The Alchemy Of Natural Gas

In the Dark Ages, long before the birth of the science known today as chemistry, alchemists strove to transform base metals into gold.

A modern day economic alchemy is under way in North America as billions of dollars are being allocated to a variety of new industrial facilities. However, unlike the Dark-Age effort of alchemy, this transformation is founded on technological innovation and science rather than magic and superstition.

Those new and expanded industrial plants will make the most of the U.S. shale gas revolution. Consider that impact on just two industries: fertilizer and steel.

Knowledge is power

Most Americans might be aware of only two types of natural gas demand: home heating and electricity generation. Their understanding of what gas can be transformed into—and what it helps produce beyond heat and light—is not very deep. But even there the impact of the shale revolution has been major.

In 2012, home-heating costs for low-income households were $10 billion less than the average cost between 2003-2008. However, low-income households were not the only benefactors of the shale revolution. The U.S. economy realized a $110 billion total savings in 2012 when combined with all residential, commercial and industrial consumers of gas.

The shale gas revolution did more than cut expenses for U.S. consumers. It has also saved the U.S. from higher particulate air pollution and carbon dioxide (CO2) emissions.

Although the U.S. was not a signatory to the Kyoto Treaty and its environmental efforts, the U.S. is the first major industrialized country to meet the treaty’s international CO2 reduction targets set forth nearly two decades ago. The reason? During the past 20 years, U.S. electric utilities have gradually switched from coal-fired to gas-fired electricity generation. (Canada signed the treaty but later withdrew from it.)

That fuel switch was made possible by new, abundant, affordable reserves of shale gas. In 2008, gas production from shale formations accounted for 4% of total U.S. gas production. In 2012, it accounted for more than 40% and shale gas production continues to grow.

In 2008, experts projected that the U.S. would need foreign producers to provide 20% of U.S. gas, and it would be delivered to U.S. ports via liquefied natural gas (LNG) tankers. Instead in the past five years, the combination of hydraulic fracturing and horizontal drilling has extinguished that LNG import forecast and simultaneously changed the world’s energy dynamics. The one-two combination of horizontal drilling and hydraulic fracturing is perhaps the greatest technology-driven energy breakthrough since scientists split the atom.

However, there is far more to the U.S. shale gas story than lower home-heating costs and clean electricity.

Industrial transformation

The world’s industrialists are undertaking new efforts to transform U.S. shale gas into fertilizer and steel, as well as plastics, glass, cement, explosives and a host of other products, all made in the U.S.

According to a Dow Chemical Co. study released in May 2013, the manufacturing industry is expected to invest more than $110 billion in new projects in the U.S. in coming years.

New and expanded fertilizer and chemical plants could account for more than $80 billion of that total investment. The activity could mean as much as 7 billion cubic feet (Bcf) per day of new demand for U.S. gas by 2018.

Shale gas marks a significant turnaround for the U.S. fertilizer industry, Dr. Harry Vroomen, vice president of economic services for The Fertilizer Institute (TFI), tells Midstream Business.

“As the major cost component of nitrogen fertilizer production, increasing domestic natural gas prices beginning in mid-2000 were the largest factor leading to a 40% decline in U.S. nitrogen production capacity by 2008. Similarly, lower domestic natural gas prices beginning in 2009—resulting from the shale gas revolution— will result in the largest expansion of the domestic nitrogen industry in over 40 years,” Vroomen says.

Fertilizer breakthrough

What is the most important scientific discovery ever made?

No, it’s not the combination of horizontal drilling and hydraulic fracturing. The top prize may go to man-made nitrogen fertilizer—the synthesis of anhydrous ammonia.

In the fall of 1898, Sir William Crooke, president of the British Academy of Sciences, issued a challenge to his colleagues. He was concerned that “England and all civilized nations stand in deadly peril.” Crooke went on to explain that if nothing were done by the 1930s, millions would die of starvation.

The problem? As the world’s population grew there was not enough natural fertilizer for crop production. A synthetic fertilizer would have to be invented.

Within 15 years, two German chemists answered Cooke’s challenge by inventing a technique to synthesize ammonia. It was the agronomists’ Holy Grail— manmade fertilizer. In his recent book, “The Alchemy of Air,” author Thomas Hager tells the story of that world-changing discovery, known as the Haber-Bosch process, made by Nobel Prize winners Fritz Haber and Carl Bosch.

According to Hager, “if we all ate simple vegetarian diets and farmed every acre of arable land as wisely as possible using the best techniques of the late 1800s, the earth could support a population of around 4 billion people. In theory, the other 2 billion-plus inhabitants should be starving, the natural result of population outstripping food supply, as doomsayers from Thomas Malthus to Paul Ehrlich have long predicted.” Hager goes on to say, “we should thank them [Haber and Bosch] every time we take a bite of food.”

Dr. Vaclav Smil of the University of Manitoba agrees with Hager on the historical significance of the Haber-Bosch discovery. Dr. Smil writes in his book, “Enriching the Earth, 2001” that “the Haber-Bosch process has been of greater fundamental importance to the modern world than the airplane, nuclear energy, space flight or television. The expansion of the world’s population from 1.6 billion people in 1900 to today’s 6 billion would not have been possible without the synthesis of ammonia.”

The Haber-Bosch process is responsible for 99% of the world’s nitrogen production today. For perspective, global ammonia production has increased by a multitude of 57 times since 1945.

Water and gas

One hundred years ago, Haber and Bosch relied on water to produce hydrogen. A much less expensive method is used now and the vast majority of applications rely on gas, not water, as a feedstock.

The dire forecasts of Malthus and Ehrlich’s for humanity now appear as accurate as M. King Hubbert’s forecast for peak oil. Evidently, none of the doomsayers considered the impact of human ingenuity and scientific breakthroughs on food and energy production. The human value of those technological breakthroughs is underscored by an expected population growth of 3 billion people in the next 50 years.

It’s no stretch of the truth to assert that hydraulic fracturing and horizontal drilling will help feed the world. The significance and the connection between fracing, fertilizer and food is hard to ignore. Abundant gas will inevitably translate to lower-cost fertilizer and, as a result, high-quality, affordable food.

Gas for food

The impact of the U.S. shale revolution on the domestic fertilizer industry can best be understood by comparing the production-cost advantage that U.S. fertilizer manufacturers enjoy now versus ammonia produced overseas. That U.S. cost-advantage correlates directly to the cost of gas, the key raw material for nitrogen production.

At current gas prices, ammonia can be manufactured in the U.S. for approximately $150 per ton. The most liquid, publicly reported index price for world ammonia prices is the CFR Tampa Ammonia Index. Its price for ammonia is currently $380 ton. That means that U.S. fertilizer producers currently enjoy a profit margin averaging approximately $230 per ton, compared to a loss just a few years ago.

The five-year NYMEX gas price forecast is $4.23 per million Btu (MMBtu) at the end of 2013. That five-year U.S. gas price is approximately one-quarter of the price forecast for LNG deliveries to Asia and one-third the price forecast for Europe during the same five-year period.

It’s no wonder that worldwide fertilizer manufacturers have purchased existing brownfield and new, or greenfield, U.S. industrial real estate in an effort to stay competitive.

There are at least 30 nitrogen plants in some stage of planning, expansion or construction in the U.S. and Canada.

Dependent upon the efficiency of an ammonia plant—newer plants are more efficient than the older plants—every short ton of ammonia that is produced requires anywhere between 28.5 MMBtu to 35 MMBtu per ton of gas feedstock.

New gas demand

If 70% of the plant capacity noted in the nearby table is built, the demand side of the gas supply-and-demand equation could see an additional 2 Bcf per day that midstream operators will need to move to end-use customers.

Historically, nitrogen production was limited to the gas-producing states of Louisiana and Texas. That is no longer the case, thanks to the geography of shale gas. Fertilizer plants are being proposed though out the Midwest, in some cases much closer to agricultural demand.

The TFI’s “Fertilizer 101 Report,” confirms Dr. Vroomen’s number that “over 40% of ammonia plant capacity in the United States closed down over the last 10 years, in large part because rising natural gas prices have made the plants uneconomical to operate.”

Paul Cicio, president of the Industrial Energy Consumers of America, magnifies the TFI report and includes all manufacturing job losses when he cites U.S. Bureau of Labor Statistics Reports. Cicio states, “natural gas prices significantly contributed to 5.2 million manufacturing jobs (30.6%) lost. That’s an average rate of 433,333 jobs lost per year.”

Industrial demand for gas correlates all too closely with Cicio’s numbers. From peak to trough, U.S. industrial demand for gas fell 6 Bcf per day, from 23.5 Bcf per day in 1997 to approximately 17 Bcf per day in 2009.

But there is good news. Since 2010, there has been an annual average of 461,000 jobs created in the manufacturing sector and industrial demand for gas has increased more than 2 Bcf per day. The U.S. Energy Information Administration forecasts a 14.7% increase in gas demand in the manufacturing sector from 2013 through 2023.

Imports spike

U.S. fertilizer plant closures resulted in a spike of ammonia imports from lower-cost foreign suppliers who could rely on a cheaper gas.

The cost of imported fertilizer into the U.S. grew five-fold from 2002 to 2008, from $1 billion a year to $5 billion. American farmers, and in turn American consumers, paid the bill. The high cost of gas reverberated up and down the food chain.

Other countries shared the problem of higher food costs—especially those countries that relied on food imports from the U.S. TFI states that “in 2006, 22% of U.S. agricultural commodity production was exported. In 2008, the value of U.S. agricultural exports was $115 billion (compared to imports of $80 billion, for a trade balance of $35 billion). Higher food costs in the U.S. translate to higher export food costs for other countries.

Shale believers

According to the American Chemistry Council (ACC), “more than 70% of new capital investments in the chemical industry will be invested in the Gulf Coast region of the U.S.” That was the ACC’s conclusion after studying the investment of “$84.4 billion in 126 projects connected to the increased availability of shale gas in the U.S.” According to the ACC, “more than 50% of that investment was made by foreign corporations.”

That’s not an alchemy-like effort. That is real 21st century chemistry at work, meeting the demand of a reborn economy or perhaps, as most of the gas industry believes, driving a new economy.

Just three years ago, manufacturing was in a steep decline in Louisiana.

According to a June 2013, article in the “Greater Baton Rouge Business Report,” the area from Baton Rouge to New Orleans is anticipating a minimum “$50 billion boom” in manufacturing.

According to the publication’s managing editor, Penny Font, “that’s the minimum that national and international firms are expected to spend in the next three to four years, erecting dozens of new manufacturing facilities or expanding existing ones, largely along the Mississippi River, from Baton Rouge to New Orleans and along Lake Charles.”

Several major petrochemical players have recently reopened plants, or planned new ones, along the Mississippi.

Geismar reopening

PotashCorp, one of the largest fertilizer producers in the world, recently re-opened its Geismar, Louisiana, ammonia facility, one of the many new projects along a relatively short stretch of the Mississippi River.

In 2003, the Saskatoon, Saskatchewan-based firm was forced to mothball the Geismar plant due to “high natural gas prices,” it said. PotashCorp’s Geismar ammonia facility was another demand-destruction victim in the high gas price years before the shale revolution took hold.

Now, PotashCorp has invested $260 million to bring the idled plant back into operation.

During the 10 years that it was closed, PotashCorp relied on imported ammonia supplies from its Trinidad ammonia facility.

For at least a decade, the island state of Trinidad and Tobago had a captive gas supply that, from a pricing standpoint, was impossible for most foreign gas suppliers to compete against. Trinidad has long been considered a bastion of cheap gas prices.

Earlier this year, a PotashCorp spokesperson said that it was now economically feasible to re-open the Geismar plant because of the continuing decline in U.S. gas prices.

The PotashCorp Geismar facility is working at its 1,500 short tons per day of ammonia production capacity, with an annual targeted capacity of 450,000 tons. That level of activity equates to gas demand of approximately 50,000 MMBtu per day or 15 Bcf per year.

Competitive gas prices

Clearly, U.S. shale gas prices have become competitive enough with Trinidad gas prices, allowing the Potash- Corp re-opening of Geismar—a development that no one considered possible just five years ago.

Nearby, Incitec Pivot Ltd. (IPL) is undertaking a big expansion project. In April 2013, IPL announced that it had “approved an $850 million capital expenditure on the construction of a world-scale, 800,000 metric-tonnesper- annum ammonia manufacturing plant.” Production is planned to commence in third-quarter2016.

IPL, based in Melbourne, Australia, announced that “100% of the plant’s volume was committed to off-take arrangements from day one of production, priced on a [CFR] Tampa [Ammonia] index.”

“Gas is a critical feedstock for our business, particularly in terms of of its overall profitability,” Jamie Rintel, IPL's president of strategy and business development, tells Midstream Business. “As such, being able to access a competitively priced and secure supply of gas with supporting infrastructure was a critical factor in our investment decision to build a world-scale ammonia plant in the U.S.”

IPL, through its U.S. business subsidiary Dyno Nobel, entered into a contract with KBR, a global engineering and construction company. KBR will construct the plant and also license its ammonia technology to Dyno Nobel, North America’s largest manufacturer of industrial explosives.

More than fertilizer

The German chemists Haber and Bosch would be proud. Dyno Nobel’s announcement came on the 100th anniversary of the discovery of their Haber-Bosch process.

Haber and Bosch did more than just create a method to produce manmade ammonia. The process has many other applications and during World War I synthetic ammonia was used for the production of nitric acid, a precursor to ammonium nitrate— the feedstock for explosives, or what was known back then as munitions.

The Haber-Bosch process was extremely important to the German war effort in World Wars I and II.

As Thomas Hager adds in his book, “The Haber-Bosch process was also used to make the gunpowder and explosives that killed millions during the two world wars. Both men were vilified during their lives; both, disillusioned and disgraced, died tragically.”

Dyno Nobel’s plant at Geismar will produce ammonium nitrate that is a feedstock for explosives. Half of all industrial explosives consumed in North America are used in mining coal. It is hard not to point out the irony here. Inexpensive gas is displacing coal in U.S. electric generation. Ammonium nitrate manufacturers appreciate the inexpensive feedstock, that same feedstock, gas, is reducing the demand for coal, even while the former aids in the production of the latter.

Steel’s rebirth

When it comes to the U.S. industrial renaissance, the alchemy of turning gas into fertilizer is not the only story of transformation. Much like the alchemists of old, the steel industry is planning to turn—not base metal into gold—but a base metal, iron, into steel. At least five new steel mills are in the planning stages that would employ the direct-reduced iron (DRI) process rather than conventional steelmaking.

DRI is an alternative, catalytic procedure in which steel is produced by reacting iron ore (generally 65% to 70% iron) at a high temperature with hydrogen, carbon monoxide and methane produced from gas (a process called reduction) but below iron’s melting point (2,795°F). Since the reduction process consumes prodigious amounts of gas, it is economically viable only where gas is abundant and relatively cheap.

Steel manufacturing using the DRI production method in the U.S. had been on a steady decline since 2000, when DRI production amounted to 1.56 million tons. In 2008, it was just 260,000 tons. The DRI production method was another victim of high gas prices. Those few facilities that did exist in the U.S. were either demolished or dismantled and moved to other countries, such as Trinidad, in search of low gas prices.

Nucor Corp. plans one of those new DRI plants. Nucor is completing the first phase of its DRI plant downstream of Geismar in St. James Parish.

Steelmaking emissions

It came as quite a surprise when Nucor announced in the fall of 2010 that it planned to base its iron-making plant in Louisiana on the DRI method rather than a blast furnace as initially anticipated. Nucor’s reasoning was initially stated to be an effort to lower its carbon footprint.

A gas-fired DRI process creates one-third of the CO2 that a blast furnace would. However at that time, unbeknownst to anyone outside its executive management group, they were quietly working on an extremely creative, 20-year supply of gas. That supply deal would eliminate the historic risk of volatile gas pricing.

Nucor’s initial plant investment of $750 million could grow, if all phases of the project are pursued, to $3 billion, ultimately employing more than 1,000 people. In their effort to do so, Nucor, a Charlotte, North Carolina- based steelmaker, wins the prize for the most creative gas supply solution.

In the fall of 2012, analysts were surprised by an announcement by Nucor and Encana Corp., the Canadian based gas producer. According to Encana’s website, “Nucor is to earn a 50% working interest in certain gas wells to be drilled over the next 20 years in the Piceance basin in Colorado. Nucor has agreed to pay its share of well costs plus a portion attributable to Encana’s interest.”

According to an Encana announcement, Nucor and Encana entered into a long-term supply agreement. That announcement described a follow-up agreement to a smaller gas-drilling deal established with Nucor in 2010: “These two agreements with one of America’s largest steel manufacturers signify a new era of longterm partnerships between the natural gas industry and industrial consumers that provide large manufacturers with economic and environmental incentive to expand operations in the United States to take advantage of abundant and secure natural gas resources.”

Jeff Wojahn, Encana’s president of USA Operations stated in a November 2012 announcement, “this is a unique partnership that has been designed to support Nucor’s increased use of gas for their facilities such as their direct reduced iron facility currently under construction in Convent, Louisiana.”

Nucor deserves credit for the creativity of this transaction. Unlike other manufacturers that are concerned about the price impact of U.S. LNG exports, Nucor tied up a physical supply of gas.

Seeking dry gas

Since 2010, 70% of the drilling rigs in the U.S. that were specifically targeting dry gas reserves (with no natural gas liquids present) have been parked. That unfortunate reality is very obvious in western Colorado’s Piceance basin. In 2008, there were more than 100 drilling rigs exploring and developing gas reserves in the Piceance. Today there are 11. Nearly half of those active drilling rigs are related to the Encana-Nucor 20-year gas supply agreement.

Nucor Corp.’s Louisiana facility, if all phases are built out, will cost $1.4 billion. The value of the gas that will emanate from Nucor’s 20-year drilling commitment to Encana is more than twice that number. It appears that the 20-year supply agreement, where Nucor supplies drilling dollars each consecutive year, may have been a way to avoid Nucor’s counterparty credit concerns with potential suppliers.

The value of the gas committed to this transaction during 20 years is in excess of $3 billion. There are only a handful of producers in the U.S. that would consider committing that type of transaction and the necessary letters of credit to their book of business. That market reality may have influenced the nature of Nucor’s drilling deal commitment with Encana.

The transaction between Nucor and Encana is indeed unique. It could serve as a model for long-term gas deal structures for other U.S. manufacturers.

Nucor’s transaction with Encana seems even more prescient given Encana’s announcement in November 2013 that it would cut 20% of its 4,000-plus workforce by year’s end in an effort to create a “sustainable business though commodity price cycles” by shifting away from dry gas to oil, natural gas liquids and condensates. Encana plans to reduce its North American focus from 30 areas to its five best resource areas.

Nucor has created a relationship with Encana that will survive any gas producer’s inclination to avoid drilling for dry gas reserves.

Imports to exports

While there is much debate over U.S. LNG exports, it appears that the current 50% chemical import position for the U.S. will soon reverse itself to exports, given the billions of dollars being invested in factories and plants here. As one 35-year chemical industry expert said, “there is no opportunity for which we cannot over-compensate.” But if the U.S. chemical industry overbuilds, won’t those products be exported?

What does the future hold? It appears that the shale gas revolution is here to stay. Will it spread to other countries? Those foreign chemical manufacturers that are investing in U.S. facilities have obviously made their bet on that possibility.

Some chemical industry experts project that the U.S. will be in a chemical export position within five years. Perhaps that is why the Mississippi River and the Gulf Coast play such a huge role in chemical plant expansion.

Even with aggressive U.S. LNG exports, any rise in gas prices is likely to cause an immediate response in the domestic gas industry’s productivity. Essentially, we have a built-in, North American ceiling. But where does that ceiling price occur?

One final question: Will the combination of hydraulic fracturing and horizontal drilling one day be considered with the same reverence as the Haber-Bosch process and its impact on humanity? Considering the impact that the shale gas revolution has already had in the last few years, it might not be a surprise.

Whatever the answers to these speculative questions, we know with certainty that the world’s ever-growing population will have to be fed, and gas will play a more critical role in addressing that need.

The Haber-Bosch Process

By John Harpole

More than half the fertilizer applied in the U.S. and around the world is nitrogen, according to The Fertilizer Institute. Anhydrous ammonia is the most economical and efficient source of nitrogen for most farmers. It can be used directly as a fertilizer, as is common in the U.S. where it accounts for more than 25% of total nitrogen use, and is also the feedstock for other common nitrogen and phosphate fertilizer materials.

The rest of the world relies primarily on urea, which accounts for more than 60% of total nitrogen use.

Ammonia is made by reacting nitrogen and hydrogen gas in the Haber-Bosch industrial process. Basically, natural gas is compressed to 400-500 pounds per square inch. The highly compressed gas is mixed with high-temperature, high-pressure steam. This mixture is heated to some 1,600°F in a reaction furnace and the resulting chemical reaction forms hydrogen gas and carbon monoxide.

These are mixed with compressed air in a secondary chamber. The carbon monoxide is converted to carbon dioxide and then removed. The final steps of the process yield anhydrous ammonia.

Is Shale Gas For Real?

By John Harpole

Two years ago I was asked to give the natural gas update to a large annual gathering of individuals interested in the North American fertilizer market. The Fertilizer Outlook and Technology Conference, a session organized by The Fertilizer Institute, was a chance for industry analysts to share information on demand and best practices.

At the time, I thought the best way to describe the future relationship between the domestic U.S. gas industry and the fertilizer industry was to create a slide entitled, “This Time It’s for Real.” I inserted the iconic Charles Schultz cartoon image of Lucy holding a football waiting for Charlie Brown to try to kick it—just before she pulls it away and allows him to fall flat on his back.

It was my first PowerPoint slide in a deck of 30 slides, all meant to convey the message that the U.S. shale gas revolution is real and is here to stay. I aimed to convince them that the term “finite,” used in the Wikipedia definition of gas, should be changed to “super abundant.”

I opened my 45-minute presentation with it and no one laughed.

Like Charlie Brown in the cartoon, I had fallen flat. I obviously struck a nerve. At that time, I didn’t appreciate what the U.S. fertilizer industry had endured in the prior 10 years. The volatility of U.S. gas prices from 2002 to 2008 forced the closure of a large number of U.S. fertilizer manufacturing facilities.

The historic relationship between the U.S. gas industry and the U.S. nitrogenous fertilizer manufacturing industry has been difficult.