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Alaska Cook Inlet Natural Gas Competitiveness

Alaska Cook Inlet Natural Gas Competitiveness. Alaska Joint Committee on Natural Gas Pipelines November 2001. Chris W. Tworek Vice President, Supply Management Agrium Inc. Agenda. The Company Kenai Nitrogen Operations World Competitiveness The Alaskan Situation Partners in Growth.

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Alaska Cook Inlet Natural Gas Competitiveness

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  1. Alaska Cook Inlet Natural Gas Competitiveness Alaska Joint Committee on Natural Gas Pipelines November 2001 Chris W. Tworek Vice President, Supply Management Agrium Inc.

  2. Agenda • The Company • Kenai Nitrogen Operations • World Competitiveness • The Alaskan Situation • Partners in Growth

  3. The Company • Agrium is One of World’s Largest Fertilizer Manufactures • 14 Production Facilities • 11 million tons ( • Second Largest Ag. Retailer in N.A. • 226 Outlets • Annual sales exceed US $2.0 Billion

  4. The Company • World Scale Facilities • High Efficient / Low Cost Producer • Strategically Located Near Key Markets • Tidewater Access to International Markets • Highly Skilled Workforce • More Than 5000 Employees World Wide • Committed to Safety & The Environment

  5. Kenai Nitrogen Operations • Products • 6% of N.A. Nitrogen Production • Ammonia - 700,000 (net) tons • Urea - 1.1 million tons • 50-55 BCF/yrof Natural Gas Consumption • Employees • 300 Full-Time, Highly Skilled • 30 Contractors on average

  6. Kenai Nitrogen Operations • Primary Markets • Ammonia – Pacific Rim • Urea – Mexico, South America, Taiwan and Korea • Competition • FSU, South America, Trinidad and Pacific Rim • Many new plants built in last decade • World product prices tend to be capped by trapped gas economics

  7. Kenai Nitrogen Operations Economic Benefits – over 130 M$/yr • Community Investments • Large Local Employer • 300 Highly Skilled Employees • Donations & Sponsorships • Caring for The Kenai • United Way • Challenger Learning Center • Boys & Girls Club, etc. • Commitment to Safety & Environment *Includes Royalties

  8. World Competitiveness • Nitrogen is a World Traded Commodity • Easiest way to monetize & transport gas reserves • $15/t to 50/t ocean freight • Recent high N.A. gas prices made N.A. Nitrogen production uneconomic • N.A. Produces 14% of World’s Nitrogen* • Up to 50% of N production shut-in at peak • U.S. Nitrogen imports doubled • Gas producers lost sales for all industrial products • * 20 M tons N - Ammonia, Urea, Nitrate, UAN solutions • (2.0 - 2.3 BCF/d natural gas consumption)

  9. Importance of Natural Gas • Ammonia takes 33.5 MMBTU per ton • Gas is 75 – 90% of ammonia production cost

  10. World Industrial Gas Cost Comparison Projections for 2001 (US$/MMBtu) Alaska $1.20-1.50 Western Europe $3.60 Canada $4.50 FSU $1.30 United States $5.00 China $2.50 Middle East $1.00 Trinidad $0.75-1.50 India $4.50 Indonesia/Malaysia $1.00-1.50 Latin America $0.60-1.50 Australia $1.00-1.30 High-Cost Low-Cost Source: CERA, BJ&A, Fertecon, Agrium

  11. The North America Balance

  12. Major Ammonia Exporters to North America ‘000 Tons of NH3 1,692 3,228 1,092 2,418 FSU 226 23 91 0 Asia Middle East Trinidad 311 180 Latin America 1999/00 2000/01 Source: USDC, Statistics Canada

  13. Major Urea Exporters to North America ‘000 Tons of Urea 1,671 280 878 160 753 W. Europe 389 426 52 297 Asia Middle East 97 Trinidad Africa 150 38 Latin America 1999/00 2000/01 Source: USDC, Statistics Canada

  14. Affect of High N.A. 2001 Gas Pricing • Plant Shut Downs • Up to 50% at Peak Gas Pricing • Loss of Market Share • Imports almost doubled • $ 4-5 gas cannot compete against $1 gas • Offshore competition won • Gas Producers lost sales • N was about 0.75 of 3-5 BCF/d industrial demand destruction • High prices were not sustained

  15. The Alaskan Situation • Cook Inlet Products are exported • Fertilizer and LNG compete globally • New industries (e.g. gas to liquids) will also have to compete internationally • Our prices are based on international markets not lower 48 US$/ton NOLA Black Sea New Orleans World Market Source: Green Markets, Blue Johnson

  16. The Alaskan Situation • Jones Act restricts exports to lower 48 • Act requires U.S. Flag vessels to move products among U.S. ports • Cook Inlet Fertilizer is forced to go off-shore • No U.S. flag ammonia vessels left • Urea limited to 1-2 sea going barge

  17. Partners in Growth • Expansion Opportunity • Based On Cook Inlet Advantages: • Close to Pacific Rim markets • Good Business Climate & Skilled Workforce • World Scale Plant • Needs to expand to stay competitive • Agrium uses 50-55 BCF/yr today • Expansion plans add up to 30 BCF/yr • Current base supply needs long term extension

  18. Partners in Growth • Expansion Benefits to Alaska • Grows Current Local Economic Contribution of $130 M annually • Increases Sales/Exports • Expands skilled employment • Allows Greater Community Investment • Increases Tax Base • Encourages Gas Exploration • Opens Up Other Industries to Export Markets • Must Be Based on Competitiveness • Reliable and Internationally Competitive Supply of Gas

  19. Partners in Growth • Some Possible Solutions • Spur from Alaska Gas Pipeline is long term advantageous solution • Cook Inlet has immediate additional gas potential • Anchorage Economic Development Corp Report: 1-3 TCF to be found • Coal Bed Methane: 8 – 250 TCF • Escopeta: 5-18 TCF

  20. Partners in Growth • Agrium willing to work with State and Producers to encourage development: • Pre-investment on appropriate risk/reward: • Pre-bought gas production • Infrastructure investment (e.g. pipelines) • Exploration and drilling partnerships • Exploration Royalty Relief • Ongoing royalties based on actual contracts or weighted average sales prices • Purchase of State Royalty Gas • North Slope Spur Line

  21. In Closing… • Successful partnering will: • Continue Alaska’s development for all sectors • Building Cook Inlet strengthens base for mega projects such as Alaska Pipeline • Contribute to Alaska’s export position • Increase Agrium’s annual $130 M plus contribution to local economy

  22. November 2001

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