day of Reliance’s current output of 60 million cubic meters and power companies about 31 million cubic meters, according to the oil ministry. The remainder goes to industries including chemicals, steel, liquefied petroleum gas plants and refiners.

Gas Requirement

India’s fertilizer producers will need 95.52 million cubic meters of gas a day in the year starting April 2011, compared with 72.76 million cubic meters this year, according to the ministry’s report. Apart from Reliance’s supplies, gas is bought from Oil & Natural Gas Corp., the nation’s biggest energy explorer, and from overseas, Chander said in July last year.

India imports all the potash it needs and may use 4.55 million metric tons of the mineral salt fertilizer in the year ending March compared with 4.38 million tons a year earlier, junior agriculture minister K.V. Thomas told parliament April 20.

Gas production in Asia’s third-biggest economy rose 28.4 percent in 2009, the biggest increase by any country that year, according to BP Plc’s 2010 Statistical Review of World Energy. Output may increase to 186 million cubic meters a day by 2013 from 142 million, Oil Secretary S. Sundareshan said July 28.

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

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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