ANALYSIS: Some US gas demand at risk as fertilizer growth slows

Knoxville, Tennessee (Platts)--12Aug2013/440 pm EDT/2040 GMT


While the US natural gas industry is expected to benefit from a host of expansions proposed by the fertilizer sector, just how much gas demand will be generated remains an open question as manufacturers cope with their own market woes and rising construction costs.

If all of the proposed new capacity were to be built, it would comprise some 30 projects and equate to about 2 Bcf/d of additional gas demand, according to Platts unit Bentek Energy.

But some makers of ammonia- and nitrogen-based fertilizers are already backing off previous expansion plans, and fewer new projects are being announced, meaning the sector's growth appears to be slowing, said Bentek analyst Darrell Proctor.

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"Cheaper gas, along with thinking that fertilizer demand would rise globally, was a reason many companies decided to expand or build new facilities, hence the number of projects that were announced prior to the summer of 2012," Proctor said.

"After the 2012 drought, uncertainty about weather conditions and the effect of weather on crop production serves as a limiting factor in agricultural purchases of fertilizer. In a global market such as fertilizer, US producers also are subject to weather conditions elsewhere, such as South America," he added.

"I suspect there will be fewer announcements of new projects or expansions after this initial run-up, although there would be room for more if the US fertilizer industry wanted to eliminate any dependence on foreign imports or saw the need for more exports," Proctor said.

"If there are more announcements forthcoming in the Southeast/Gulf region, I would suspect the operator is looking at exporting to the global market. More announcements in the Midcontinent would likely signal an expectation of greater demand in that region and a desire to use more domestic fertilizer," he added.

One of the largest is a $2.1 billion expansion at CF Industries' Donaldsonville, Louisiana, complex. CF plans to add a new plant at the facility by 2016 that would produce about 1.27 million mt/year of ammonia, equating to about 43 Bcf/year, or 118,000 Mcf/d, of potential gas demand starting in 2015.

CF, the largest nitrogen-based fertilizer manufacturer in the US, also plans to add 849,000 mt/year of ammonia capacity at its Port Neal, Iowa, complex at a cost of $1.7 billion, potentially increasing gas demand by some 29 Bcf/year, or 80,000 Mcf/d, beginning in 2016.

CF said last week that construction on the projects should begin in the next few weeks as both had received coveted air permits in July.

"While some of our peers have announced indefinite delays to their nitrogen expansion plans," said CF Chairman Stephen Wilson. "None of them has cited the lack of expected product demand as a reason. We are pleased to be in the vanguard of North American capacity additions."

Wilson added, however, that the US is expected to remain a net importer of nitrogen-based fertilizers for the foreseeable future. "We expect there to continue to be substantial imports of [nitrogen-based fertilizer] at the time we complete our projects, and we actually don't see anything on the horizon that's going to flip that for a number of years."

Another major North American fertilizer company, Agrium, said recently that it was suspending engineering work on its proposed greenfield project in the Midwest. The nearly $3 billion project would have a capacity of 1.8 million mt/year and a projected 2017 startup.

Agrium, citing rising construction costs, said it was focusing its efforts on securing a strategic partner and a gas supply contract for the project, which is expected to use as much as 61 Bcf/year of gas, or 167,000 Mcf/d.

But the firm said last week that it is continuing to explore an expansion at its existing Borger, Texas, facility, which would add about 120,000 mt/year of ammonia capacity, creating the potential for another 4 Bcf/year of gas demand upon startup in late 2015 or early 2016.

Also backing off expansion plans is Norwegian-owned Yara, which said in June that it was postponing a 700,000 mt/year second plant at its Belle Plaine, Saskatchewan complex. The company cited recent construction cost increases in Canada and North America.

"There is also a significant risk of future [nitrogen-based fertilizer] oversupply in North America as new project initiatives are announced, despite deteriorating project profitability," said Yara CEO Jorgen Ole Haslestad, adding that a future expansion at Belle Plaine remains an option for the company when construction costs improve.

Commenting on the long list of fertilizer projects announced in the past couple of years, Agrium Senior Vice President Ron Wilkinson told analysts on the company's earnings call last week that it will likely be the larger, established companies that bring such projects to fruition.

"I think you have to stand back and say, which ones are supported by strong balance sheets, and which ones are promoters out there with a great idea," Wilkinson said. "We do think a number of these will get built, and you can just look at the big players that have made announcements and are progressing projects. But we don't see the vast majority, the smaller ones, progressing."

An analyst who follows the fertilizer industry said the majority of ammonia- or nitrogen-based facilities to be built will likely be bolt-ons to existing facilities, such as the ones proposed by CF and Agrium.

"The total nitrogen market [in North America] is mostly flat," the analyst said, "so I don't see a reason why it will grow substantially. So what's the target market? You have to assume that it will be exports."

"If we build all this capacity and we can't keep imports out, you're really going to have a bloodbath," he said. "You have to think these companies are questioning that, if they build what turns into a 'surplus' plant, what will that do to my netback?"

--Stephanie Seay, stephanie.seay@platts.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@platts.com

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