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Agrium and the Cook Inlet gas market
When Agrium Inc. bought the Nikiski fertilizer plant on Alaska’s Kenai Peninsula from Unocal Corp. in 2000, Agrium expressed optimism that fertilizer production at Nikiski would enhance Agrium’s position in the North American fertilizer market. And as part of the takeover deal, Agrium inherited a 1998 Unocal supply agreement for natural gas, the plant’s main feedstock, from Unocal’s erstwhile Alaska fertilizer subsidiary. That agreement was due to expire in 2009.
In 2001 the Regulatory Commission of Alaska approved a new gas supply contract between Unocal and Enstar Natural Gas Co., the main Southcentral Alaska gas utility. That contract involved gas pricing intended to encourage new Cook Inlet gas exploration, given that much of Unocal’s existing gas reserves were dedicated to supplying Agrium, according to RCA records.
And in that same year Unocal announced a new $10 million gas exploration project on the Kenai Peninsula. The company also said that it was investing about $15 million in developing existing Cook Inlet gas fields in 2001.
But things had turned sour by early 2002 when Unocal announced that it had failed to discover commercial quantities of natural gas in a three-well drilling program in the southern Kenai Peninsula.
Litigation Then, in the summer of 2002, litigation erupted between Unocal and Agrium over a dispute about the gas sales agreement for the fertilizer plant. According to Agrium the dispute, although financial in nature, hinged on issues relating to gas supplies from Unocal. And Unocal told Petroleum News at the time that, under the terms of the gas sale agreement, Unocal should be able to reduce its gas supplies to Agrium, to reflect a decline in Unocal’s Cook Inlet gas reserves.
In May 2003 Agrium laid off 65 employees, in part, the company said, because of gas supply issues with Unocal. And a month later Agrium announced that Unocal had intimated further cuts in gas supplies. Agrium said that it was seeking alternative supplies from other producers.
In March 2004 Bill Boycott, general manager of Agrium’s Kenai operations, told the Resource Development Council of Alaska that the fertilizer plant gas consumption of 53 billion cubic feet in 2001 had dropped to 40 bcf in 2004 and was expected to drop to 36 bcf in 2004.
Arbitration panel And in July of that year an arbitration panel in the litigation between Agrium and Unocal awarded Agrium $38.5 million in damages plus interest for the under-delivery of gas. The panel accepted that the gas sales agreement involved delivery volumes linked to the levels of specific gas reserves dedicated to the agreement. However, Unocal’s gas deliveries had not met required minimums, the panel said.
But in October 2004 Unocal said that it was unlikely to be able to deliver on-going gas volumes specified by the arbitration panel, despite the fact that “Unocal is in full-out production” from gas fields dedicated to the Agrium contract. And the company said that if it found new gas sources it was not obliged to divert that gas to meet Agrium’s needs.
In December 2004 Agrium and Unocal settled their litigation with an agreement that involved the termination of gas supplies on Oct. 31, 2005, and a payment of $25 million in compensation to Agrium for the cessation of supplies prior to the June 2009 date in the original gas supply agreement.
Agrium continued to seek new gas supplies at prices that would be viable for fertilizer production. The company even investigated converting the Nikiski plant to use coal gasification rather than natural gas. But, with annual gas supplies to the plant dwindling to 10 billion cubic feet, the plant finally closed its doors in late 2007.
—Alan Bailey
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