(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON Northern Plains Nitrogen is developing ambitious plans for a billion-dollar fertiliser plant in North Dakota to extract better value from the state's abundant natural gas.
If launched, the plant would help reverse a long-term decline in U.S. nitrogen-fertiliser output, reflecting the competitive advantages conferred on U.S. fertiliser makers by cheap gas.
While the project and economic risks are high, growing demand for agricultural output and low gas prices should give the state a compelling advantage in nitrogen production.
Increased fertiliser output is likely to be one element in a portfolio of projects to utilize the gas glut, alongside marketing it to consuming centers in the Midwest and raising local electricity production.
"Our mission is to create a profitable investment opportunity to finance, construct and operate a nitrogen-based fertiliser plant in the Northern Plains that will utilize the increasing natural gas output in North Dakota, provide a reliable regional supply of fertiliser, and enable farmer-investors to hedge input costs and reduce dependence on imported fertiliser," Northern Plains explains on its website.
Feasibility studies have been completed. In July 2012, the state Department of Commerce awarded Northern Corn Development Corporation $100,000 to hire accountants, marketers and lawyers to develop a business plan and raise equity for the project.
Financial commitments could be sought as early as February 2013, according to local news reports, and the plant could enter service by 2016 or 2017 ("Nitrogen plant to be located in tri-state area", Wahpeton Daily News, July 20).
PATHWAYS TO MARKET
In 2011, the state produced 156 billion cubic feet of natural gas alongside crude oil from wells drilled into the Bakken formation. But it marketed only 98 billion cubic feet (63 percent), with the remainder flared, according to state records.
In the first half of 2012, production soared to an annual rate of 232 billion cubic feet. The recovery rate improved slightly to 64 percent. But the surging volume of gas produced ensured that the total amount of gas flared soared from an annual rate of 58 billion cubic feet to 88 billion cubic feet.
The state has several options for capturing more value. Finding ways to market the gas will become increasingly important in the decade ahead as oil output declines and the wells yield an increasing proportion of natural gas, according to a study by Bentek ("The Williston Basin: Greasing the Gears for Growth", August 2012).
One option is to market the gas via the interstate pipeline network, selling it into the gas-consuming urban and industrial centers around Chicago and the Upper Midwest.
Bentek concluded there would be sufficient capacity on the transmission network to take all the rising output from the Bakken. North Dakota's gas has locational and other cost advantages which will enable it to compete successfully for space on existing transmission lines, squeezing out more expensive gas from Canada [ID:nL6E8JM3UJ].
Valuable liquids like propane, butane and natural gasoline can be stripped out before the gas is placed into the pipeline and marketed separately, used for home heating, gasoline production and as diluents to mix with heavy bituminous crudes to help them move more easily along pipelines such as the proposed Keystone XL from western Canada to refineries on the U.S. Gulf Coast.
Another option is to burn the gas and turn it into electricity. The sparsely populated states of North and South Dakota, Montana and Wyoming are likely to see only limited growth in power demand and have an abundance of other forms of power, including huge wind resources, some hydro and plentiful coal and lignite.
Power could be exported to neighboring areas or North Dakota and neighboring states could attempt to attract more energy-intensive industries.
NATGAS AND AMMONIA
The final set of options is to make more direct use of the gas in local manufacturing. Among the most attractive options is developing ammonia plants for fertiliser production.
Nitrogen is an essential part of all plant and animal proteins. While a few crops such as peas and soybeans can "fix" nitrogen directly from the air, most, including wheat and corn, rely on nitrogen uptake from the soil from decomposing animal and plant waste or commercially produced fertilizers.
With the exception of Chile's saltpetre deposits, almost all nitrogen-base fertilizers are produced by reacting nitrogen from the air with hydrogen sourced from natural gas to produce ammonia.
Natural gas accounts for 80-90 percent of the total cost. Fertiliser costs and profitability are therefore tied directly to the price of natural gas ("A primer on ammonia, nitrogen fertilizers and natural gas markets" September 2005).
Most nitrogen fertilizers are therefore produced in areas where there is abundant natural gas or a source of stranded gas that cannot be economically transported to market via pipelines.
The world's biggest producers last year were China (41 million metric tonnes by nitrogen content), India (12 million metric tonnes). Russia (11 million metric tonnes) and the United States (8.1 million metric tonnes) followed by Trinidad (5.6 million), Indonesia (4.8 million) and Canada (4.1 million). Other significant producers include Egypt, Ukraine, Qatar and Uzbekistan, according to the U.S. Geological Survey.
In the United States, ammonia was produced by 12 companies at 24 plants in 16 states last year, while four other plants remained idle, according to the Geological Survey. More than half was concentrated in the gas-rich states of Louisiana, Texas and Oklahoma.
Before 2009, the industry experienced a wave of consolidation and plant closures as rising natural gas prices squeezed margins. Between 1999 and 2008, the number of companies in the ammonia business halved, while the number of plants in operation fell from 42 to 22, according to USGS. Plants that remained open operated at reduced rates.
But the drop in gas prices, continued growth in demand for fertiliser as a result of high grain prices, and sharply rising fertiliser prices, have resulted in a renaissance. Several idled plants have been reactivated as producers take advantage of the wide spread between the cost of natural gas inputs and selling prices for ammonia and other nitrogen-based fertilizers.
NEW PLANTS, BIG RISKS
There is plenty of scope to grow domestic ammonia production. Although the United States was the world's fourth-largest producer of fixed nitrogen last year (8.1 million metric tonnes) it still needed to import another 5.8 million metric tonnes to meet domestic demand (an import dependence of 42 percent).
There is only a single nitrogen plant in the northern tier of states along the Canadian border stretching from Idaho east across Montana, the Dakotas to Minnesota, Wisconsin and Michigan. Ironically that plant is also in North Dakota. Dakota Gasification Company produces around 360,000 metric tonnes of ammonia per year from its Great Plains Synfuels Plant (GPSP) as a by-product of gasification of lignite to produce natural gas.
U.S. ammonia production has been shrinking even as demand for nitrogen fertilizers has risen. Between 1992 and 2009, U.S. nitrogen output shrank from 13.4 million metric tonnes to 7.7 million, while world production rose 40 percent from 93 million to 127 million metric tonnes, causing U.S. market share to drop from 14 percent to 6 percent.
It would be surprising if the country did not recapture some of the market share given the plunge in U.S. gas prices. And North Dakota looks ideally placed. It has lots of natural gas, comparatively few other uses for it, and it lies close to the farming heartland.
The main risk is timing. Big ammonia plants are major capital projects that take years to build. Natural gas prices may not always remain low, and fertiliser prices seem unlikely to remain at current elevated levels forever.
Other companies and locations are moving to build new plants, risking overcapacity. Nitrogen-producers will have to compete for gas with pipeline demand from the Midwest which could push Dakota's gas prices higher.
"A fertiliser manufacturing business needs to develop a long-term vision and prepare for times when fertiliser prices decline," according to Northern Plains. "Long-term supply (natural gas) and off-take partners will reduce risk."
Any project will need to be carefully structured. Nevertheless, ammonia will remain an attractive option for using surplus gas, as part of a portfolio including pipeline marketing to the Upper Midwest and more local power production.
(Editing by Catherine Evans)