Agrium Inc. said Sept. 25 that it is closing its Kenai nitrogen fertilizer operations due to a natural gas supply shortage in Alaska’s Cook Inlet. Agrium told Green Markets that this is a permanent closure, not a temporary closure for the winter as has been occurring for the past few years.
Agrium said it has diligently attempted to encourage natural gas supply development and to negotiate contracts for 2008 and beyond. Despite these efforts, and after offering what it believed to be competitive prices and incentives, Agrium was unable to secure gas supply.
It is estimated that the facility will contribute approximately $6 million in EBITDA in 2007 and account for less than one percent of Agrium’s total 2007 EBITDA. The facility produced about 325,000 mt of urea and ammonia in 2007 during the five months it was operational, with the shutdown expected by month-end. It is expected the resulting reduction in nitrogen supply will further tighten the global nitrogen market in 2008.
Agrium purchased 53 billion cubic feet (BCF) of natural gas in 2001; this supply has steadily diminished to only 10 BCF in 2007. The book value of the asset was written down in 2003 and shutdown costs were accrued at that time, therefore no further impairment charge is required. Incremental costs associated with the shutdown are expected to be less than five cents per share.
Agrium’s plant was shut down for the winter period of 2006/2007, but no layoffs occurred. Closing the facility will result in the layoff of over 100 employees. Layoffs will begin Dec. 1. Some of the approximately 140 employees will remain to keep the plant in a “warm shutdown” mode.
In its most recent second quarter earnings report (GM Aug. 13, p. 1), Agrium noted that company-wide results were strong enough to offset negative factors, including less nitrogen production at Kenai due to colder weather in the second quarter. As a result, the facility was only able to operate for 59 days during the second quarter, versus the year-ago 92 days.
“It is a sad day for us to have to close this facility, which has added much value to the Alaskan economy for the past 40 years. It has been a major supplier to international markets in the Pacific region and was Alaska’s third largest exporter in 2006, despite running at 50 percent of capacity,” said Mike Wilson, president and CEO of Agrium. “Our employees at Kenai have been the key to the success of the operation. Had it not been for the natural gas supply situation in the Cook Inlet, we would not have had to make this difficult decision, which will impact our employees, customers and the community.”
The primary markets for the Kenai facility are in Southeast Asia – mainly Korea and Taiwan – and the west coast of Mexico, according to Agrium spokesman Richard Downey. He said no sales are made into the U.S. due to the Jones Act, and added that the company has been in touch with its customers. He said there is little chance that material will be available for them from Profertil given the strong growth expected in demand from Argentina and Brazil.
Industry sources noted that customers and competitors have had time to adjust to the Kenai news, as production at the facility has waned in recent years due to the limited gas supply. Sources suggested that China might be a beneficiary.
Agrium continues to work on the feasibility of a coal gasification project to use coal as a feedstock instead of scarce natural gas for the Kenai facility. A decision on whether to proceed with the next stage of the project is anticipated later this year. The earliest the proposed facility could be operational is 2012. Alaska’s governor recently signed a bill that could provide over $2.5 billion in financing for the coal gas project should it proceed (GM Sept. 17, p. 1).
Agrium has threatened in the past to close the Kenai plant if it was unable to find a good source of gas, most notably in 2005 (GM July 4, 2005). However, in recent years the company has been able to source gas for at least May-October, closing the Kenai facility in the winter months.
Agrium sees the current situation as more dire than in 2005. Downey said Agrium is always open to obtaining gas, but views this chance as a very low probability at this time.