Nitrogen project interest heats up in North America as gas prices drop to record lows

There is growing interest in developing new nitrogen capacity in North America, as the market adjusts to the prospect of much lower gas costs in the medium term. Exploitation of unconventional gas resources drove the Henry Hub gas benchmark price to tumble to below US$2/MMBtu in Q2 2012, compared with three or four times that level just four or five years ago.

Interest in nitrogen investment had begun some time ago with significant company acquisitions or revamps of existing production sites, but as such opportunities are exhausted, greenfield projects have been proposed as well. Interest in developing these facilities has extended beyond existing players on the continent and there is even interest from South Asia, where high natural gas prices or gas availability issues are deterring investment.

Source: Integer Research, Press/Company reports *Based on estimated urea requirement for 363,000 tpy expansion

In addition to low gas prices, high netbacks for North American nitrogen fertilizer sales represent another strong attraction. The United States remains the largest importer of nitrogen fertilizers in the world (including around 5 million tonnes urea and 7 million tonnes of ammonia in 2011), so domestic producers enjoy a location advantage, especially those sites located inland and closer to the main agricultural states. In combination with low gas prices, now at levels not much higher than the lowest cost exporters, this creates a strong incentive for plant investments.

North American gas prices are not fixed or linked to prices of any other commodity. In the current situation of oversupply, this has allowed gas prices to reach very low levels despite high oil prices creating incentives for petroleum product substitution, LNG exports or other natural gas chemical production. To some extent, this gives US projects a disadvantage compared with other investments able to secure gas contracts with a defined pricing formula.

Henry Hub vs WTI (assuming oil energy value of 5.8 MMBtu/barrel)

“Falling gas prices coupled with strong domestic and international nitrogen prices secured windfall profits for producers in 2011” says Integer Research Director of Fertilizers, Oliver Hatfield. “North America was the second most profitable region globally, after the energy-rich Middle East. There are robust economic fundamentals supporting the expansion of North American nitrogen capacity. ”

A shift in fundamentals of nitrogen production in the US is now kick-starting investment activity. Are low gas prices creating conditions to stimulate continued North American investment? Who is investing in nitrogen projects and where are sponsors choosing to invest?