While US natural gas prices below $3/MMBtu seem enough to entice any industrial user to expand their use of the fuel, for US fertilizer manufacturers the equation is not quite that simple.
Analysts said recently that a host of obstacles, such as permitting and long-term financial risk, would make construction of a new site untenable, but that hasn't stopped the industry from resuscitating mothballed facilities or mulling expansions.
Natural gas typically represents 70% to 90% of the production cost for anhydrous ammonia -- the key building block for nitrogen-based fertilizers, according to The Fertilizer Institute.
Several manufacturers have been coaxed into restarting plants and studying expansion, both by the shale boom and its resulting low gas prices, as well as higher demand and prices for chemical fertilizers.
"With margins just so good, why not do it?" said Ryan Sherwood, a commodity futures broker at FCStone's Fertilizer Group. "Some companies have been tinkering around the edges. It's been very interesting to see just how much fertilizer is picking up."
That's a sharp reversal from a decade ago, when high gas prices forced multiple plant closures.
Between 1999 and 2007, 27 ammonia plants shut in the US, representing more than 40% of capacity, said Harry Vroomen, vice president of economic services at TFI. Many of those facilities were dismantled, he noted.
But over the past couple of years, several facilities have returned to production and at least one large firm said it is considering expansions that could equate to the capacity of a new plant.
Oklahoma-based LSB Industries reopened its Pryor, Oklahoma, ammonia facility in 2009. The plant had historical capacity of some 366,000 tons/year, consuming roughly 12.8 Bcf/year if at full capacity, according to the industry standard of 35 MMBtu of gas for every ton of ammonia.
Two smaller units at Pryor await restart, said LSB CFO Tony Shelby. The restart of those units, with projected capacity of 60,000 tons/year, await regulatory approval and the company has yet to set a target date for restart, he added.
Current natural gas spot prices "are very favorable," Shelby said. "However, for the longer term, the capital investment required to add additional capacity would require extensive analysis and a long-term gas purchase agreement."
Orascom Construction, or OCI, has reopened an ammonia plant in Beaumont, Texas, which produces some 250,000 tons/year, using roughly 8.75 Bcf of gas annually. The plant will consume more natural gas when it begins producing methanol, expected to happen at the end of the first quarter, OCI said.
"Low natural gas prices in the US were a deciding factor in the company's decision to acquire and rehabilitate the plant," said a spokeswoman for Egypt-based OCI.
PCS Corporation is in the process of bringing back its plant in Geismar, Louisiana, with an online target in the third quarter this year. The plant historically produced about 525,000 tons/year of ammonia, which would equate to about 18 Bcf/year of gas demand. It is also considering expansions at its Lima, Ohio, and Augusta, Georgia, plants, the company said Thursday on a conference call with analysts.
In announcing its fourth-quarter earnings Thursday, Saskatchewan-based PCS said its total average cost of gas used for production, including hedges, rose 13% to $6.35/MMBtu during the quarter. Much of the increase was due to rising gas costs in Trinidad, where it operates a major fertilizer complex, and where gas costs are indexed to Tampa, Florida, ammonia prices, which have been trending higher, PCS explained. The company said its overall earnings in the quarter were up 39% from a year ago.
The company noted during the call that it is currently negotiating a new gas supply contract in Trinidad, and that those talks would "have to reflect what's going on in North America" in terms of pricing.
CF Industries has brought portions of its giant Donaldsonville, Louisiana, complex back to capacity in the past two years, where, along with a facility it purchased as part of an acquisition, production could reach more than 3 million tons/year of ammonia. The complex would have the potential to consume as much as 105 Bcf annually at that rate.
The company told investors in November that it expects to spend $50 million to $60 million to complete an expansion at the Donaldsonville plant that it bought as part of its acquisition of Terra Industries. The project is expected to increase ammonia capacity by about 100,000 tons/year, equating to some 3.5 Bcf/year of gas demand.
CF said in August that it intends to invest $1 billion to $1.5 billion over the next four years to expand its capacity for ammonia and other products. The company said last week that it is still conducting front-end engineering and design studies for several projects.
Permitting "has gotten a little worse" for such facilities, said TFI's Vroomen. "When you are considering investing about $1 billion for a new plant, you always worry about risk."
Outside gas prices, "the biggest issues for any project are permitting/environmental, which, as you know, rear their ugly heads nationally, state and local, ergo obviously varying by locale," said a fertilizer industry consultant.
In the end, "sure, there's a potential for a few more plants to open, particularly with low gas prices and solid nitrogen prices," Vroomen said. "But you won't see 20 of those plants open again, just a handful perhaps. You just don't go in and turn the lights back on."
