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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?