Alaska Cook Inlet

1
Alaska Cook Inlet Natural Gas Competitiveness
Alaska Joint Committee on Natural Gas
Pipelines November 2001
Chris W. Tworek Vice President, Supply
Management Agrium Inc.
2
Agenda

• The Company
• Kenai Nitrogen Operations
• World Competitiveness
• The Alaskan Situation
• Partners in Growth

3
The Company

• Agrium is One of Worlds Largest Fertilizer
  Manufactures
• 14 Production Facilities
• 11 million tons (
• Second Largest Ag. Retailer in N.A.
• 226 Outlets
• Annual sales exceed US 2.0 Billion

4
The Company

• World Scale Facilities
• High Efficient / Low Cost Producer
• Strategically Located Near Key Markets
• Tidewater Access to International Markets
• Highly Skilled Workforce
• More Than 5000 Employees World Wide
• Committed to Safety The Environment

5
Kenai Nitrogen Operations

• Products
• 6 of N.A. Nitrogen Production
• Ammonia - 700,000 (net) tons
• Urea - 1.1 million tons

• 50-55 BCF/yr of Natural Gas Consumption
• Employees
• 300 Full-Time, Highly Skilled
• 30 Contractors on average

6
Kenai Nitrogen Operations

• Primary Markets
• Ammonia Pacific Rim
• Urea Mexico, South America, Taiwan and Korea
• Competition
• FSU, South America, Trinidad and Pacific Rim
• Many new plants built in last decade
• World product prices tend to be capped by trapped
  gas economics

7
Kenai Nitrogen Operations
Economic Benefits over 130 M/yr

• Community Investments
• Large Local Employer
• 300 Highly Skilled Employees
• Donations Sponsorships
• Caring for The Kenai
• United Way
• Challenger Learning Center
• Boys Girls Club, etc.
• Commitment to Safety Environment

Includes Royalties
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World Competitiveness

• Nitrogen is a World Traded Commodity
• Easiest way to monetize transport gas reserves
• 15/t to 50/t ocean freight
• Recent high N.A. gas prices made N.A. Nitrogen
  production uneconomic
• N.A. Produces 14 of Worlds Nitrogen
• Up to 50 of N production shut-in at peak
• U.S. Nitrogen imports doubled
• Gas producers lost sales for all industrial
  products

20 M tons N - Ammonia, Urea, Nitrate, UAN
solutions (2.0 - 2.3 BCF/d natural gas
consumption)
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Importance of Natural Gas

• Ammonia takes 33.5 MMBTU per ton
• Gas is 75 90 of ammonia production cost

World Recent Prices N.A.
Feed (MMBTU/ton) 33.5 33.5
Gas Price (/MMBTU) x 1.00 x 5.00
Variable Feed /ton 34 168
Cash Conversion /ton 25 25
Cash Production /ton 59 ?100-190? 193
10
World Industrial Gas Cost Comparison
Projections for 2001 (US/MMBtu)
Alaska 1.20-1.50
Western Europe 3.60
Canada 4.50
FSU 1.30
United States 5.00
China 2.50
Middle East 1.00
India 4.50
Trinidad 0.75-1.50
Indonesia/Malaysia 1.00-1.50
Latin America 0.60-1.50
Australia 1.00-1.30
High-Cost
Low-Cost
Source CERA, BJA, Fertecon, Agrium
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The North America Balance
2001 vs 2000 (Crop Year) Nitrogen (million st/yr)
Normal Production 19
Production reductions (3)
Increased imports 3
Supply 19
Market Demand 18
Inventory Build 1.0
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Major Ammonia Exporters to North America
000 Tons of NH3
1,692
3,228
1,092
2,418
FSU
226
23
91
0
Asia
Middle East
Trinidad
311
180
Latin America
1999/00
2000/01
Source USDC, Statistics Canada
13
Major Urea Exporters to North America
000 Tons of Urea
1,671
280
878
160
753
W. Europe
389
426
52
297
Asia
Middle East
97
Trinidad
Africa
150
38
Latin America
1999/00
2000/01
Source USDC, Statistics Canada
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Affect of High N.A. 2001 Gas Pricing

• Plant Shut Downs
• Up to 50 at Peak Gas Pricing
• Loss of Market Share
• Imports almost doubled
• 4-5 gas cannot compete against 1 gas
• Offshore competition won
• Gas Producers lost sales
• N was about 0.75 of 3-5 BCF/d industrial demand
  destruction
• High prices were not sustained

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The Alaskan Situation

• Cook Inlet Products are exported
• Fertilizer and LNG compete globally
• New industries (e.g. gas to liquids) will also
  have to compete internationally
• Our prices are based on international markets not
  lower 48

US/ton
NOLA
Black Sea
New Orleans
World Market
Source Green Markets, Blue Johnson
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The Alaskan Situation

• Jones Act restricts exports to lower 48
• Act requires U.S. Flag vessels to move products
  among U.S. ports
• Cook Inlet Fertilizer is forced to go
  off-shore
• No U.S. flag ammonia vessels left
• Urea limited to 1-2 sea going barge

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Partners in Growth

• Expansion Opportunity
• Based On Cook Inlet Advantages
• Close to Pacific Rim markets
• Good Business Climate Skilled Workforce
• World Scale Plant
• Needs to expand to stay competitive
• Agrium uses 50-55 BCF/yr today
• Expansion plans add up to 30 BCF/yr
• Current base supply needs long term extension

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Partners in Growth

• Expansion Benefits to Alaska
• Grows Current Local Economic Contribution of 130
  M annually
• Increases Sales/Exports
• Expands skilled employment
• Allows Greater Community Investment
• Increases Tax Base
• Encourages Gas Exploration
• Opens Up Other Industries to Export Markets
• Must Be Based on Competitiveness
• Reliable and Internationally Competitive Supply
  of Gas

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Partners in Growth

• Some Possible Solutions
• Spur from Alaska Gas Pipeline is long term
  advantageous solution
• Cook Inlet has immediate additional gas potential
• Anchorage Economic Development Corp Report 1-3
  TCF to be found
• Coal Bed Methane 8 250 TCF
• Escopeta 5-18 TCF

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Partners in Growth

• Agrium willing to work with State and Producers
  to encourage development
• Pre-investment on appropriate risk/reward
• Pre-bought gas production
• Infrastructure investment (e.g. pipelines)
• Exploration and drilling partnerships
• Exploration Royalty Relief
• Ongoing royalties based on actual contracts or
  weighted average sales prices
• Purchase of State Royalty Gas
• North Slope Spur Line

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In Closing

• Successful partnering will
• Continue Alaskas development for all sectors
• Building Cook Inlet strengthens base for mega
  projects such as Alaska Pipeline
• Contribute to Alaskas export position
• Increase Agriums annual 130 M plus contribution
  to local economy

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November 2001