Pakistan revised gas pricing policy for fertilizer manufacturers

On February 15th, Pakistan’s Oil and Gas Regulatory Authority (OGRA) notified a single gas price of PKR1,597/mmbtu ($5.76) for both feed and fuel for the fertilizer plants, replacing the previous differentiated rates of PKR580/mmbtu ($2.09) and PKR1,580/mmbtu ($5.70), respectively. This change primarily affects fertilizer producers such as Engro Fertilizer, Agritech Ltd., Fatima Fertilizer and Fauji Fertilizer Bin Qasim Ltd on networks of two gas utilities in the country. IMS Research expects companies to raise their average urea prices by PKR1,300/bag ($4.69) to mitigate the cost pressure.

This was the second gas price hike in the 2024 fiscal year to meet the International Monetary Fund’s (IMF) recommendation, which has demanded semi-annual revisions to gas prices to control rising gas circular debt. The local industries and all apex trade bodies objected to the price hike and warned that it could lead to a closure of industries. Still, Pakistan’s largest urea manufacturer – Engro Fertilizers, welcomed gas tariff revision as a step in the right direction. The Sindh-based urea producers termed it a good decision, and the government has taken a bold first step by removing the subsidy for fertilizer manufacturers that get their gas from the Sui Northern Gas Pipeline Ltd (SNGPL) network, which represents 60% of all fertilizer manufacturing capacity.

Engro Fertilizer says that the government has increased feedstock prices from PKR 580/mmbtu to PKR 1,597/Mch, almost a 300% increase in the cost of producing fertilizer. While this is a step in the right direction, the battle is half won, as the remaining 40% of fertilizer manufacturing capacity on the Mari Gas network is still at the subsidized price of PKR 580/MMBtu.

Engro warned that Pakistan’s current financial position is distressed; it is in a debt crisis, with the debt-to-GDP ratio already above 70% and more than $27 billion of foreign debt to be repaid by November 2024. Therefore, in the country’s national interest and to fix the problem at the source, Engro Fertilizer urged the government to completely remove all fertilizer subsidies from the sector. Only with the complete removal of this debt can the government free the nation from this debt and truly benefit the people of Pakistan.

Engro believes that with this complete removal, the government is expected to collect PKR 150 bn ($541.24 mn), which can be used for targeted agricultural projects and initiatives that generate economic activity and growth in the country. Engro expressed hope that this is a fantastic opportunity for all fertilizer manufacturers to demonstrate that even without subsidized gas, they are globally competitive. When everyone has the same gas price, it will encourage the manufacturers to become more efficient and lean and promote capital investment in the fertilizer industry. In addition, the fertilizer industry will emerge as a role model that can operate efficiently without any subsidies, thereby encouraging the government to look at removing subsidies from other sectors of the economy as well.