It has also decided to promote efforts to make gas available from new discoveries, including Reliance Industries' KG Basin blocks, for the fertiliser industry.
The short supply of natural gas has affected urea production, which is crucial to agricultural production. This is causing difficulties for companies like Rashtriya Chemicals and Fertilisers and Nagarajuna Fertilisers, among others.
Fertiliser units have also been asked to explore the possibility of entering into joint venture agreements for procuring natural gas. However, they will have to shell out higher prices for gas, including gas from domestic sources, as there has been a significant increase in production costs.
The petroleum ministry estimates that the expected gas availability by 2011-12 would be around 150 million standard cubic metre per day, including gas from import sources.
The shortage of natural gas has another impact. Of the total subsidy of around Rs 16,000 crore (Rs 160 billion) for urea, as much as 65 per cent is being given for use of naptha.
The subsidy burden can be brought down by about one-third if gas is used. For gas based units, the cost of feedstock accounts for 60 per cent of the total cost of production, while for naptha based units the figure stands at 75 per cent.
Importing urea is not a good option as this would lead to a significant increase in international prices. The fertiliser sector requires around 68 MMSCMD of gas, but only 28 MMSCMD is available at present.
An additional capacity of 5 million metric tonnes per annum will be added in the next five years. Pipeline infrastructure is being expanded and additional gas from Panna-Mukta and Tapti is also being earmarked for fertiliser units.