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Petroleum News: Agrium to decide on coal project in July

Agrium to decide on coal project in July

Company is close to finishing first phase of feasibility study that’s likely to decide the fate of huge Nikiski fertilizer plant

Allen Baker

For Petroleum News

This coming summer will provide a crucial “litmus test” on whether Agrium Inc. and other potential investors pony up well north of a billion dollars to convert coal into feedstock for the Canadian company’s giant Alaska fertilizer plant.

That’s what Bill Boycott, general manager of Agrium Kenai nitrogen operations, told Alaska legislators April 19.

“If the opportunity is strong enough, it will be fundable,” Boycott told a Juneau hearing of the Senate Finance Committee. “And we will have the participants and the partners to move forward. Or it won’t, and we’ll continue our search for natural gas and likely watch our business prepare to wind down on the (Kenai) peninsula.”

If the Blue Sky Project gets the financial support of Agrium and potential partners, the Nikiski facility could be doubled in size. A gas feedstock derived mostly from Beluga coal shipped across Cook Inlet will completely replace natural gas that currently feeds the fertilizer plant, perhaps as early as 2011. The complex would export around 2 million tons of fertilizer to customers around the Pacific Rim.

Otherwise, the second-largest nitrogen fertilizer plant in the U.S., with a replacement cost estimated at $1.5 billion or more, will almost certainly close down.

Twin projects

Both Agrium and Usibelli Coal Mine Inc. have been working on their parts of the puzzle, which would tap the huge Beluga coal deposit across Cook Inlet from Nikiski for something like 4 million tons of coal a year. The coal would be shipped across the inlet in 12,000-ton barges, with a backup supply from Healy shipped south to Anchorage by rail, then loaded into barges there.

Once it reached Nikiski, the coal would be pulverized and then burned in a specialized gasification plant to produce a gas rich in hydrogen and carbon dioxide, explained Boycott and Agrium spokeswoman Lisa Parker.

The hydrogen from that process would be combined with nitrogen from an air separation facility to produce anhydrous ammonia. Adding some of the carbon dioxide to the ammonia would turn it into urea, another fertilizer product.

The purity of the feed gas would immediately boost capacity by roughly 20 percent compared with natural gas, he said.

Enhanced oil recovery

But not all of the carbon dioxide from the process would be used in the fertilizer operation, so Boycott has been talking up the potential for using the gas as an injectant for Cook Inlet’s aging undersea fields.

“We would have significant incremental CO2 available to support an enhanced oil recovery operation in the Cook Inlet,” he said. What he means by significant is an estimated 7,000 tons a day, even without recovering the carbon dioxide from the power plant needed to supply electricity for the complex.

The upshot could be extracting as much as 300 million additional barrels of crude oil from Cook Inlet fields, he said.

Dwindling gas

The natural gas from the Cook Inlet region that has been turned into fertilizers in Nikiski since 1968 is running out.

Almost since Agrium purchased the plant from Unocal in 2000, it’s been touch and go to find sufficient supplies of natural gas to keep the complex in operation. The plant has been running at only half of its capacity since November due to supply issues, and Boycott says that executives “don’t see a chance of restarting (full operations) with natural gas.”

The company only has enough committed gas to keep up at current rates until October. Agrium has asked for proposals for gas supplies after that, “trying to get an extension of the commercial life” of the facility, he said. But even if suppliers turn up for this next round, the crystal ball looks cloudy at best later in the decade.

So if the plant has a future, that future is almost certainly tied up with coal.

Huge power plant

Alaska’s power grid is just about as dependent on natural gas from the Cook Inlet region as Agrium itself, and that fact provides another piece of the economic puzzle the company is putting together.

The power plant needed to supply 90 megawatts needed for the industrial processes could also export significant amounts of electricity for other consumers in the region, according to Boycott, replacing some of the system’s aging gas-fired generators.

The power plant alone will cost $600 million to $700 million. “With Alaska’s 900 megawatt grid, that’s a difficult expenditure to support,” Boycott notes. It would be a big stretch for Alaska’s electric cooperatives and the municipal utility in Anchorage.

“We believe with this project we have a foundation to establish the coal infrastructure (at Beluga), and also an immediate demand for 90 megawatts,” he said.

“We provide the foundation necessary and the economics to support a power plant that we really need in this state.”

With the limitations of the current power line to the major load in Anchorage, the Nikiski complex could export around 60 megawatts, according to Boycott, with a potential to reach 130 to 180 megawatts if an upgraded line were added to take more power to the north.

$28 million next step

Boycott said he was headed for Kansas City after the Juneau hearing to talk with engineers from Black & Veatch Corp. and Uhde GmbH about design issues. Those companies formed an alliance in 2004 to work on coal gasification using Shell’s coal gasification technology. Heat material balances will be done by Shell.

It’s all part of the $4 million being spent on the initial phase of the feasibility studies. Most of that work should be finished in the next couple of weeks.

“We will know at the completion of that work whether we should move forward,” Boycott told the lawmakers. The second phase will be a lot more expensive, at $28 million, and “what we’re saying is that we would fund phase 2 by July or we would …” He hesitated before adding; “That’s really a litmus test for us.”

“Assume the answer is yes,” he continued. “What we would like to do is create a bankable commercial deal.

“And when I say bankable, what I’m talking about is firm contracts for the supply of coal, for the offtake of the fertilizer, for the offtake of the power. And then a lump sum turnkey engineering contract with a process performance guarantee, so that we’ve really done our best to manage the risk.” The design of the engineering contract would take up an estimated $13 million of the phase two cost.

All that would create a blueprint “that we can then take to Wall Street and finance. And that’s really how we’re looking to finance it.”

Even Agrium, a power in the fertilizer industry with $4 billion in sales and $283 million in profits last year, doesn’t have the heft to do the deal alone. If the project goes ahead, the cost will be second only to the trans-Alaska oil pipeline among Alaska’s commercial projects.

Government partnering

For the phase two work, Agrium is looking for partners, and also for a bit of a lift from Uncle Sam and Uncle Sourdough.

The company has been talking with U.S. Sens. Ted Stevens and Lisa Murkowski about a federal contribution, Boycott said, and Agrium wants the state to put in a chunk as well.

“We are looking to both the federal government and state government for some level of support at that level,” he said. “We’re looking at $5 million in phase 2 funding (from the two governments.”

Beyond that, Boycott said, the company might be able to take advantage of some federal tax credits to encourage new energy technology. Some grant funds were included in the recent energy package approved by Congress and President George Bush, but those grant funds are very limited and Agrium won’t be trying to tap that source, he said.

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