LAHORE, May 29: The federal government’s failure to decide a fresh criterion for feed gas (raw material) allocation for the establishment of the proposed urea plants, as well as to announce a new gas pricing mechanism for them is delaying expansion of urea production in spite of its increasing demand in the country.

At least two urea manufacturers -– Engro Chemicals and Fauji Fertiliser Corporation -– plan to set up new production plants with a capacity of around one million tons per annum (1mtpa) each. However, the government in September last year allocated only 100MSCFT per day for just one plant or production of one million tons urea a year from the Qadirpur Gas Fields owing to gas shortage.

Both the companies, according to sources in the fertiliser industry, are waiting for a government decision on the new feed gas allocation formula before announcing their future expansion plans.

“Our growth is restricted because of supply constraints despite an ever increasing demand for urea due to better crops and improved incomes of farmers,” a senior executive of a urea company told Dawn on Monday.

The 2001 fertiliser policy provided that the feed gas allocation would be made on the principle of “first come, first served”. The policy provided that the agreements should be signed between the prospective manufacturers and the government before June 30, 2005. At least one manufacturer, Engro Chemicals, is said to have applied for feedstock allocation for new plant in 2004, but no decision was taken on it.

In March this year, however, the Economic Coordination Committee of the Cabinet decided to change the criterion for the allocation of feed gas to new plants in view of the shortage of gas in the country and set up a committee to evolve a new criterion for this purpose. But the committee has so far not been able to evolve the criterion, delaying expansion of urea production in the country.

A report prepared by a brokerage company says the urea off-take increased by 16 per cent during 1Q06, with the local manufacturers meeting 88 per cent demand and the imports the remainder 12 per cent.

The urea demand during 2006, the industry sources say, is expected to grow to 5.4 million tons from 5.2 million tons in 2005 against a local production of 4.7 million tons. Pakistan has been importing urea in order to meet the growing demand for the last two years.

“In 2004, the Trading Corporation of Pakistan (TCP) imported around 100,000-150,000 tons of urea. This year the import target is upped to 700,000 tons,” the sources say.

The imported fertiliser costs twice the price of the locally produced urea. “While locally manufactured urea is priced at Rs505 per 50kg (ex-factory rate), the landed cost (in Pakistan) of imported fertiliser is around Rs1,000 per 50-kg. The price difference between the imported and local urea means that the government gave a subsidy of around Rs6 billion or so last year. The size of subsidy on imported urea will go up to Rs8-9 billion this year, which clearly shows that it is not in the interest of the country to import the fertiliser. Thus, the government should encourage local production instead of relying on imports for meeting the ever growing demand,” insist the sources.

It may be recalled that the government provides feed gas to urea producers at subsidised rates. The quantum of the subsidy is calculated to be around Rs14-15 billion a year. The manufacturers say they get a net subsidy of Rs10 billion as the remainder is returned to the government in the form of different taxes.

The urea companies say the farmers pay Rs43 billion less on urea because of its local production. “IT means that the cost of farmers would rise as much if the entire urea demand is met through imports,” say the industry sources.

“The net benefit passed on to the farmers by the local urea manufacturing companies in 2005 is Rs33 billion against the subsidy of Rs10 billion received by them on feed gas used by them as raw material,” claim the sources.