Arif Habib Limited said that the fertilizer sector would not require to lay down 1,000 kilometers pipeline to connect to a dedicated gas field under a long term plan approved by the sub committee of the Economic Coordination Committee to ensure uninterrupted gas supply to the sector.
According to the report, approval from the sub-committee makes the case of fertilizer sector very strong to be presented before an upcoming meeting of ECC. Fertilizer sector would use the existing Sui network and only 136 kilometers line would be laid down by the Sui Southern Gas Company Limited.
This is a positive development for the fertilizer sector in general, and Engro Fertilizers in particular, as they would not require investing in the pipeline anymore, thus phasing out the opposition to utilizing the funds from the Gas Development Infrastructure Cess.
Under the new petroleum policy, exploration and production companies are now allowed to sell 10% of their gas directly to the consumer adding this would help fertilizer companies to ensure uninterrupted gas supply. Fertilizer companies will be signing gas purchase agreements directly with the E&Ps.
Under the new framework, both the Sui companies are expected to supply gas from the E&P fields on a tolling basis to fertilizer companies. Since the gas supplied to the fertilizer sector would be on a tolling basis, Sui companies would not be able to divert this gas to any other sector.
We have seen in the past gas being diverted from fertilizer companies to other sectors despite government guaranteed contracts with the fertilizer industry. However with the implementation of this arrangement, certainty of gas supplies to the fertilizer sector could be assumed to a great extent.
Implementation of the long term plan will improve the availability of gas, which in turn may result in urea price decline. Fatima and Engro would be the least impacted fertilizer companies under a price cut scenario due to their long term contract of low feed gas prices.
Faujis, on the other hand are expected to bear the brunt of declining urea prices due to their relatively less efficient plants and comparatively higher feed gas tariffs.
Meanwhile, the National Fertilizer Development Center released fertilizer off take and production data showing 55% drop YoY in urea sales to 234,000 tonnes in October 2012 and 17% decline YoY in sales to 3.96 million tonnes during January to October 2012.
