Update on Ammonia Shutdowns/Terra Chemical ,
 High Prices Force Chemicals to Sell Gas, Futures

Chemical companies, forced to shut in operations because of high natural gas 
prices, are nevertheless making money --- by selling gas futures contracts. 

Terra Industries and Mississippi Chemical Corp. became the latest companies 
to announce cutbacks related to current natural gas costs. 

Iowa-based Terra Industries said it had sold off a portion of its December 
natural gas purchases, and shutdown 50% of its Verdigis, OK, ammonia 
facility. The company had previously reported that it would not operate its 
Bytheville, AR, and Beaumont, TX, facilities during the month of December as 
well. 

In a similar maneuver, Mississippi Chemical Corp., a producer of nitrogen, 
phosphorus and potassium-based products in Mississippi, Louisiana and New 
Mexico, reported the sale of all of its natural gas futures contracts from 
January forward, in order to take full advantage of the opportunity uncovered 
by soaring natural gas prices. Mississippi Chemical said it expects to 
realize a pre-tax gain of $16 million in its second fiscal quarter ending 
Dec. 31 from the recently sold contracts. 

The problem lies in the fact that escalating natural gas costs are not being 
mimicked by chemical prices. An overabundance on the market has kept chemical 
prices relatively low, while gas prices, a feedstock for some chemicals, 
continue to climb. The difference in the latest shutdowns is that the 
companies involved have openly announced they have sold their gas contracts 
off because it is more profitable than manufacturing their products, said Ron 
Phillips of The Fertilizer Institute. 

Duke Energy's Ken Nyiri, divisional director of strategic planning and 
research, commented on Mississippi Chemical's transactions, "I guess they 
probably made about a $4/MMBtu margin on the gas, which is significantly more 
than they could make on the ammonia; in fact, they would have lost $30/unit. 
Their ammonia was probably costing them about $205/ton to make (with gas 
bought at $5/MMBtu in November) and the market today is at $205 so basically 
they would break even on their ammonia production costs. By selling the gas 
at around $9/MMBtu they made $4/MMBtu. It was just a question of do they 
convert the gas to ammonia and make nothing on it, or do they sell the gas 
and make $16 million." 

Michael L. Bennett, executive vice president of Terra, said, "The natural gas 
price increase since our December requirements were purchased for Verdigris 
permitted us to sell a portion of those purchases and generate higher gross 
profits than could be realized from selling the products manufactured with 
the natural gas. We will evaluate the economics of bringing Verdigris back to 
full production near the end of December when January's natural gas purchase 
commitments must be made." 

Terra estimates the idled facilities represent 40%, 30%, 77% and 88% of the 
company's North American ammonia, UAN, urea and methanol manufacturing 
capacity, respectively. The production of all four chemicals are heavily 
dependent on natural gas. Phillips said "The latest data we had in October 
was that of the companies that we survey, which is not the entire ammonia 
market, but a good bit of it, we were looking at operating rates of 76%." 

Currently, a total of 4-5 million tons/year of ammonia production capacity is 
out of service out of about 20-21 million tons/year of production capacity. 
"Clearly some of these folks have been selling their gas [rather than 
producing ammonia]," said Nyiri. "It's the prudent thing to do, I think, in 
this marketplace. Buy your ammonia if you can. At $9 gas, that costs you 
$350/ton to make the ammonia, which is $145 more than the current market is 
willing to pay." 

A spokeswoman for Mississippi Chemical said the company held on to its 
December gas contracts, and has been operating at varied levels of capacity 
throughout 2000 (see Daily GPI, June 30). "Depending on what the gas prices 
are, and what our product prices are around the January-February time frame, 
we will make decisions then on our operations rate [capacity]," said Melinda 
Hood, a Mississippi Chemical spokeswoman. 

Charles O. Dunn, CEO of Mississippi Chemical, said, "We remain committed to 
the nitrogen business and our customers, but we also have to take advantage 
of opportunities to optimize cash flow during these challenging times. It is 
our belief that the current unprecedented natural gas prices are unlikely to 
be sustained during the intermediate term," stated Dunn. "As a result, we 
felt it was in the company's best interest to sell our futures positions to 
lock in the substantial gain afforded by the recent increase in natural gas 
prices. Going forward, we will continue to determine operating levels for our 
plants based on the relationship between natural gas prices, nitrogen product 
prices and our customers' requirements, as we have been doing for some time." 

International imports are also hurting U.S. producers. Currently, there is a 
surplus of ammonia in the international market, which is holding ammonia 
prices down. U.S. fertilizer producers can't compete with the international 
market. Gas prices are 46 cents/MMBtu in Russia, 50 cents to $1/MMBtu in 
Argentina and Venezuela, and $1/MMBtu in Trinidad. The U.S. imports 5.5 
million tons of ammonia each year. Fertilizers represent 80% of the demand 
for ammonia in the United States. 

Terra Industries said its facilities would resume production as soon as it 
became economical again --- whether from gas prices declining or nitrogen and 
methanol prices rising, just as long as "prices reach levels allowing 
positive cash flows." 

Nyiri said he believes relief is in sight. He pointed out that the ammonia 
market has been sitting around the $205/ton level for the last several 
months, but believes ammonia prices will have to increase entering the next 
planting season. "I've got my model peaking out around $250/ton in April or 
May and at that time I have gas costs coming down." At that point, the 1-2 
Bcf/d of demand from the fertilizer production industry should begin 
returning to service. 


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rockey.storie@enron.com, kent.miller@enron.com, john.dushinske@enron.com, 