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Agrium ups ante on Cook Inlet gas Higher fertilizer prices prompt Agrium to offer $3 per mcf, wants to keep Nikiski plant open Steve Sutherlin Petroleum News Associate Editor
Agrium Inc. has offered to pay more money for Cook Inlet natural gas in its latest attempt to avoid a scheduled Oct. 31 shutdown of its nitrogen fertilizer plant on Alaska’s Kenai Peninsula.
The company offered $3 per thousand cubic feet of gas to Cook Inlet producers, a significant jump over the historic $2 per mcf average gas price paid for delivered supply to its Kenai plant.
High recent prices for nitrogen fertilizer on the world market made the higher offer possible.
“Current international fertilizer price levels, although dynamic, appear to be able to support an average price of $3 per mcf delivered at the plant,” the company said in a March 18 letter to the governor’s Agrium task force. “Agrium is prepared to pay this price for the next two years if sufficient gas can be secured to operate without the risk of frequent outages due to lack of gas supply.”
The company has issued a request for proposals to Cook Inlet gas producers, to be submitted by April 15. Agrium prepared to share risk Agrium said it is prepared to share in the risk of fertilizer and gas market fluctuations with its suppliers.
If a supplier was willing to enter into a shared-risk supply contract, it is possible the price Agrium pays for gas could rise above $3 per mcf, the company said.
Under a shared-risk arrangement, the price paid for gas delivered to the Kenai plant would fluctuate based on ammonia market price indicators and natural gas market indicators, as specified in the contract, according to Agrium spokeswoman Lisa Parker. The result would be a higher average price, if ammonia prices escalate and stay high. Parker said the contract would set a floor price for gas as well, likely at a price below $3.
Agrium has a shared-risk agreement in place at its Bahia Blanca, Argentina plant, according to Richard Downey of Agrium investor and media relations. Although the Bahia Blanca deal has an initial price of far less than $3 per mcf, the mechanics would be similar for a Kenai deal, he said.
Natural gas is the highest cost component in the process of making anhydrous ammonia, the Kenai plant’s primary product. Gas accounts for 80 percent to 90 percent of the cost of ammonia manufacture.
A one-dollar increase in the cost of gas adds $35 per ton to the cost of manufacturing ammonia at the Kenai plant, according to Christine Gillespie, Agrium investor relations manager.
Agrium has to be careful not to pay too much for gas, to avoid being pinched when ammonia prices fall, Gillespie told Petroleum News.
The per-ton price of ammonia went to $53 in 1999, $85 in 2001, and to $70 in 2002, she said. Without the use of variable cost analysis, a plant might appear to be making a profit, while it actually is losing money on a long-term basis. Gas needed on year-round basis Agrium said it needs enough gas to operate its Kenai plant at half the current capacity on a year-round basis.
“Agrium has explored summer operations and at this time, the analysis has determined it is not feasible,” the company said. “This is due to high fixed costs of a limited operation, product would be sold on the spot market, which commands lower prices, and it would be difficult to attract and retain the skilled workforce.”
The company said it has purchased some spot gas, but all of the spot gas purchases have been made available only on a fully interruptible basis. Recent attempts to purchase a significant quantity of gas from current Cook Inlet producers for firm delivery, at competitive rates, have failed, it said.
In the next few weeks the company will institute its first reduction in workforce, resulting in the termination of about 12 employees, the company said. With current vacant positions that have not been filled and upcoming terminations the company will have about 190 employees at the plant for the next seven months, it said.
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