In the US, Henry Hub gas prices fell below US$2.50/MMBtu in January 2012, due to a combination of economic uncertainty, increasing availability from shale gas reserves and unexpectedly mild winter conditions. This price was reported to be the lowest in a decade, and production of associated gas, due to high oil and liquids prices, was cited as an additional key influence.
At prices below US$2.50/MMBtu, this makes US natural gas cheaper than Russian gas in many cases. The latest available gas prices for industrial users in Russia, set annually by the state regulator FST, are in the range RUB 2582-3225/1000m3 (US$2.7-3.5/MMBtu, depending on location, at average 2011 exchange rates). There are two methods of calculating heat value of natural gas; lower heating value (LHV), used in Russia, excludes heat energy from condensation of steam combustion products, while higher heating value (HHV), used in most other parts of the world, including Henry Hub, includes energy from steam condensation. The difference between prices expressed in LHV terms and HHV terms is around 10%. Even with such an adjustment, most industrial gas users in Russia are currently paying higher prices than Henry Hub.
There are diverging views of the outlook for US gas prices for 2012. Some reports expect prices to fall as low as US$1/MMBtu, but high oil prices suggest energy supply will generally remain tight. On the other hand, Russian gas prices are almost certain to increase, as Gazprom wishes to gain European parity pricing for domestic sales. This is part of Russia’s commitments under rules of the WTO, which it recently was approved to join. Perhaps to hedge against increasing gas prices, Eurochem acquired a natural gas producer—becoming one of the few nitrogen fertilizer producers with upstream integration.
This latest development puts Russian producers at a competitive disadvantage against US producers, as Russian plants typically have lower energy efficiency (38-40MMBtu typical gas consumption per tonne ammonia production, compared with 36MMBtu or less for North American plants), and higher transport cost to market. Producers in both regions remain profitable, with urea prices of US$375-390/tonne FOB Yuzhny reported towards the end of January.
How will Russian producers’ competitive position shift in response to continued gas price hikes?
Will low gas price and location premium create enough incentive to overcome growing capital cost and economic uncertainty to stimulate investment in the US? We explore costs, margins and investment activity in detail in Integer’s Nitrogen Cost and Profit Margin Service. The first service to analyse the global nitrogen cost curve, in combination with analysis of product prices and profit margins. View our Nitrogen Service brochure.
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