Gas producers must be wringing their hands in glee as futuresprices top $4.45/MMBtu, but some of their customers clearly are alittle less than overjoyed. High gas prices are forcing somefertilizer producers to consider shutting down their plants andselling their feedstock on the open market just to make ends meet.

WEFA Inc. energy analyst Ron Denhardt estimates the gas industrywill lose 25% (400 MMcf/d) of demand from the ammonia and ureaindustry this year because of the high price of natural gas. Otherobservers are expecting much larger losses, reaching as high as 1.5Bcf/d. Denhardt also estimates the loss of an additional 1-2 Bcf/ddue to fuel switching in the power production sector and possiblyanother 2.2 Bcf/d as industrial end users switch over to fuel oil.But those numbers are dependent on the comparative price of Nos. 1and 2 fuel oil, both of which currently exceed the price of naturalgas per Btu.

“Chemical and fertilizer companies who have hedged their gassupplies are better off shutting down their plants right now andselling the gas into the market,” said one chemical plant supplymanager, who asked to remain anonymous. “It’s terrible. It’s awful.About 70% of my contracts for sale are pass-through based on thecost of raw materials, and that’s the only thing that is keeping mein business right now. We would not be making cost right nowotherwise. We might be at a break-even point. And we hedged about40% of our purchases back in September of last year, which was apretty good time, looking back right now. We just have to plan itday by day. A number of fertilizer companies have closed up.”

It’s difficult to say when it becomes uneconomic to producefertilizer because each plant is unique with its specificdepreciation rate and costs, noted Dennis Lee, manager of energyand feedstock for Sask Ferco Products Inc., a partnership of Cargiland the Saskatchewan government. Lee’s plant is one of the largestammonia and urea producers in the world. It uses about 75 MMcf/d.Regardless of the unique circumstances of each plant, however, it’sclear most of the companies will have to put out a lot of cash inthe next few months to stay producing, said Lee. “From a creditperspective, some of the weaker companies may be in a creditcrunch. There have been a couple of announcements of prolongedshut-downs in the Gulf Coast region recently because of high gasprices.

“People are getting antsy” because of a potential fertilizershortage in the fall, he said. “Overall, I don’t think it’s a veryhealthy time for our industry. There could be some restructuringbecause of it.”

He said it “doesn’t look like” his plant is in any danger of ashut-down “at this point” because it is very close to its customerbase in the Midwest and has a high efficiency factor, much higherthan its older competitors in the Gulf Coast and Midcontinentregions. But the outlook does not look as good for many of hiscompetitors, he said.

Procter & Gamble recently turned to energy procurement over theInternet in an attempt achieve greater purchasing efficiency and lowerprices. It is posting requests for quotes (RFQ) for a number of itsfacilities on a new transaction website, www.energygateway.com, aspart of its exploration of new avenues for supply acquisition. “We’rein the early stages of experimenting with this,” a P&G buyersaid. (See Daily GPI, June 13) P&G,which like most very large energy using manufacturers, continues to doits buying and risk management in-house, plans to post more RFQs onthe energygateway.com website.

“We’re looking for other opportunities to try out and evaluate.We’re always looking for ways to bring value to our company,” theP&G buyer said. “It’s not a good time to be a buyer in theenergy market. We’re re-evaluating our approaches. We don’t want tojust be a victim of the market.”

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