Nitrogen Plans Altered

3 Sep 2015

By Russ Quinn
DTN Staff Reporter

OMAHA (DTN) -- Two years ago the fertilizer world was abuzz with promise of new U.S. nitrogen plants and plant expansions. As many as 34 new plants or major expansions were on the books for the U.S. and Canada, according to DTN reporting in July 2013.

Even at that time fertilizer market experts suggested most of those plans would never make the jump from paper and ink to dirt and steel.

Those predictions appear to have been on the mark, as progress on those plans has been slight. One of the most anticipated new facilities, by farm cooperative CHS, Inc., was shelved this August. CHS announced mid-month that rather than spending up to $3.3 billion on a new nitrogen production facility in Spiritwood, North Dakota, it instead would invest $2.8 billion in current fertilizer producer CF Holdings, Inc.

The investment was not in CF stock, but rather in guaranteed access to N supplies. Under the 80-year agreement, CHS has the right to purchase 1.7 million tons of urea ammonium nitrogen (UAN) and urea annually. That amounts to 10% of CF's expected annual nitrogen production, following that company's kickoff of its new production facility in Port Neal, Iowa.

"Essentially, we're buying CF's new production capabilities, but instead of having to ship it out of one place, we have access to product at any of CF's production facilities,' said Carl Casale, CEO of CHS, in an interview with DTN.

Earlier in August CF announced it would buy OCI's nitrogen plants near Wever, Iowa, and in Geleen, The Netherlands, and OCI's portion of an ammonia plant in Beaumont, Texas. That deal was struck in the wake of CF's failure to merge with Norway-based Yara International. The OCI purchase makes CF the largest publically traded N producer and adds capacity to CF facilities in Louisiana and Alberta, plus the new N plant in Port Neal.

In addition to capacity, the Spiritwood CHS plant would have added more of a competitive element to the world's increasingly concentrated nitrogen production. Casale countered the competition argument by saying the investment into CF had a number of advantages for his cooperative's owner/customers.

"CF was bringing on a little more than our planned capacity (at Spiritwood), and our owners and customers will have access to that in February 2016 instead of four years from now," Casale said during a recent CHS media event. "We spent $500 million less, and the returns are about equal. Plus, we have someone running a nitrogen facility that does that full time for a living.

"Not that we couldn't have done that, but we'll have 10% of the output, so somebody else is selling 90% of that output. So they're nine times more motivated to make sure the plants are operated well. We like that model."

CHS was also worried about water supplies for Spiritwood. Water is the second largest input in ammonia production, after natural gas. Casale said that while state and local water entities worked hard to create water supply assurances, all tendered agreements included an exception for prolonged drought.

While the risk of a water cutoff had low probability, "it was not zero," Casale said. "If you're going to spend $3.3 billion, you want zero."

Casale said CHS still will import more than half of its nitrogen needs after the deal with CF begins. They never planned to produce 100% of the nitrogen needs here, he said.

OTHER N PRODUCERS

A second planned North Dakota nitrogen plant, Northern Plains Nitrogen, continues to move ahead. While the CHS-CF announcement did create stir in the fertilizer industry, "It hasn't changed any of our plans," Don Pottinger, CEO of Northern Plains, told DTN. "We are continuing on as planned."

The company was created by farmers it will serve and their roots are in research sponsored by the North Dakota Corn Growers Association, according to their website. The plan is to build a 2,400 ton a day ammonia plant near Grand Forks, North Dakota.

Increasing construction costs were one of the issues CHS cited for deciding against building its own plant. The cooperative has approximately $100 million invested "in a big field that has some roads," Casale said.

Pottinger agreed constructing a new facility is expensive, and ever-increasing construction costs are a concern. The NPN facility is expected to cost $2 billion.

The advantage of the new plant, versus investing in expanding an additional plant, is that while a new plant takes more capital costs, it will be more efficient to operate, which will lower costs over time. Pottinger compared the advantage to driving a 1985 model car. While you can keep it running, at some point it is just not worth it anymore and a new car would be much more efficient.

NPN could benefit from the CHS decision to stop building Spiritwood. Pottinger said manpower would have been a major obstacle to overcome if both companies had decided on building. Roughly 1,500 workers would have been needed to build each plant. Now the demand for local construction workers would be lessened some, he said.

Finding skilled workers for both plants also could have been an issue, Pottinger said.

Pottinger said NPN has completed the founders and seed capital round of funding, acquired 320 acres of land in northwest Grand Forks and water and air permits have been issued. The public had a period of time to comment on the project and no one stepped up to complain about it, he said.

With permits in place, the company is now focusing attention on financing the facility. While he could not comment directly on the profile of possible financing partners, he did say the company has been talking to "interested and capable players.

"North Dakota has the highest price for nitrogen in the entire country as we are at the end of the line so to speak," Pottinger said. "Growers and retailers in the Northern Plains need this plant for a local, dependable source of nitrogen."

CHS officials had earlier said the need for fertilizer in the region, plus access to natural gas resources in that state, was part of the allure of building in North Dakota. Casale said the CF investment, however, was in part a better deal for the whole of CHS owners and customers.

"We can now pull (nitrogen fertilizer) from anywhere in the CF system, from Louisiana to Medicine Hat (Canada) to Port Neal. We can ship by truck, rail and barge. So our logistics are much more efficient than had we built a plant in North Dakota." Casale also said the CF agreement did not preclude still building in Spiritwood, or elsewhere.

"We still own the engineering plans, with a design that was tried and true. So if we chose to, we could still build a plant. We could do that on our own, or in partnership." Obviously, Casale said, given the size of the current deal the two companies feel comfortable with each other. "If we decide to expand in the future it's likely the first conversation would be with CF or someone like that."

Editor-in-chief Greg Horstmeier contributed information to this article.

http://www.chsinc.com/…

Russ Quinn can be reached at [email protected]

(GH/CZ)