The Natural Gas Crisis
By Jim Harris

Like residential consumers who have been hard hit by large utility bills in recent months, the Louisiana ammonia industry has also felt the jolt and the plants have faced major difficulties in surviving the impact of high natural gas price, according to Louisiana Ammonia Producer (LAP) Chairman Lou Frey.

HISTORY
The ammonia industry began operating in Louisiana in the mid-1960s. Abundant and relatively inexpensive natural gas -- which is vital to the production of ammonia -- and ease of Mississippi River transportation spurred the rapid development of the industry. Louisiana's ammonia industry grew to include as many as 10 companies operating 11 facilities. Recent downturns in global markets for agricultural nutrient products and high natural gas prices, however, have reduced those numbers. Today the industry is made up of seven companies operating eight ammonia plants across the state.

The Louisiana Ammonia Producers consume more than 207 billion cubic feet of natural gas each year. About 60 percent of this natural gas is used as a feed stock, and 40 percent is used as fuel. Much of this gas comes from fields in Louisiana, generating millions of dollars in severance taxes for the state. These facilities pay property taxes to parish and municipal governments amounting to more than $9 million each year. Sales taxes, which are a direct result of these operations, are about $13 million per year to state and local governments. This all adds up to more than $22 million per year in state and local taxes from ammonia producing facilities.

THE CURRENT STUATION
Frey noted that while rising costs of natural gas may be good news to the state's oil industry and to state government in the form of additional severance tax money, it is bad news for ammonia producers, who use natural gas as both fuel (electricity) and feedstock in their production process. Natural gas makes up 90 percent of the cost of making ammonia. "Natural gas prices surged in the past year, going from $2 per million BTU in 1999 to levels as high as $10 per million BTU this past December. In other words, natural gas prices quadrupled within a year," said Frey.

Two plants in Louisiana-Borden and Monsanto-permanently closed their ammonia business over the last year and, all but two of Louisiana's remaining ammonia plants were completely shut down for much of December and January. Even the two still produced ammonia all year did so at reduced levels. With these curtailments, LAP member companies reported some 200 employee layoffs.

High natural gas prices, according to a survey conducted of LAP members in late December, have also resulted in the facilities placing future construction plans in limbo. Two-thirds of the companies surveyed indicated new construction or upgrade projects were put on hold or indefinitely postponed, unless the work is environmental or safety-related.

Other negative fallout of the high price of natural gas includes an increase in cost of other product lines due to higher electricity and heating rates and potential equipment damage resulting from shutdown and start-up activities. Unfortunately, the uncertainty of high natural gas prices has, according to the survey, also resulted in low employee morale and difficulty in keeping or hiring professionals due to the uncertainty of the industry.

The slowdown and the shutdown of Louisiana ammonia production late last year and in January of this year has eased somewhat as natural gas prices have fallen to around $5 per million BTU. Unfortunately, this is still well above the $2 per million BTU it was selling for in early 2000. LAP members are restarting production in an effort to meet demands for fertilizer this spring. But according to The Fertilizer Institute, a national trade group, supplies are running 10 percent behind last year and the higher price for fertilizer, caused by high natural gas prices, will be felt by farmers this spring.

HOW DID THIS HAPPEN?
Ammonia producers, like residential customers, are wondering how the devastating increases in the cost of natural gas occurred so rapidly. Based on industry research, the answer is simple--too much demand and not enough supply. This, in turn, has led to a sharp decline in natural gas inventory and a sharp rise in natural gas prices. The American Gas Association reported that natural gas inventory at the end of last year was at a record low. Cambridge Energy Research (CERA) reported that another significant factor has been the unseasonably cold weather over the last few months. CERA said residential demand for natural gas during the fourth quarter of 2000 was 18 percent more than last year, with demand in the first quarter of this year expected to be up 10 percent. The increase in the use of natural gas for electric power generation due to a robust economy in recent years has also played a part, with overall demand for electric power increasing by 4 percent.

At the same time demand has been increasing, supply has been going down. Older existing wells are playing out. Federal policies and low prices in recent years has deterred the oil and gas industry from exploring for additional natural gas in hard to get at fields. Moreover, the failure of the Federal Government to establish an U.S. Energy Policy over a number of years has, as much as any other factor, contributed to the current crisis. Many areas of potential natural gas production in the Gulf of Mexico, off the coast of California, in Alaska and other states are off limits for drilling by mandate of the federal government.

WHAT CAN BE DONE?
The situation is expected to improve very little through next winter according to a recent report from the EIA, an independent information service of the U.S. Department of Energy. Aware that the current crisis is long-term, LAP members initiated an aggressive letter writing campaign to federal elected officials late last year to notify them of the dire situation faced by the industry.

LAP Chairman Lou Frey asked the Louisiana congressional delegation to "pursue efforts to increase incentives for domestic natural gas production, including opening of untapped areas of natural gas reserves to exploration."

U.S. Congressman Billy Tauzin, D-Chackbay, the new chairman of the House Energy and Commerce Committee, has responded to LAP members with a news release calling "for new hemispheric agreements encouraging natural gas exploration and production."

Tauzin continued, "The Louisiana ammonia industry supplies fertilizer to the entire farm belt. The critical role of this industry in our nation's food production-and the extraordinary-difficult times it's now facing-make it imperative that we consider options to alleviate these difficulties."

President Bush has made a national energy policy, including the opening of some areas in Alaska, a priority of his administration. Republicans in the U.S. Senate have introduced a 300-page bill to address the country's energy problems and the U.S. House is holding hearings about the situation as a prelude to introducing legislation.

LAP member Jim Dutcher of Cytec said, "We don't have a lot of time to talk about this situation. It is imperative that the President and Congress take immediate action to increase U.S. natural gas production. It is important for everyone to assure the continued existence of the ammonia industry and the fertilizer we produce to help feed the world."

LAP is requesting Louisiana citizens to call or write their U.S. Congressmen in support of action to increase exploration and production of natural gas.