The shale gas revolution has suddenly flipped North America from being one of the most expensive places to produce fertilizer to among the world’s cheapest.
That’s drawing interest from manufacturers to boost production here, which might give prairie farmers a crucial competitive advantage in the cutthroat world of global trade.
“This has turned completely up-side down the market and now gas is abundantly available,” Bartolomeo Pescio, manager of global fertilizer giant Yara’s North American operations, which purchased SaskFerco in 2008, told the Canadian Association of Agri-Retailers convention in Winnipeg Feb. 23.
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
“Gas prices in North America are much more competitive compared with the rest of the world.”
Natural gas is the key component of some fertilizers, and energy prices are important overall because fertilizer production uses lots of energy.
Pescio said cheap natural gas in North America is allowing most fertilizer producers to design expansions for their existing plants and also consider building new ones.
“We are looking into this and would really like to expand capacity in North America if it makes economic sense,” said Pescio in an interview following his speech.
“There is a change in the trend of closing down capacity to a trend where definitely capacity will stay on stream and there is a potential for expansion.”
He said fertilizer companies aren’t rushing to build new plants because of the enormous cost and many-year payback required to justify them. They must be extremely cautious with their assumptions and get the long term economics right.
“What is going to happen in five years is difficult to predict,” said Pescio. “Whether this (expansion) will truly happen is not clear, but the dimension of these projects is enormous and before it comes on stream it will take at least five years.”
The long-term availability and price of natural gas is the key economic consideration. Shale gas technology has radically cut prices in North America, but that might not become permanent as other parts of the world adopt the approach.
“The temporary differences might balance out. That is what is under evaluation,” said Pescio.
Shale gas extraction has so radically changed energy production that the United States became a net energy exporter in 2011.
That means North American prices are no longer set as an import market, based on world prices plus transportation costs of getting energy to North America, but as an export market, where the price is the world market price minus transportation costs.
Shale gas technology involves breaking natural gas and other forms of energy out of the rocks in which they are trapped. It has released massive amounts of energy reserves from the bedrock lying under North America.
Sizeable reserves are being developed in Pennsylvania and Ohio, have been found but not developed in New York state and have caused an economic renaissance in North Dakota.
But the North Dakota development is just at the edge of a massive basin of shale gas reserves that covers much of Western Canada, offering the promise of decades of cheap natural gas.
The low prices can hinder drilling because they make it less profitable, but the economics of shale gas drilling depend on a favourable return from both natural gas and natural gas liquids.
There is often enough return and profit in the liquids alone to justify the costs, with the natural gas being simply an additional source of revenue.
“What is happening is that in the so-called ‘wet wells,’ natural gas is containing energy that can be stripped and that alone pays for drilling,” said Pescio.
It is easy to project today’s good economics far out into the future, but Pescio said he and other producers of fertilizer are cautious. If natural gas is so cheap now, people might stop producing it. Or they might find a way to arbitrage the difference between cheap natural gas and expensive petroleum products.
At the Grainworld conference the week after Pescio spoke at CAAR, former Saskatchewan premier Grant Devine discussed the gains that could come to farmers if cheap natural gas could be used to replace more expensive diesel fuel on farms.
“Over time it’s easy to predict that demand and offer will again find a balance,” said Pescio.
The stunning turnaround in energy production economics in North America is evident in the fact that a decade ago people were building expensive liquefied natural gas import facilities, but now North America is exporting liquefied natural gas.
For farmers, the long-term gain from shale gas appears to be the return of long-term competitiveness in fertilizer prices promised by the evening out of energy prices and the expansion of North American fertilizer capacity.
