The construction of a Spiritwood, North Dakota, nitrogen plant would have been the largest single investment ever made by CHS and the largest single investment project in North Dakota. But the plant, once set to open in 2018, was scrapped after construction expenses mushroomed to $3.3 billion — more than triple the initial $1.2 billion project cost and in excess of what CHS’ board of directors had authorized, a CHS spokesperson said. Less than a year ago, CHS executives pegged the plant cost at $2.8 billion and said they were confident it could pay for itself despite the collapse in grain prices since 2012.
“Our long-term goal has always been to add value for CHS owners through investment in the nitrogen fertilizer manufacturing space. To that end, we’ve continued to look at a variety of options, including the Spiritwood project,” said Carl Casale, CHS president and chief executive officer. “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.”
Access to cheap natural gas had sprouted a renaissance in domestic fertilizer production, with the possibility of at least 12 world-scale ammonia plants, 11 urea facilities and several incremental plant expansions all slated by 2020. However, industry analysts had cautioned that such an investment boom could risk an oversupply situation, if all proposed plants were built. The Spiritwood plant would have generated more than 2,400 tons of ammonia daily that would have been converted into urea, ammonium nitrate and diesel exhaust fuel.
Since 2000, the U.S. has imported about half of its nitrogen needs, subjecting the fertilizer chain to volatile prices between orders and deliveries. It often takes 60 days or more to move fertilizer from dominant manufacturers in the Black Sea region to the upper Midwest. Rail bottlenecks in 2014 caused major headaches throughout the Dakotas.
The joint venture announced Wednesday between the two firms entitles CHS to purchase up to 1.7 million tons of UAN and urea at market prices from CF Industries. Simultaneously, CHS is purchasing a minority ownership stake in CF Industries Nitrogen LLC for $2.8 billion and will be entitled to semi-annual profit distributions.
CF Nitrogen currently owns three production facilities in the United States, including Donaldsonville, Louisiana; Port Neal, Iowa; and Yazoo City, Mississippi. It has announced projects worth $2.1 billion for new ammonia, urea and UAN production units in Donaldsonville and $1.7 billion for new ammonia and urea plants at the Port Neal Nitrogen Complex in Sergeant Bluff, Iowa.
Both CF projects have broken ground and are expected to be among the first to come online in North America in 2015-16. When complete, they will increase CF Industries’ nitrogen capacity by 25%, the company says, generating 2.1 million metric tons of gross ammonia and upgraded products ranging from 2.0 mmt to 2.6 mmt of urea and 1.8 mmt of UAN solutions.
“While we are disappointed that the proposed plant will not be completed, we are happy that CHS has committed to investing $2.8 billion into nitrogen fertilizer manufacturing through CF Industries Nitrogen, LLC,” North Dakota Farmers Union President Mark Watne said in a statement. “This step will ultimately help producers and will allow CHS to get their products to patrons on a timely basis using their new resources.”