Natural Gas and the U.S. Fertilizer Industry

Harry VroomenVice President, Economic Services

The Fertilizer Institute

July 15, 2010

www.tfi.org

Outline of Presentation

• Brief Intro on Fertilizer• Focus on N Production

– Anhydrous Ammonia

• Impact of Increased U.S. Natural Gas Prices

• Climate Change Legislation• Concluding Remarks

Contributions of the Domestic Fertilizer Industry

Fertilizer nutrients account for 40-60% of total crop production!=> Enable the U.S. to feed the world; without it, the U.S. (and world) would have to plant 2X as many acres, which is impossible, or have significantly less agricultural output which would result in higher food prices and significantly more world hunger!

Agriculture is one sector in the U.S. budget accounts where we have a POSITIVE trade surplus. Fertilizer is one of the primary inputs which makes our highly productive agriculture possible!

In addition to it’s SIG contribution to AG, domestic fertilizer Prod:- Creates a total of 245 thousand U.S. jobs!- Provides a total U.S. economic contribution of over $ 58 Billion!

NPK

PHOSPHORUS (P)

is found in every living cell. Phosphorus is a component of

DNA and it also plays vital roles in capturing light during

photosynthesis, helping with seed germination, and helping

plants use water efficiently. Plants also use phosphorus to help fight external stress and

prevent disease.

COMES FROM ANCIENT SEA LIFE

NITROGEN (N)

is a primary building block for all organisms. It is essential to making proteins, helps keep plants green and is a critical component of soil structure.

COMES FROM THE AIR

POTASSIUM (K)

is essential to the workings of every living cell. It plays an

important role in plant’s water utilization and also helps

regulate the rate of photosynthesis. Other aspects of

plant health influenced by potassium include the growth of

strong stalks, protection from extreme temperatures, and the ability to fight stress and pests

such as weeds and insects.

COMES FROMEVAPORATED

OCEANS

Source: USDA, IFA.

6%

11%

21%

28%

36%

20%23%

30%

33%

48%

58%

77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Rice Corn Wheat Cotton Soybeans AN Urea Nit. Sol. Amm.Phosphate

Amm.Sulf.

TSP Potash

perc

ent o

f pro

duct

ion

whi

ch is

exp

orte

d

Share of World Crop and Fertilizer Products Traded, 2008

37%

16%

NH3atmosphere natural gas

Anhydrous ammonia production• Source of the nitrogen in fertilizer• Haber-Bosch process (Fritz Haber/Carl Bosch)• Combines N (atmosphere) with H (natural gas)• 32.5 MMBtu’s natural gas per ton ammonia

Natural Gas Required to Produce a Ton of Anhydrous Ammonia

30

31

32

33

34

35

36

37

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mill

ion

Btu

per

ton

of a

mm

onia

Source: TFI.

1983 to 2006 => 11 % increase in efficiency

60%

65%

70%

75%

80%

85%

90%

95%

 $‐  $1  $2  $3  $4  $5  $6  $7  $8  $9  $10  $11  $12  $13  $14  $15

Natural Gas as a Share of Total Anhydrous Ammonia Production Cost

2004‐08: $5.64 ‐ $8.84 MMBtu

Price of Natural Gas ‐ $/MMBtu

What Happened the Last Time U.S. Natural Gas Prices Increased?

0

1

2

3

4

5

6

7

8

919

86

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$ M

MB

tu

Source: Spot-delivered-to-pipeline price, Natural Gas Week.

4

7

12 13

17

21

25 25 26

0

1

2

3

4

5

6

7

8

9

0

5

10

15

20

25

30

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

natu

ral gas price -$

/MM

Btu

nu

mb

er o

f pla

nts

Cumulative U.S. Ammonia Plant Closures vs. Natural Gas Prices

Source: Blue, Johnson and Associates, IFDC, Natural Gas Week and The Fertilizer Institute.

1985-1997Average

Natural GasPrice of

$1.90 MMBtu

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

0

2

4

6

8

10

12

14

16

1991/92 1993/94 1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08

Imports as share of Totalm

illio

n sh

ort t

ons

NU.S. Nitrogen Sources - Ammonia Production and N Imports

Ammonia Production Nitrogen Imports Imports as share of Total (right scale)

Source: U.S. Department of Commerce and The Fertilizer Institute.

Most imports from countries with no climate change legislation!

U.S. Retail Fertilizer Prices Reach Record

50

100

150

200

250

300

350

400

450

50019

95

July

1996

July

1997

July

1998

July

1999

July

2000

July

2001

July

2002

July

2003

July

2004

July

2005

July

2006

July

2007

July

2008

July

1990

-199

2 =

100

Source: National Agricultural Statistics Service, USDA.

Increase of 356 percentJan. 2000 - Sep/Oct. 2008

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Dol

lars

Per

MM

Btu

Source: Monthly Average, Natural Gas Week.

Spot delivered-to-pipeline Natural Gas Prices

Average Gas Price:

1985-1999: $ 1.97/MMBtu

2000-2008: $ 6.03/MMBtu

Potential Impact of Climate Change Legislation on:

1. The Domestic Fertilizer Manufacturing Industry:- Direct Impacts – cost of CO2 emissions allowances- Indirect: Higher domestic energy (natural gas, electricity) prices

2. U.S. Agricultural Production Costs:

CropsDoane Study

Livestock

USDA Estimates

IncreasedEnergy

and other Input Prices

Local Utility*97.4%

Other**2.4%

Where do we get our electricity?

*'Local Utility' is an entity that produces and/or delivers a particular energy source**'Other' includes independent producers, brokers, marketers, and marketing subsidiaries of utilities;  for the case of electricity sources,also include small  power producers and cogenerators not located at the establishment site.Source: EIA Manufacturers Energy Consumption Survey ‐ 2002

Nitrogenous Fertilizer Manufacturing

Local Utility*0.2%

Other**99.8%

Where do we get our natural gas?(fuel and feedstock)

*'Local Utility' is an entity that produces and/or delivers a particular energy source**'Other' includes independent producers, brokers, marketers, and marketing subsidiaries of utilities;  for the case of electricity sources,also include small  power producers and cogenerators not located at the establishment site.Source: EIA Manufacturers Energy Consumption Survey ‐ 2002

Nitrogenous Fertilizer Manufacturing

Costs of Potential Climate Change Legislation to U.S. Fertilizer Manufacturers

Nitrogen Fertilizer production would be impacted in four major ways:

1. Through the direct cost of allowances the industry would need to purchase to offset emissions – estimated cost of $1.02 - 1.43 billion, before free allowances*

2. Through the indirect increase in electricity costs (through suppliers’ purchases of emission allowances and through cogeneration of electricity) - potentially covered under current proposed bill

3. The unknown impact of fuel switching which will inevitably raise the price of natural gas – estimated cost of hundreds of millions of dollars

Nothing in the bill to cover this => A competiveness (survival) issue!

4. 1. – 3. above place the domestic industry at a competitive disadvantage relative to foreign producers from countries with no climate change laws because most foreign producers do not have to deal with these cost increases!

* Computed using 2008 nitrogen production data and a CO2 cost of $25-$35/ton.

Costs to U.S. Fertilizer Manufacturers - continued

Phosphorous and Potash Producers Will Also Be Impacted:

Phosphorous:

- Through the direct cost of allowances the industry would need to purchase to offset emissions from the production of phosphoric acid;

Potash:

- Through the unknown impact of fuel switching which will inevitably raise the price of natural gas, which is used in the drying process.

Nothing in current proposed bills to cover ANY of these costs!

44.8%

7.7% 6.0%4.7% 4.6% 4.0% 4.0% 3.6% 3.5% 3.5%

17.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Nitr

ogen

ous F

ertil

izer

s

Fla

t Gla

ss

Car

bon

Bla

ck

Eth

yl A

lcoh

ol

Gla

ss C

onta

iner

s

Oth

er B

asic

Org

anic

Che

mic

als

Ele

ctro

met

allu

rgic

al F

erro

allo

yPr

oduc

ts

Pap

erbo

ard

Mill

s

Cyc

lic C

rude

s and

Inte

rmed

iate

s

Pet

roch

emic

als

Purchased Natural Gas (fuel and non-fuel use) as a percent of industry's value of shipments - Top 10

Source: EIA Manufacturers Energy Consumption Survey - 2002Formula used: ((natural gas fuel use + natural gas non-fuel use) * Price)/Value of ShipmentsData years used: Prices - 2002 (latest data available)

Total fuel use - 2002 (used to make fair comparison)Value of Shipments - 2002 (used to make fair comparison)

Note: Green bars represent industries that are not listed in EPA's list of presumptively eligible sectors

Natural Gas used for fuel purposes

Natural Gas used as a feedstock (27.3%)

Nitrogenous Fertilizers43.8%

Other Basic Organic Chemicals

18.5%

Industrial Gases12.1%

Iron and Steel Mills7.9%

Plastics Materials and Resins2.8%

Carbon Black 2.6%

Other Basic Inorganic Chemicals

2.6%

Phosphatic Fertilizers2.1%

Noncellulosic Organic Fibers1.8%

Ethyl Alcohol 0.5%

All Other5.4%

Purchased nonfuel (feedstock) Natural Gas - 2006

Source: EIA - 2006 Manufacturing Energy Consumption Survey (MECS) (latest available data)Note 1: "All Other" includes: all other industries that are estimated to use less than 0.5TBtu natural gasNote 2: Industry ranked using 6-digit NAICS code level

Climate Change: Issues for the Fertilizer Industry

• Fuel Switching – The Natural Gas Industry is advocating for government subsidies to close old coal fired plants. Natural gas to pick up excess capacity.

• Increased natural gas demand puts upward price pressure on critical feedstock for fertilizer production.

• Higher U.S. natural gas prices increase vulnerability to international nitrogen and phosphate fertilizer competition.

Coal48.5%

Natural Gas21.6%

Nuclear19.4%

Hydroelectric Conventional6.0%

Other Renewables2.5%

Petroleum Liquids1.2%

Petroleum Coke0.4% Other Gases

0.3%Other0.1%

Net Generation of Electricity by Energy Source ‐ 2008

Source: EIA

U.S. Natural Gas Demand - 2008

(Trillion Cubic Feet)2008

Lease and Plant Fuel 1.28 Lease Fuel - Plant Fuel -

Pipeline & Distribution Use 0.62 Volumes Delivered to Consumers 21.30

Residential 4.87 Commercial 3.12 Industrial 6.62 Vehicle Fuel 0.03 Electric Power 6.66

Total Consumption 23.21

Source: EIAData

U.S. Natural Gas Consumption by End Use

Natural Gas41.3%

Coal30.9%

Nuclear9.7%

Hydroelectric Conventional7.1%

Petroleum5.7%

Pumped Storage1.9% Wind

1.5%

Other1.8%

Electricity Generator Nameplate Capacity – 2007 

Source: EIA

U.S. Electricity Generation Capacity from Natural Gas

Capacity - 2008Number of Generators: 5,439Generator nameplate: 449,389 MegawattsNet Summer: 392,876 MegawattsNet Winter: 422,184 Megawatts

Ave. Summer/Winter: 407,530 Megawatts

Total capacity: 3,423,252 thousand Megawatt hours

= 407,530 Megawatts * 24 hrs./day * 350 days/yr.

Source: EIA.

2008 Actual Consumption (876.9 thousand MWh)

25.6 %

Available Capacity74.4%

U.S. capacity to generate electricity from natural gas 2008 Ave. Net Summer/Winter

Total electricity generation capacity from natural gas:  3,423.3 thousand MWh

Source: EIA

Required 6.66TCF – 29% of total U.S. – Natural Gas Demand!

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Coal Natural Gas Nuclear Hydroelectric, Net Other Renewables Other

trillion megaw

att h

ours

Net Generation of Electricity by Energy Source:  2008

Source: EIA

There is ample capacity to produce more electricity from natural gas and

significant electricity production currently from coal which natural gas can displace for natural gas

demand in electricity production to rise significantly!

Snippets from EIA’s Annual Energy Outlook 2009 with projections to 2030

• “In addition to ongoing uncertainty with respect to future demand growth and the costs of fuel, labor, and new plant construction, it appears that capacity planning decisions for new generating plants already are being affected by the potential impacts of policy changes that could be made to limit or reduce GHG emissions.”

• “Instead of relying heavily on the construction of new coal-fired plants, the power industry constructs more new natural-gas-fired plants, which account for the largest share of new power plant additions, followed by smaller amounts of renewable, coal, and nuclear capacity.”

Stage is already being set for an increase in natural gas demand!

CONCLUSIONSDomestic Fertilizer Production Makes a Significant Contribution to U.S. Agriculture and the U.S. economy:

Accounts for 40-60 percent of crop production – feed world + Ag. trade surplus;Creates a total of 245 thousand U.S. jobs!Provides a total U.S. economic contribution of over $ 58 Billion!

Climate Change Legislation Will Significantly Raise Production Costs of the U.S. Fertilizer Industry, Particularly for the Nitrogen Sector:

Increases the Uncertainty of running the business - number of free allowances?;What will be the cost of the allowances: $25/ton CO2 ?, $30? , $35?, $40?Increased energy costs – electricity and especially natural gas, where the rise in price will add hundreds of millions of dollars to production costs!Higher costs will significantly impact the international competitiveness of industry!Will place thousands of productive jobs in rural America at risk!

The Increase in Fertilizer Production Costs, Energy Prices, and other Farm Input Costs which rise with Energy Prices Will Lead To:

Significantly Higher Domestic Crop Production Costs;Significantly Higher Livestock Production Costs;And Significantly Lower Farm Income!

Thank you! Any questions?