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PETROLEUM DIRECTORY: Agrium adds value to Alaska, Cook Inlet natural gas The company’s plant on Alaska’s Kenai Peninsula produces urea and ammonia from natural gas Alan Bailey Petroleum Directory Contributing Writer
Since its startup in 1968 the fertilizer plant at Nikiski on Alaska’s Kenai Peninsula has become a mainstay of the local economy and a major exporter of value-added natural gas products from Alaska. And when Agrium Inc. bought the plant from Unocal in 2000, the plant joined one of the world’s major suppliers of agricultural fertilizers.
“We’re an international fertilizer company,” Richard Downey, Agrium’s director of investor and media relations, told Petroleum News. “We’ve been on the New York and Toronto Stock Exchanges since 1993, but we’ve been in the fertilizer business for almost 75 years through previous companies.”
Agrium expanded considerably after going public in 1993, acquiring assets throughout North America and in South America, Downey said. When the company bought the Unocal fertilizer business, Agrium obtained some small facilities in Washington State and California, as well as the Nikiski plant.
“Our total (annual) sales are approximately $2.5 billion and we produce all three nutrients — nitrogen, phosphate and potash, as well as a significant retail business in North and South America,” Downey said.
And fertilizers like this underpin world crop yields.
“Fertilizers account for as much as a third of the crop yields that the world gets, so it’s a significant contributor to feeding the world,” Downey said. Uncertain future of this important plant The Nikiski plant manufactures a significant part of Agrium’s total fertilizer production.
“It’s an important plant for Agrium,” Richard Downey, Agrium’s director of investor and media relations, told Petroleum News. “It accounts for over 15 percent of our total fertilizer capacity.”
For many years the plant has operated in a classic stranded gas situation, with an excess of gas supply over demand around the Cook Inlet. However, reduced gas supply deliverability from Unocal for the operation of the plant has led to significantly lower operating rates and a great deal of uncertainty about the future operation of the facility. The issue of the reduced deliverability of natural gas from Unocal to Agrium’s Kenai facility is currently subject to binding arbitration, scheduled for May 2004.
“This winter, the plant had to cut back its production rates and operated at 50 percent of capacity due to the current shortfall in Cook Inlet gas deliverability,” Downey said.
Agrium continues to explore all opportunities to secure additional gas supplies for its plant. “If there was a significant find in the region we would be very interested in getting long-term gas supplies, but they would have to be at a reasonable price to compete on world markets,” Downey said.
As well as offering long-term gas contracts, the fertilizer plant creates a steady, year-round demand for gas. Utility gas demand, in contrast, is very cyclical with peak demand occurring in the winter. Exports support local economy Because the Jones Act requires products within the United States to be shipped on U.S. flagged vessels, almost all the products from the Nikiski plant go overseas to places like Korea, Taiwan and Mexico. The company does ship some urea to the Lower 48, but there aren’t any U.S. flagged ammonia ships, Downey said.
In fact Agrium is one of the largest exporters of a value-added product from Alaska, Downey said.
“We were recognized as the 2001 Alaska Exporter of the Year because we’re upgrading raw material into finished product,” Downey said. Agrium accounts for about 7 percent of Alaska’s export market.
And this all makes a major contribution to the Alaska economy. With 230 jobs in the Nikiski plant and the indirect impact of these jobs, Agrium brings about $330 million into Alaska each year.
“We did business with over 380 Alaska businesses last year alone,” Downey said. Making ammonia and urea The core process in the Nikiski plant consists of using a catalyst to react natural gas with nitrogen from the air to form ammonia. The gas provides hydrogen for the ammonia. Ammonia forms the basic building block for all nitrogen fertilizers. At Nikiski, the plant combines some of the ammonia production with carbon dioxide to form urea, a dry granular product that’s easy to ship. In terms of volume and value, urea is the largest traded nitrogen fertilizer in the world, Downey said.
Some of the ammonia and urea from Nikiski supplies industrial processes such as the manufacture of resins and artificial fibers. However, a significant portion of the production ends up as fertilizer. Fertilizer economics Natural gas accounts for about 80 percent of the cost of nitrogen fertilizers, Downey said.
As with any commodity, the price of fertilizer depends on the vagaries of supply and demand. For example, grain prices and the closure or opening of fertilizer plants affect fertilizer prices.
“So fertilizer prices tend to be cyclical in nature,” Downey said. “At the peak of the cycle you might be able to pay slightly more than $2 (for gas) ... but at the bottom of the cycle you are going to have a hard time unless it’s below $2.”
As a result, fertilizer companies build export facilities in parts of the world where there’s stranded gas at competitive prices.
“You look at the Middle East and their gas is less than $1 and that’s true in Russia as well,” Downey said.
And fertilizer production provides a convenient use for the stranded gas in these places.
“Unless you liquefy it, gas is difficult to transport ... so one of the processes is to make it into nitrogen fertilizer and export it around the world,” Downey said. Using the pipelines Agrium thinks that increased access to the gas pipeline systems in the Cook Inlet would help open up additional gas supplies for the Nikiski plant. Mike Palmer, Agrium’s manager of gas development, told Petroleum News that companies new to the Cook Inlet can’t ship gas for industrial use by pipeline from the west side of the Inlet to the Nikiski plant on the east side of the Inlet because the pipelines are proprietary.
“There are some other companies that would like to develop gas on the west side (of the Inlet),” Palmer said. “We’d like to be able to enter into purchasing agreements with them, where we could then buy gas on the west side and transport it across the Inlet to our plant.”
Palmer said that making the Cook Inlet Gas Gathering system into a common carrier pipeline and enabling bi-directional gas flow in one of the pipelines on the west side of the Inlet would enable any company to supply Nikiski with industrial gas directly across the Inlet.
Downey also thinks that opening up the pipeline system would encourage competition for exploration around the Inlet.
“We’d like to have it opened up to allow some new producers to get into the market,” Downey said.
Agrium is leaving no stone unturned in its quest to find economically viable gas in the region, as the company is anxious to see the plant continue to operate.
“It’s been in operation since 1968, and if at all possible, we would like to be in operation for another 35 years,” Downey said.
Editor’s note: Alan Bailey owns Badger Productions in Anchorage, Alaska
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