Spurred by shale-produced, abundant, low-priced natural gas, U.S. fertilizer production is slowly rebounding as a few idled plants are reopening, and plans are being made for new facilities.

It reverses a trend that started in the early 2000s when much of the domestic-fertilizer production was halted and moved overseas as gas prices spiked. There was a fear that U.S. gas production would continue its downward spiral.

“A reliable supply of U.S.-produced gas is now boosting the domestic fertilizer industry’s employment footprint by stimulating new investment in nitrogen-production facilities. This is in stark contrast to the 1999-2007 period when nearly half of U.S. nitrogen-fertilizer production capacity was lost to plant closures related to, among other things, high relative gas costs,” Kathy Mathers, vice president of The Fertilizer Institute (TFI), tells Midstream Business.

“With U.S. gas prices declining substantially during the past few years, the U.S. fertilizer industry is experiencing a renaissance, evidenced by announcements of restarting existing facilities and construction of new plants, which could potentially double capacity and add billions of dollars to the U.S. economy,” Mathers says. According to the Washington- based trade organization that represents the industry, there are 44 fertilizer-production plants in the U.S., including 30 nitrogen-producing plants.

The U.S. nitrogen-fertilizer industry is both energy intensive and trade exposed, with 70% to 90% of the cost of production being attributed to gas, which is used as the principle feedstock and also an energy source, Mathers says.

Self-sufficiency lost

Until about 2000, the U.S. had been nearly self-sufficient in balancing its supply and demand for nitrogen fertilizer. But that changed when gas prices and domestic fertilizers could not compete with producers in areas with less expensive gas. The U.S. is now the world’s largest importer of nitrogen fertilizer. Imports today represent about half of its nitrogen-based fertilizer consumption. Fertilizer is an estimated $15 billion per-year industry in the U.S. alone.

Domestic production of anhydrous ammonia in 2011, the latest year for which completed data is available, was 9.35 million tons, according to the U.S. Geological Survey.

No ammonia plants have been built in the U.S. in more than 20 years. Most operating facilities are 1960s vintage. But in the next three to five years, that is likely to change. Today, there are numerous proposals for new facilities, as well as expansion for existing—and re-commissioning and upgrading—idled facilities.

This phenomenon has caught the attention of the Natural Gas Supply Association (NGSA), the Washingtonbased trade association of gas producers, which is eager for new and expanding markets to support the overabundance of gas resulting from shale plays.

The NGSA recently contracted Energy Ventures Analysis Inc., (EVA) a consulting company based in Arlington, Virginia, to project gas-demand growth from fertilizer production, as well as the entire industrial sector. The study concluded that it expects total industrial demand to increase by 3.6 billion cubic feet (Bcf) per day and that 30% of that increase—or about 1.1 Bcf per day—would come from the fertilizer industry. The lion’s share of the increased demand will occur in 2015 and beyond.

Jeffrey Quigley, senior analyst for EVA, tells Midstream Business that there are about 35 new plants or capacity expansions in the fertilizer industry. EVA says it expects about 15 will eventually get built, with most of the new plants scheduled to come online in 2015 and 2016.

About half the proposed projects are concentrated in Texas and Louisiana, with the others mostly spread over six states—Georgia, Tennessee, Illinois, Iowa, Oklahoma and North Dakota. Illinois and Iowa are engaged in a bidding war offering incentives to try to secure the projects, Quigley adds.

Of the 15 projects, four were restarts of previously mothballed units, and one was an expansion. All were online at year-end 2012. The remaining expansions are spread evenly during the 2013-2015 time period.

State incentives

“States are offering competing incentives, but proximity to demand and gas-supply centers are much more critical. Gulf states have historically been friendly to industry, which is where a large number of the new plants will be located,” Quigley says.

“Fertilizer plants, like other industrial users, have the potential to be very attractive to suppliers because they can offer ratable loads and are not driven by changes in weather. This helps producers lock in industrial users at a price that can guarantee a strong rate of return,” Quigley adds.

“There should be very few limitations to get a robust supply of gas to new fertilizer facilities. This isn’t to say they won't have to build some lateral capacity or expand portions of the lines in the future.”

Like much of the oil and gas industry, there is a large presence of foreign-based companies interested in locating facilities in the U.S. Most notably, Egypt-based Orascom Construction, and Russia-headquartered EuroChem, are among those with announced proposals. A Pakistan-based company has proposed a project in Indiana. Like their U.S.-based competitors, they see cheap feedstock as an indicator of long-term competitive advantage over many other potential sites and wish to have production facilities close to large consumer markets, Quigley says.

Orascom, through its subsidiary The Iowa Fertilizer Co., is the first proposed new facility to break ground, having done so in November 2012, in Wever, Iowa. That $1.4-billion facility, which could produce up to 2 million tons of fertilizer per year, is scheduled to go online in 2015.

For a short time, Orascom’s proposal was touted as the largest announced investment in the state of Iowa. Soon after, CF Industries, headquartered in Deerfield, Illinois— also with financial incentives from the state of Iowa— topped it with an announcement that it would invest $1.7 billion for new facilities at its Port Neal, Iowa, location near Sioux City. The new ammonia and urea facilities are scheduled to come online in 2016.

CF Industries also said it is investing another $2.1 billion to add more production capacity at Donaldsonville, Louisiana. Combined, the Port Neal and Donaldsonville expansions would annually produce about 2.1 million tons of ammonia and upgraded products.

CF Industries says it expects those projects to be among the first new capacity in North America to be in production. The industry refers to Orascom’s project as a greenfield proposal because it is a new facility on a new site. The CF Industries projects are brownfield because they are additional facilities on existing sites.

Long rebound

Despite all of the talk and slew of announced proposed projects, increases in U.S. fertilizer production have been relatively small, Glen Buckley, chief economist and partner with NPK Advisory Services, tells Midstream Business. With a few idled or expanded plants that came online between 2008 and 2011, production increased about 6% from its historic lows. Since then, however, the pace has flattened to about 1.5% and is expected to be only about 1% annually until 2016-2017, when some of the proposed new projects come online.

Incremental growth will be slow because most of the closed facilities were dismantled and equipment sold overseas. New facilities will take at least two-and-a-half years to go from an announced proposal to coming online. Most of the proposed projects are in the $1.6-to $2-billion price range with 20-year financing, so such capital-intensive projects are likely to move slowly as developers consider all factors—not the least of which are regulatory uncertainties. Among those uncertainties are corporate tax structure, energy policy, a possible carbon tax and gas production regulations. Fertilizer market conditions, relative to the price of gas, and evaluating competing proposals also have to be weighed.

Buckley notes the boom-and-bust cycle of gas in the U.S., recalling that when many of the new projects were announced the price was as low as $2.50 per thousand cubic feet (Mcf), and when much production in the U.S. was halted, the price was as high as $11 per Mcf, spiking to as much as $13. As the summer of 2013 wound down, the price was about $3.40 per Mcf.

Buckley cautions against viewing the U.S. as the likely long-term, low-cost gas supplier. Although prices are unpredictable, he thinks that from 2017-2020 when the proposed projects would come online, gas is likely to be in the $5-per-Mcf range, probably much higher than Middle East gas, and certainly Russia is unlikely to allow gas prices to be uncompetitive with U.S. gas prices. Developers only began to look to the U.S. for possible siting of new fertilizer production once they were convinced that the gas supply, spurred by shale production, was sustainable.

He adds that if all of these projects materialized, it would roughly double current fertilizer production. But in Buckley’s opinion only five or six will get built—roughly returning domestic production back to pre-year 2000 levels. Buckley’s estimate of proposals that will materialize is less than half of that of the NGSA. Instead of many new plants, what is more likely is that companies with existing plants will expand capacity, he says.

Gas-transportation infrastructure is a major issue in siting a plant. However, given the extensive pipeline system in the Midwest, it will not be a limiting factor for building capacity within the region, Buckley says. The Midwest is the hub of the nation’s gas pipeline and infrastructure system, where numerous pipelines interconnect, and infrastructure is rapidly being built in North Dakota to accommodate Bakken shale production.

Fertilizer projects have not faced the extensive siting opposition or the not-in-my-backyard syndrome that many industrial proposals have faced. That’s because most of the proposals are in states like Louisiana, which has extensive historic and economic ties to the petroleum industry and petrochemicals, or in agricultural states like Iowa, which views fertilizer as essential for crop production. The opposition has mainly been concerning large government-provided financial incentives, particularly to foreign-based companies, Buckley says.

New Bakken market

Competing proposals have been announced for North Dakota, timed to utilize a planned new interstate pipeline.

MDU Resources’ WBI Energy is planning a 400-mile pipeline, with a scheduled in-service date in 2016, which would stretch from western North Dakota to western Minnesota and tie into the existing Viking Gas Transmission by North Plains Nitrogen would produce 2,200 tons of ammonia per day and consume about 80 MMcf per day, beginning in 2017.

New demand for Bakken production would be welcomed by both gas producers and environmentalists, concerned that currently about 30% of Bakken gas production is flared.

David Goodin, chief executive of MDU Resources, said in June, “it’s exciting to think that the proposed pipeline could provide a new transportation route to bring Bakken-produced gas directly to industrial customers and commercial and residential utility customers in eastern North Dakota. Through interconnecting pipelines, the proposed pipeline could also serve Minnesota, Wisconsin and Midwest U.S. markets.”

Industry Defends Its Safety Record

By Gary Clouser

Renewed interest in increasing U.S. fertilizer production is occurring despite the explosion of a fertilizer operation earlier this year that killed 15 people, injured more than 100 and leveled much of the town of West, Texas, located some 75 miles south of Dallas.

That facility stored and blended anhydrous ammonia. It also contained as much as 270 tons of ammonium nitrate. It was not a production plant, but rather was a retail facility, stresses Kathy Mathers with The Fertilizer Institute. It was one of about 6,000 retail facilities around the country. There is no national list of retail-fertilizer outlets, each state registers and regulates them.

There have been about 16 explosions of ammonium nitrate that led to casualties, worldwide, since 1921. Only six occurred in the U.S. The deadliest accident occurred in 1947 when 581 people were killed after 2,300 tons of ammonium nitrate detonated on a ship docked in the Port of Texas City, Texas.

Overall, Mathers says the fertilizer industry is proud of its safety record and constantly strives to improve it. New, world-class facilities would be built under the strictest environmental and safety rules and best-in-class methods, further increasing safety, she says. The fact that so many states are aggressively pursuing proposed facilities is revealing, Mathers adds.

Anhydrous ammonia contains 82% nitrogen and is the most concentrated nitrogen fertilizer. It must be stored in approved containers in a cool, dry, well-ventilated areas away from heat, direct sunlight, hot metal surfaces and all sources of ignition.

Still, the most recent explosion in Texas has prompted a call from some groups for more federal oversight.

Sen. Barbara Boxer, D-California, chair of the Senate Environment and Public Works Committee, is calling for greater federal oversight of all fertilizer plants. The U.S. Environmental Protection Agency is investigating the possibility of new rules and standards for production as well as ammonium-nitrate fertilizer storage. Storage and retail regulations are currently regulated by the individual states.

Feedstocks And Fertilizer

By Gary Clouser

Natural gas plays an essential role in today’s industrial agriculture system, says The Fertilizer Institute.

Nitrogen fertilizers are made by processing gas for its hydrogen and nitrogen from the air to form ammonia. Approximately 33 million Btu of gas are needed to chemically produce 1 ton of ammonia. This ammonia is used as the feedstock for other nitrogen fertilizers, such as anhydrous ammonium nitrate and urea. These concentrated products may be diluted with water to form a concentrated liquid fertilizer— urea-ammonium-nitrate.

Hydrocarbons are a cheaper source of hydrogen than the more expensive process of electrolysis. Statistics published by the U.S. Geological Survey last year show that 12 U.S. companies had 24 plants in 16 states producing ammonia in 2011. The U.S. produced 8.1 million metric tons in 2011 and imported 5.8 million metric tons—42% of its need.

The majority of the ammonia, 86%, was used for fertilizer. Sixty percent of U.S. ammonia manufacture occurs in Louisiana, Texas and Oklahoma— traditional sources of gas. The U.S. imports about half of the synthetic fertilizer it consumes. Most of the imported nitrogen fertilizer comes from Canada, Russia and Trinidad and Tobago—places with plenty of gas.

Global demand for agricultural nitrogen fertilizer is expected to be 109 million metric tons in 2013, with North America consuming about 13% of that total.

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