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Agrium pursues new gas supplies for Nikiski plant

Posted: Tuesday, February 25, 2003

One of the largest cogs in the Kenai Peninsula's economy got a major wrench in its works last November that threatened to throw its productivity, and quite possibly the welfare of the surrounding community, out of whack as a legal dispute over natural gas ensued between industrial giants.

The threat in question has loomed over the Kenai Agrium plant, located north of Kenai in Nikiski, since July when oil and gas giant Unocal announced it would curtail natural gas delivery to the nitrogen fertilizer operation.

The cut meant that the plant, which combines natural gas with water and air to produce anhydrous ammonia and urea, would have to operate at barely three-quarters of its regular capacity.

In order to survive, the company will have to either make cuts or find more gas. Agrium Kenai Nitrogen Operations General Manager Mike Nugent said there already was a team addressing ways to maximize efficiency, and he said the door is open for whatever is deemed necessary.

"We won't go through this and say everything is going to be status quo," he said. "There will be some layoffs. We have to look at what is best for us going forward."

Nugent said he had no idea what the assessment team would determine, but said the group would return its evaluation by the end of the second quarter.

Agrium spokesperson Lisa Parker said the company will weather the storm as short- and long-term solutions are sought.

"Agrium is very aggressively involved in finding new gas supplies," she said. "The company knew that as of 2009 we would be looking for more gas.

"Unfortunately, we're looking a lot sooner."

Operations at the Nikiski plant have been temporarily cut before in 1986 and 1987, and again in 1997. Agrium purchased the plant from Unocal in September 2000. As part of the sale, Unocal entered into a contract to deliver gas to Agrium at a comparatively low price for 10 years.

But prices for urea have dipped in recent years, dropping from a high of nearly $300 per ton in 1996 to about $225 in 2001, according to figures from Nitrogen Use Efficiency, an agricultural collaboration including Oklahoma State University, NTech Industries Inc., and the International Maize and Wheat Improvements Center.

Anhydrous ammonia prices have been a different story, however, increasing as natural gas prices increased, jumping from $200 per ton in 1997 to $350 per ton at the beginning of 2001, according to "Consensus," a stock and futures investment publication.

Meanwhile, Agrium has been locked in a legal dispute with Unocal regarding Unocal's gas supply obligations, with both sides filing suit against the other last June. Agrium's complaint claimed Unocal did not meet contractual commitments to supply natural gas.

"There were specific fields where gas was supposed to be sold as per contract," said Parker, referring to the Swanson River field, the Grayling gas sands and another reserve on the west side of Cook Inlet.

Unocal agreed to deliver 155 million cubic feet per day of natural gas until 2009. Unocal is providing only 95 million to 125 million cubic feet per day between November and April, according to reports.

Unocal's complaint claimed Agrium breached the contract by not paying a $16.6 million annual fee due January of last year.

Neither side would speak to the other's complaints, however, and both offered different views of where legal proceedings were headed.

Parker said her company expects the legal conflict to continue for quite a while.

"We don't anticipate that it's going to be resolved anytime soon," she said.

Unocal spokesperson Roxanne Sinz said attempts are under way to work out the differences out of court, however.

"It's an unfortunate situation for Unocal and Agrium," she said. "We are trying to negotiate a settlement."

Why is gas so important to Agrium?

Natural gas is all-important to Agrium's overall operations. A company-produced quarterly report called natural gas "the major cost component of nitrogen fertilizer." Agrium has 14 North American production facilities, and one in Profertil, Argentina -- all of which depend on natural gas as a primary component of the company's major products, nitrogen-based fertilizers.

At capacity, the facility produces about 700,000 tons of anhydrous ammonia and 1.1 million tons of urea per year. That's enough to fertilize a strip of farmland 16 miles wide stretching from Los Angeles to New York.

The Nikiski production plant requires a steady supply of gas just to continue operating. Production is divided into two separate ammonia plants and two separate urea plants. The complex produces its own electricity using five gas turbine generators that produce 2.5 megawatts each and buys electricity from Homer Electric Associ-ation's cogeneration plant located on the site.

All of these facilities combine to burn a great deal of gas. Each of the ammonia plants can use 50 million cubic feet of gas per day, and the two urea plants and the utility plant use 15 million cubic feet each per day. Parker said warm weather benefits operational efficiency, because the price of gas can be affected by how much needs to be used throughout the area.

"Throughout the year, you hope to consume the same amount of gas," she said. "But we don't have (seasonal) spikes like a utility company does."

Agrium tries to keep the facilities operating around the clock, a practice that saves money, Craig Lott, urea plant No. 2 operating supervisor, said.

"It costs days' worth of gas to take down or start up a plant," he said. "That's when we tear up parts, and those are $200,000 parts."

Parker said the Nikiski plant needs a reliable flow of natural gas to continue to fulfill contracts with its long-term buyers.

"We pride ourselves on keeping our commitments," she said. "One of the reasons we have a market is because companies that we deal with know that we have a stable government and know that we're going to be here."

Agrium's four major competitors are based in China, Russia, Indonesia and Venezuela.

What is at stake?

The Nikiski plant carries a significant amount of clout in the community and nationwide. It is the second largest nitrogen fertilizer plant in the country, producing a quarter of all of Agrium's total ammonia and urea output, and 6 percent of the world's total product.

According to 2001 borough figures, its 292 workers made Agrium the fourth largest private employer in the Kenai Peninsula Borough, behind Peak Oilfield Services, Central Peninsula General Hospital and Safeway-Eagles Stores.

An October study done by Juneau-based economic consulting firm the McDowell Group reported that Agrium injects a healthy supply of dollars into the peninsula's economy, driven primarily by a $25 million annual payroll.

The study said the facility was seasonably stable with 302 employees, including contract workers at its peak.

In 2001, Agrium paid its employees an average salary of $84,000 a year.

Its employees were among the highest paid, with salaries exceeding all industries in the borough, including oil and gas extraction, where annual wages averaged $69,000.

"By Alaska economic standards, the Agrium operation is exceptional for its combination of high pay levels, amount and concentration of expenditures in the local area, and the degree of value-added manufacturing that occurs in Alaska prior to export. The result is a high multiplier impact," the report said.

Included in the multiplier effect of Agrium employees, the study said the facility accounts for 9 percent of the peninsula's wages and salaries.

Agrium employees have 326 school-aged dependents who make up about 5 percent of the central peninsula student enrollment, and the facility creates 1,000 related jobs which support a population of 2,150, or 7 percent of the central peninsula.

The study said Agrium paid $2.5 million in taxes and lease payments in 2001 and made $140,000 in charitable donations to 87 nonprofit organizations.

The facility, which was built in two phases by Unocal in 1968 and 1977, was sold to Agrium in late 2000.

Parker pointed out that when the site changed hands from a natural gas exploration organization to a manufacturer, it created more opportunity.

"Because it is not in exploration, this facility provides companies with a market to sell their gas to," she said. "We're also serving as a stimulus for further exploration in the inlet with newer companies that will be coming in."

Kenai Peninsula Borough Oil and Gas Liaison Bill Popp said any negative impact to jobs and operations at the plant could reverberate throughout the borough.

"We recognize the importance of the Agrium facility to the economy with its tax base to the borough and the jobs that they provide," he said. "We would hope that is something they would not have to go through."

Parker said the company plans to do what it must to stay around. When the company purchased the complex it invested in the community, she said.

"It was a long-term investment," she said. "You don't spend hundreds of millions of dollars for the short term."

CREDIT:Clarion file photo

CAPTION:Agrium produces fertilizer at its plant in Nikiski.

BYLINE1:By MARCUS K. GARNER

BYLINE2:Peninsula Clarion

One of the largest cogs in the Kenai Peninsula's economy got a major wrench in its works last November that threatened to throw its productivity, and quite possibly the welfare of the surrounding community, out of whack as a legal dispute over natural gas ensued between industrial giants.

The threat in question has loomed over the Kenai Agrium plant, located north of Kenai in Nikiski, since July when oil and gas giant Unocal announced it would curtail natural gas delivery to the nitrogen fertilizer operation.

The cut meant that the plant, which combines natural gas with water and air to produce anhydrous ammonia and urea, would have to operate at barely three-quarters of its regular capacity.

In order to survive, the company will have to either make cuts or find more gas. Agrium Kenai Nitrogen Operations General Manager Mike Nugent said there already was a team addressing ways to maximize efficiency, and he said the door is open for whatever is deemed necessary.

"We won't go through this and say everything is going to be status quo," he said. "There will be some layoffs. We have to look at what is best for us going forward."

Nugent said he had no idea what the assessment team would determine, but said the group would return its evaluation by the end of the second quarter.

Agrium spokesperson Lisa Parker said the company will weather the storm as short- and long-term solutions are sought.

"Agrium is very aggressively involved in finding new gas supplies," she said. "The company knew that as of 2009 we would be looking for more gas.

"Unfortunately, we're looking a lot sooner."

Operations at the Nikiski plant have been temporarily cut before in 1986 and 1987, and again in 1997. Agrium purchased the plant from Unocal in September 2000. As part of the sale, Unocal entered into a contract to deliver gas to Agrium at a comparatively low price for 10 years.

But prices for urea have dipped in recent years, dropping from a high of nearly $300 per ton in 1996 to about $225 in 2001, according to figures from Nitrogen Use Efficiency, an agricultural collaboration including Oklahoma State University, NTech Industries Inc., and the International Maize and Wheat Improvements Center.

Anhydrous ammonia prices have been a different story, however, increasing as natural gas prices increased, jumping from $200 per ton in 1997 to $350 per ton at the beginning of 2001, according to "Consensus," a stock and futures investment publication.

Meanwhile, Agrium has been locked in a legal dispute with Unocal regarding Unocal's gas supply obligations, with both sides filing suit against the other last June. Agrium's complaint claimed Unocal did not meet contractual commitments to supply natural gas.

"There were specific fields where gas was supposed to be sold as per contract," said Parker, referring to the Swanson River field, the Grayling gas sands and another reserve on the west side of Cook Inlet.

Unocal agreed to deliver 155 million cubic feet per day of natural gas until 2009. Unocal is providing only 95 million to 125 million cubic feet per day between November and April, according to reports.

Unocal's complaint claimed Agrium breached the contract by not paying a $16.6 million annual fee due January of last year.

Neither side would speak to the other's complaints, however, and both offered different views of where legal proceedings were headed.

Parker said her company expects the legal conflict to continue for quite a while.

"We don't anticipate that it's going to be resolved anytime soon," she said.

Unocal spokesperson Roxanne Sinz said attempts are under way to work out the differences out of court, however.

"It's an unfortunate situation for Unocal and Agrium," she said. "We are trying to negotiate a settlement."

Why is gas so important to Agrium?

Natural gas is all-important to Agrium's overall operations. A company-produced quarterly report called natural gas "the major cost component of nitrogen fertilizer." Agrium has 14 North American production facilities, and one in Profertil, Argentina -- all of which depend on natural gas as a primary component of the company's major products, nitrogen-based fertilizers.

At capacity, the facility produces about 700,000 tons of anhydrous ammonia and 1.1 million tons of urea per year. That's enough to fertilize a strip of farmland 16 miles wide stretching from Los Angeles to New York.

The Nikiski production plant requires a steady supply of gas just to continue operating. Production is divided into two separate ammonia plants and two separate urea plants. The complex produces its own electricity using five gas turbine generators that produce 2.5 megawatts each and buys electricity from Homer Electric Associ-ation's cogeneration plant located on the site.

All of these facilities combine to burn a great deal of gas. Each of the ammonia plants can use 50 million cubic feet of gas per day, and the two urea plants and the utility plant use 15 million cubic feet each per day. Parker said warm weather benefits operational efficiency, because the price of gas can be affected by how much needs to be used throughout the area.

"Throughout the year, you hope to consume the same amount of gas," she said. "But we don't have (seasonal) spikes like a utility company does."

Agrium tries to keep the facilities operating around the clock, a practice that saves money, Craig Lott, urea plant No. 2 operating supervisor, said.

"It costs days' worth of gas to take down or start up a plant," he said. "That's when we tear up parts, and those are $200,000 parts."

Parker said the Nikiski plant needs a reliable flow of natural gas to continue to fulfill contracts with its long-term buyers.

"We pride ourselves on keeping our commitments," she said. "One of the reasons we have a market is because companies that we deal with know that we have a stable government and know that we're going to be here."

Agrium's four major competitors are based in China, Russia, Indonesia and Venezuela.

What is at stake?

The Nikiski plant carries a significant amount of clout in the community and nationwide. It is the second largest nitrogen fertilizer plant in the country, producing a quarter of all of Agrium's total ammonia and urea output, and 6 percent of the world's total product.

According to 2001 borough figures, its 292 workers made Agrium the fourth largest private employer in the Kenai Peninsula Borough, behind Peak Oilfield Services, Central Peninsula General Hospital and Safeway-Eagles Stores.

An October study done by Juneau-based economic consulting firm the McDowell Group reported that Agrium injects a healthy supply of dollars into the peninsula's economy, driven primarily by a $25 million annual payroll.

The study said the facility was seasonably stable with 302 employees, including contract workers at its peak.

In 2001, Agrium paid its employees an average salary of $84,000 a year.

Its employees were among the highest paid, with salaries exceeding all industries in the borough, including oil and gas extraction, where annual wages averaged $69,000.

"By Alaska economic standards, the Agrium operation is exceptional for its combination of high pay levels, amount and concentration of expenditures in the local area, and the degree of value-added manufacturing that occurs in Alaska prior to export. The result is a high multiplier impact," the report said.

Included in the multiplier effect of Agrium employees, the study said the facility accounts for 9 percent of the peninsula's wages and salaries.

Agrium employees have 326 school-aged dependents who make up about 5 percent of the central peninsula student enrollment, and the facility creates 1,000 related jobs which support a population of 2,150, or 7 percent of the central peninsula.

The study said Agrium paid $2.5 million in taxes and lease payments in 2001 and made $140,000 in charitable donations to 87 nonprofit organizations.

The facility, which was built in two phases by Unocal in 1968 and 1977, was sold to Agrium in late 2000.

Parker pointed out that when the site changed hands from a natural gas exploration organization to a manufacturer, it created more opportunity.

"Because it is not in exploration, this facility provides companies with a market to sell their gas to," she said. "We're also serving as a stimulus for further exploration in the inlet with newer companies that will be coming in."

Kenai Peninsula Borough Oil and Gas Liaison Bill Popp said any negative impact to jobs and operations at the plant could reverberate throughout the borough.

"We recognize the importance of the Agrium facility to the economy with its tax base to the borough and the jobs that they provide," he said. "We would hope that is something they would not have to go through."

Parker said the company plans to do what it must to stay around. When the company purchased the complex it invested in the community, she said.

"It was a long-term investment," she said. "You don't spend hundreds of millions of dollars for the short term."



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