UPDATED: 08/24/2015 — see Change Log

OWNER: CHS Inc
PROJECT: Greenfield nitrogen fertilizer plant[memberful does_not_have_subscription=”1314-ammonia-industry-annual-subscription,1311-ammonia-industry-monthly-subscription,3338-ammonia-industry-30-day-subscription”]

COST (reported): $3.3 billion
JOB CREATION (reported): 160-180 permanent, 2,000 construction
START-UP DATE (reported): 2018

CAPACITY	USGS[1]	COMPANY[2]	PERMIT[3]	ADJUSTED[4]
Ammonia		2,400 stpd	[Membership required]	[Membership required]
Units: stpd, stpy, mtpd, mtpy = short/metric tons per day/year. [1] United States Geological Survey (USGS) Mineral Yearbook, Nitrogen gives capacity in metric tons per year, calculated as “engineering design capacity adjusted for 340 days per year of effective production capability,” rounded to three significant digits. Source: most recent year, Table 4: Domestic Producers of Ammonia, http://minerals.usgs.gov/minerals/pubs/commodity/nitrogen/. [2] Company announcements. Sources: linked below. [3] [Membership required]. Sources: linked below. [4] [Membership required]. See Methodology.

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SUMMARY STATUS: Cancelled
CHS gave its $3.3 billion greenfield the green light in September 2014, and cancelled it in August 2015. The project faced intractable issues securing an adequate supply of water, and was beset by spiraling costs. CHS is purchasing a minority stake in CF Industries instead.

COST: $3.3 billion, was $1.1 to $1.4 billion
JOB CREATION: 160-180 permanent, 2,000 construction
START-UP DATE: 2018
LIKELIHOOD: Dead — see Methodology

CAPACITY	USGS[1]	COMPANY[2]	PERMIT[3]	ADJUSTED[4]
Ammonia		2,400 stpd 150,000 mtpy	2,425 stpd	802,972 mtpy
Urea, solution			3,000 stpd	993,367 mtpy
Urea, granulated		850,000 mtpy	3,000 stpd	993,367 mtpy
Nitric Acid			835 stpd	276,487 mtpy
UAN		500,000 mtpy	2,000 stpd	662,245 mtpy
Units: stpd, stpy, mtpd, mtpy = short/metric tons per day/year. [1] United States Geological Survey (USGS) Mineral Yearbook, Nitrogen gives capacity in metric tons per year, calculated as “engineering design capacity adjusted for 340 days per year of effective production capability,” rounded to three significant digits. Source: most recent year, Table 4: Domestic Producers of Ammonia, http://minerals.usgs.gov/minerals/pubs/commodity/nitrogen/. [2] Company announcements / company reps quoted in local news (12/18/2014). Sources: linked below. [3] Permit to Construct. Sources: linked below. [4] Adjusted Capacity is in metric tons per year assuming operations for 365 days per year; based on permitted capacity. See Methodology.

FEEDSTOCK: Natural gas
END PRODUCTS: Ammonia, Urea (granular), UAN, DEF

RESEARCH NOTES:
In August 2015, CHS announced it was canceling its $3.3 billion Spiritwood plant.

Simultaneously, CHS announced a $2.8 billion investment in CF Industries, securing a long-term supply of urea and UAN, as well as twice-yearly profit distributions.

The CHS-CF supply agreement allows CHS to purchase “up to 1.1 million tons of granular urea and 580,000 tons of UAN, at market prices. The 1.7 million tons available under the supply agreement have an average gross margin that reflects the average gross margin across the entire CF system.”

But with its new equity stake, CHS will also reap “semi-annual profit distributions from CF Nitrogen … based generally on the volume of granular urea and UAN purchased by CHS.”

The announcements didn’t explicitly say the size of the minority stake that CHS is taking, only that for these 1.7 million tons of product, CHS “is making a $2.8 billion investment for approximately 8.9 percent of CF’s total system capacity.” CF Industries filed a disclosure with the US SEC specifying that CHS’s $2.8 billion buys it “an approximately 11.4% limited liability company membership interest in CFN,” a CF Industries subsidiary called CF Industries Nitrogen LLC.

CFN owns and operates three plants at Donaldsonville, LA, Port Neal, IA, and Yazoo City, MS – but will probably also own Woodward, OK, by the time the CHS transaction closes.

Left out of this transaction are any new assets from the OCI merger, as well as CF’s two Canadian plants and its Terra plant in Verdigris, OK.

Apparently, this deal “creates access to more immediate benefits to CHS owners and customers than a four-year plant construction window.” This makes the investment, and cancellation of the Spiritwood plant, sound like a decision made with a focus on short term results. CHS CEO Carl Casale explained that “ultimately, we determined that the construction cost, water supply challenges, overall risk profile and time required for the Spiritwood project had changed significantly since it was first considered. As a result, we concluded we couldn’t achieve the level of returns needed to justify the increased costs and risks.”

CHS’s investment in CF Industries costs less money and guarantees more product. Even so, “entering nitrogen fertilizer manufacturing through the purchase of a minority ownership in CF Nitrogen is the single largest investment in CHS history.”

Less than a year earlier, in September 2014, CHS had announced the formal investment decision to build the greenfield fertilizer plant near Spiritwood, ND.

At the time, the company also described this as “the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota.”

At its annual meeting, in December 2014, CHS’s CEO Carl Casale said that “This is not only the largest project in our history, but one I believe will have a transformational impact [on CHS],” because it will be the first time the company has manufactured its own fertilizer, taking ownership of the supply chain and its profit margins, like it did with fuel in the 1930s and 40s when it built refineries. This project and the Texas Clean Energy Project would together produce 1.2 million tons per year of domestic ammonia for one customer.

However, the project became bogged down because there simply wasn’t enough water in Spiritwood.

The air permit was approved in June 2014 but securing a source of water, which was underway at the same time, dragged on for another year, unresolved.

The Spiritwood plant’s water requirement was for “an average of 3,800 gallons per minute of water, peaking at 4,200 gallons per minute, mostly for cooling.”

A month before all plans were cancelled, CHS’s potential water supply plans included a mix of:
– building a water reuse facility that would “take in greywater from Cargill Malt, Dakota Spirit AgEnergy and Great River Energy’s Spiritwood Station,” at an estimated cost of $90-$150 million,
– pumping water from the Spiritwood Aquifer (permit application for 3,000 gallons per minute, short-term, though this permit was contested, as it would likely “exceed the recharge capability of the Spiritwood aquifer resulting in groundwater mining”),
– pumping water from the Jamestown Aquifer (permit approved, for 2,500 gallons per minute).
– or simply building a pipeline from the Missouri River, which would have provided more than enough water. “Early cost estimates … range from $250 million to $500 million,” and apparently the pipeline could have been built in the same 40 months it would have taken to construct the plant.

Although CHS “made progress on the critical water supply issue and … received viable plans and permits,” it clearly never found an acceptable solution.

In February 2015, “the project can’t go any further without certainty on a water supply,” according to John Traeger, president of Cenex Pipeline LLC, CHS’s subsidiary, which would have been responsible for building the Missouri River pipeline.

On top of the water challenges, the project’s costs continued to increase. Unless this was a reflection of more expensive water supply plans, I do not know why the costs went up. Following the fall in the price of oil and concomitant industry layoffs, there was no longer a shortage of skilled labor in the US, and I had expected construction costs to be revised downward in the first half of 2015.

In its Q3 2015 quarterly report, filed in July 2015, CHS estimated that the Spiritwood plant would cost “more than $3.0 billion, with the plant anticipated to be operational during calendar year 2018.” The original start up had been scheduled for the second half of 2016, so the project has already been delayed by two years.

The plant’s original cost had been “more than $1 billon” (or “between $1.1 billion and $1.4 billion”) when announced in September 2012. These costs rose to $1.5 billion in 2013, and then “more than $2.0 billion,” in April 2014, at which point CHS put the project on hold, by delaying the expected announcement of an investment decision – because construction and labor costs had grown too high. Their FEED study had estimated costs of $1.5 to $2.0 billion but the bid from their turnkey vendor was “considerably higher,” generating returns that were “positive but unattractive.” When CHS made the investment decision and gave the project the green light in September 2014, the cost had shot up to $3 billion. By July 2015, it had creeped up again to “more than $3.0 billion.”

CHS would have been “the plant’s sole investor,” although it was also open to financing partnerships (“we will always pursue ownership of strategic assets and partnerships that will help us continually add value to their businesses”) – North Dakota Farmers Union was an early partner on the plant.

CHS had already raised $977.7 million through two issues of preferred stock ($476.7 million in September 2014, and $501 million in January 2015), “to provide partial financing capability for this project,” which the company expected to finance “through a combination of issuance of preferred stock and long-term debt.” These stock issues came off a June 2014 shelf registration for $2 billion, which basically means that CHS had already done the paperwork to raise a further $1 billion of new preferred stock.

CHS is a big company: it clearly had the financial ability to build this plant if it wanted (I can’t say the same for most of the announced greenfields). To put this investment in context, according to its Q3 2015 report, CHS had quarterly revenue of $8.7 billion, its working capital was $3.3 billion, and it had a “revolving credit facility … with a committed amount of $2.5 billion and no amounts outstanding.”

When questioned about the wisdom of moving forward with the Spiritwood greenfield at the CHS annual meeting, in December 2014, CFO Tim Skidmore explained that the company “has looked at various scenarios and taken a careful approach to its investments … the company will operate within ‘financial guardrails’ – those set by lenders and more conservative internal controls – to assure that balance sheets remain strong.”

Clearly, after dragging on for too long, Spiritwood was going through the financial guardrails.

The economic argument had been this: the Spiritwood plant would have produced urea at a “cost of $139 per tonne versus product imported from China at a landed cost of $345 per tonne. It will even be cheaper than urea imported from the MENA region at a landed cost of $179 per tonne in Spiritwood.”

When costs were escalating in 2014, CHS worked to improve the project’s economics: it started negotiations with North Dakota state representatives on additional incentives, hired a third-party to analyze the differences between the FEED study and turnkey bid, and submitted an application to the US DOE for a “more than $1 billion” Advanced Fossil Energy Projects loan guarantee.

In May 2014, US Senator John Hoeven (R-ND) lobbied DOE Secretary Ernest Moniz in support of the loan guarantee, and then repeated the effort in August 2014. Hoeven’s office described the Spiritwood plant as “an innovative project,” “reducing flaring” by using “state-of-the-art technology to convert Bakken natural gas into ammonia.” Its press release measured the expected reduction in CO2 emissions as “592,000 tons per year” (Hoeven’s reps explained to me by phone that this measurement was in comparison to complete flaring).

CHS company reps confirmed by e-mail that they hoped the project would be deemed eligible for the loan guarantee under “Technology Area 1: Advanced Resource Development,” specifically the “use of associated gas production to reduce flaring.” CHS declined, however, to provide any details on how their proposal incorporates “New or Significantly Improved Technology as compared to Commercial Technology,” as required by the Advanced Fossil Energy Projects loan guarantee program (PDF).

In June 2015, the DOE issued a supplement to clarify that a project would be eligible if it “uses fossil energy to produce electricity, fuels or chemicals.” I had assumed that the addition of the word “chemicals” in the scope of the solicitation signified that CHS’s application was moving forward with DOE support – but clearly not.

Bechtel was reported to be negotiating for the EPC award, taking local office space under “a six-month lease with the option to renew or cancel at the end of 2015 depending on the status of the CHS contract.” To me, this office arrangement meant either that Bechtel might lose out on the EPC contract to a competitor, or that Bechtel has been selected but knows that the plant might be cancelled.

Wind Ridge Pipeline, a new 95-mile, 20 inch pipeline, was to be built by WBI Energy, to connect the Spiritwood plant to natural gas from the Bakken fields via the Northern Border Pipeline. This pipeline was “in the planning and permitting process,” with the total cost coming in at “an estimated $120 million.” Construction was going to begin and end in 2016, however, following the uncertainty around water availability for the Spiritwood plant, this was been pushed into 2017 – with the caveat that the Wind Ridge Pipeline would “only be built if CHS Inc. builds its fertilizer plant near Jamestown.”[/memberful]

View larger map with all ammonia plants.

ADDRESS: Spiritwood, Jamestown, North Dakota 58401, United States
WEBSITE: https://www.chsinc.com
WEBSITE: http://www.ndfu.org/index.php

REGULATORY SOURCES:

• USGS: Minerals Yearbook, Nitrogen [RECENT / ARCHIVE]
• Air Permit documents: ND Health, Air Quality Permits – Construction [LINK / PDF]
• US Securities and Exchange Commission regulatory filings: EDGAR Search Results, CHS Inc, CIK#: 0000823277 [LINK]

NEWS SOURCES:

• 08/22/2015: Star Tribune: CHS CEO Carl Casale talks Saints stadium and the company’s future [LINK]
• 08/12/2015: CHS press release: Nitrogen Fertilizer Manufacturing Investment Positions Co-Op CHS For Assured Supply, Efficiency, Economics [LINK]
• 08/12/2015: CHS press release: CF Industries and CHS Announce Agreement to Form Strategic Venture [LINK]
• 07/12/2015: Grand Forks Herald, Water permit challenge puts $3 billion CHS fertilizer plant project ‘on hold’ [LINK]
• 06/23/2015: US DOE: THIRD SUPPLEMENT TO LOAN GUARANTEE SOLICITATION ANNOUNCEMENT [PDF]
• 06/23/2015: The Jamestown Sun, JSDC budget sent back to board [LINK]
• 05/02/2015: Jamestown Sun, Water permit application challenged [LINK]
• 04/23/2015: Jamestown Sun, Legislature advances bills for CHS project [LINK]
• 03/21/2015: Grand Forks Herald, Water supply for Fargo may have to wait for pipe to fertilizer plant first [LINK]
• 03/12/2015: Jamestown Sun, Water reuse facility under review by water commission [LINK]
• 03/11/2015: Jamestown Sun, CHS project issues remain: Water supply and construction plan still under review for planned plant [LINK]
• 02/28/2015: The Bismarck Tribune, Missouri River a underutilized resource [LINK]
• 02/15/2015: The Bismarck Tribune, Fertilizer plant looks to Bismarck for water [LINK]
• 12/18/2014: The Western Producer, New U.S. fertilizer plants may spark cheaper prices in Canada [LINK]
• 12/10/2015: Jamestown Sun, Water plan: Plans continue to turn treated waste water into industrial quality water [LINK]
• 12/05/2014: Star Tribune, High earnings, ambitious future for CHS co-op [LINK]
• UNDATED: WBI Energy, Wind Ridge Project Overview [LINK]
• 09/05/2014: CHS press release: CHS to build fertilizer plant at Spiritwood, N.D. [LINK]
• 08/28/2014: Jamestown Sun, Pipeline project: Natural gas pipeline would serve CHS plant [LINK]
• 07/15/2014: Jamestown Sun, Study goes on: CHS still considering Spiritwood nitrogen plant [LINK]
• 05/02/2014: US Senator John Hoeven press release: Hoeven Presses Moniz to Support ND Fertilizer Plant [LINK]
• 04/30/2014: AgWeek, CHS water tests continue, expected to end today [LINK]
• 04/08/2014: CHS statement, provided by e-mail: Spiritwood fertilizer manufacturing plant remains under review [LINK]
• 04/02/2014: Jamestown Sun, Delay: CHS announcement for construction of nitrogen fertilizer plant on hold [LINK]
• 04/02/2014: Jamestown Sun, County rescinds bids for road project at request of CHS [LINK]
• 01/20/2014: Prairie Business, Costs rise for proposed CHS fertilizer plant [LINK]
• 12/20/2013: Bismarck Tribune, North Dakota township caps permit fee to accommodate plant [LINK]
• 11/07/2013: CHS press release: CHS reports fiscal 2013 earnings of $992.4 million [LINK]
• 08/21/2013: NDFU press release: Progress on fertilizer manufacturing plant [LINK]
• 02/25/2013: NDFU press release: Next stage of fertilizer plant approved [LINK]
• 09/12/2012: CHS press release: North Dakota governor, CHS announce plan to pursue major nitrogen fertilizer plant [LINK]