Since fracking technology in this nation advanced beginning in about 2006, the U.S. energy situation has changed so rapidly that markets have yet to adapt. So far, the larger supply of natural gas is increasingly being used to replace coal for electricity generation and it has reduced energy costs for industrial and residential consumers.
Current levels of natural gas production help promote industrial manufacturing because of the competitive edge given to U.S. industry as compared to regions of the world which have much higher energy prices. The recent glut in natural gas, demonstrated by its average 2012 price (below) is expected to even out going forward as its supply and demand balance equilibrates with the cost of production. Consequently, coal use for electricity generation is expected to gain back a few percentage points over the next few years, according to the EIA.
While there are skeptics who think the current rate of natural gas production through fracking is unsustainable, others expect it to continue for multiple decades. Though increasing the domestic use of natural gas (or exporting LNG) would help to ensure its economic viability, ethical and environmental challenges remain related to its use and the contamination of water and land in fracking areas.
Often fracking’s water requirements compete directly with agricultural water, as where I live in Colorado. One well might require as much as 10 million total gallons of water. The return water from these wells is badly contaminated. Here in Northern Colorado, some deep underground aquifers are being utilized to store this contaminated water, making those aquifers permanently contaminated. Though these aquifers are deeper than those being accessed for water use today, it is possible that they would be valuable to us in the future in this dry, but populated region of our nation.
Natural gas plays an essential role in today’s industrial agriculture system. Nitrogen fertilizers are made by using natural gas for hydrogen, and nitrogen gas from the air, to form ammonia as an end product. This ammonia is used as the feedstock for other nitrogen fertilizers, such as anhydrous ammonium nitrate and urea. These concentrated products may be diluted with water to form a concentrated liquid fertilizer (UAN).
Coinciding with agriculture’s industrial revolution, between 1960 and 2005, annual use of chemical nitrogen fertilizers in U.S. agriculture increased 455 percent. Corn is the crop which requires the most nitrogen per acre, so increased corn acres since 2006 due to this nation’s ethanol mandate has increased the demand for nitrogen fertilizer.
Natural gas is the primary raw material used to produce anhydrous ammonia, accounting for 70% to 90% of its production costs. Approximately 33 million British thermal units (mm Btu) of natural gas are needed to produce 1 ton of ammonia chemically. Global demand for agricultural nitrogen fertilizer is expected to be 109 million metric tons in 2013. North America consumes around 13 percent of the total.
After the year 2000, it became more profitable to use imported ammonia in the U.S. due to high natural gas costs. As a result, many of the nation’s smaller ammonia plants closed. Between 2000 and 2006, U.S. ammonia production declined 44 percent and U.S. ammonia imports increased 115 percent. As shown by the pie graph which follows, in 2009/10 the United States imported nitrogen from Trinidad, Canada, Russia, Egypt, Venezuela, and other nations.
Ammonia production plants are located near natural gas supplies, as shown on the 2006 map below. The plants also require a lot of water. The fertilizers are consumed in the Midwestern Corn Belt within a very short time frame in the fall and again in the spring. Pipelines, barges, and railways are required to move and handle large volumes of fertilizer during these periods of high demand. Consequently, the compromised barge traffic on the Mississippi River from recent low water levels concerned farmers.
A logical opportunity for utilizing our increased natural gas supply lies in producing more of our own nitrogen fertilizer. We imported 54 percent, or 10.79 million tons (a record) of the nitrogen fertilizer used for farming here in the U.S. in 2011, according to the USDA.
So it was not surprising that in 2012, several companies announced expansions and the construction of new plants which will produce nitrogen fertilizer. The new plants will be built near new natural gas fracking areas. Though these expensive plant ventures are risky, the current price of anhydrous ammonia fertilizer in the U.S., at $887 per ton and up 8 percent from a year ago, offers a large potential margin for profit.
One of the new ammonia and urea fertilizer plant projects which was announced in 2012 will be built in southeastern Iowa and is to become operational by 2015. Its location is on a natural gas pipeline, near the barge traffic on the Mississippi, and in the heart of the farm country which uses the fertilizer. The plant will be a subsidiary of the Egyptian company Orascom Construction Industries, and will cost $1.4 billion. According to 2b1 St Consulting, Iowa has provided a $100 million tax incentive package for the project, and it expects farmers to save $740 million per year through buying fertilizer locally and avoiding the peaks in the spot markets. The capacity of production will be 2 million tons per year of ammonia and 2 million tons per year of urea ammonium nitrate (UAN).
Also announced in 2012, was the construction of a new billion dollar nitrogen fertilizer plant in Indiana. It is to produce 2,420 tons per day of ammonia and 3,000 tons per day of urea.
CF Industries at Donaldsonville, Louisiana is the largest nitrogen complex in North America. In late 2012, they announced $2 billion in new capital expenditures at this plant which can produce and ship approximately 5 million tons of nitrogen annually. To produce this amount, it uses approximately 240,000 mmBTU of natural gas daily.
CHS Inc. announced in 2012 that it intends to build a $1.2 billion anhydrous ammonia plant in eastern North Dakota which is to become operational in 2016. Its output will be 2,000 tons of anhydrous ammonia daily. About a third of the natural gas production in North Dakota is being burned off for lack of infrastructure and sales outlets. This plant will help consume that wasted gas.
Other plants may reopen or expand in Oklahoma, Texas, Louisiana, Ohio, and Georgia, if difficult permit approval processes are successful. Some proposals will likely be dropped as large approved investments move forward, however.
In conclusion, reflecting back on the nitrogen fertilizer industry over the years, one is reminded of the boom and bust cycles that continue in all things energy related. In 2012 we had a glut of natural gas combined with high anhydrous ammonia prices paid by farmers and a booming corn industry. This convinced fertilizer industry decision makers that the margin for profit had become wide enough to risk building new plants here in the U.S. At some point in the future we will most likely see, once again, that the cure for high prices… is high prices.
In the interim, we will work like mad to extract more natural gas through fracking. We will turn that fracked gas into nitrogen fertilizer to grow more corn than we need. We will use that fracked gas to convert that great surplus of corn into ethanol. And, finally, we will burn that ethanol in our cars, which we will use to drive to our grocery stores to pay higher prices for our food.
This is not the best picture of an efficiency model.