Plenty River Corporation Limited (PRCL), plans to build an ammonia plant on the Burrup Peninsula in NW Western Australia near the source of the natural gas and the proposed Pilbara Petrochemical Project (PPP). Unlike the PPP, restrained by limited supplies of ethane, PRCL may, subject to more LNG production, have access to adequate methane and therefore may anticipate world-scale production. Like the PPP can it stimulate other chemical activities through synergistic benefits.
As an ammonia producer, it will require nitrogen obtained by cryogenic extraction from air. The co-produced oxygen would be of benefit to a methanol, glycol or EDC project. There are already expressions of interest in methanol production (also produced from methane), and the PPP will also present a ready market for the oxygen. Other benefits of the project include the production of ammonia that could help a soda ash project (especially were it to produce ammonium chloride as a by-product). It is relevant to note the Gorgon gas field contains 14 per cent CO2 that could be used in the manufacture of soda ash rather than being vented or reinjected).
In March 1999, PRCL signed a MoU with Indian fertiliser company Chambal Fertilisers and Chemicals Ltd to build a US$500 million plant to produce 1 800 tonnes per day of ammonia (657 000 tonnes pa). Approximately two-thirds of the ammonia is planned to be processed to urea fertiliser (700 000 tonnes) leaving 230 000 tonnes of ammonia for sale. An ammonium nitrate plant is under consideration that, were it to use all the expensive-to-transport ammonia, could be as large as 500 000 tonnes pa. The project developers will consider duplicating the project within five years depending on market demand. Construction is planned for Sept 2000 and completion by January 2003.
A comparative cost study has been started by Plenty River Corp and Chambal Fertilisers and Chemicals for the construction of a joint venture facility with ammonia capacity of 1800 tonne/day and urea capacity of 2200 tonne/day. Following completion of the study in Nov 1999, the partners expect to make a decision on the location of the project. The two site being considered are at Burrup Peninsula, Western Australia, and Wickham Point, Darwin, Northern Territory. The technology licensing, engineering, procurement, construction supervision and project execution contract has been awarded to Snamprogetti. Snamprogetti will also supply its own technology for urea production, Hydro Agri's urea granulation technology and ammonia technology from Haldor Topsoe.
The construction contract has been awarded to Thiess Contractors. At the end of Sep, the two construction companies are due to sign a formal co-operation agreement.
With Indian partner Chambal, PRCL will have ready access to the Indian market which is protected by import tariffs. It is possible that with that partner a by-law concession to avoid import tariffs, will give the venture a competitive edge with urea over a low cost producer such as Qatar. That said, PRCL intend to produce granular form (that sells at a premium of A$15 per tonne in Australia) while India uses a prilled form. The value of the India partner is not entirely clear and neither why PRCL would not produce a prilled form.
Ammonia transport costs from Perth region (Kwinana) to the new nickel refiners is around $79 per tonne and $20-25 per tonne to Kalgoorlie. It is anticipated the transport cost from the Pilbara to the nickel regions would be the same cost as from Perth.
The urea market in Western Australia is in the south-west requires some 250 000 tonnes per year. Freight from Perth may average around $20 per tonne compared with $55 per tonne from the Pilbara providing a net disadvantage compared with Wesfarmers of $35 per tonne (perhaps $40 for imports).
Transport to the urea markets in southern Queensland and northern NSW is estimated at some $25 to $45 per tonne from the Pilbara.
It is relevant to note that the Pilbara/Murchison requires around 130 000 tonnes of ammonium nitrate per year (including the Argyle mine at 16 000 tonnes) that is produced from 65 000 tonnes of ammonia (with balance of mass derived from air).
Ammonium nitrate can be conveyed from the Pilbara to around Perth for $55 per tonne whereas freight from Perth to the Pilbara would be around $90 per tonne. The transport of ammonium nitrate from the Pilbara based plant to users in the region might range from $35 to $65 per tonne averaging $50. In other words the potential manufacture of ammonium nitrate in the north west has a freight advantage of $40 per tonne in the north west and $20 per tonne in the Kalgoorlie region.
Ammonium nitrate is increasingly moved in liquid forms from the manufacturer to nearby explosive users sharing the benefit of avoiding the drying step up to the point where the penalty of the consequent higher transport costs of moving a bulkier form equals the cost of its drying and prilling.
A relevant issue is having access to the technology with the best prospect being Total Energy Systems.
The ammonium nitrate market is therefore only a small outlet for ammonia.
Energy prices may be negotiated at A$1.50 per gigajoule. Ammonia production requires around 35 gigajoules per tonne produced.
A producer around Perth (CSBP Wesfarmers) would incur an additional $1.20 per gigajoule pipeline tariff. Energy prices may be assumed to be the same. On this basis, a Pilbara based producer would have a production cost advantage of around $42 per tonne of ammonia, and perhaps $23 per tonne of ammonium nitrate or urea.
Higher construction costs, of around 30 per cent per unit of production capacity can be anticipated in the NW compared with around Perth. Required infrastructure, dedicated loading facilities (conveyers etc.) will further increase costs compared with the home market-oriented Wesfarmers plant at Kwinana.
The proposed scale of production is three-times that of Wesfarmers CSBP at Kwinana so it will provide a clear per unit advantage of around 25 per cent of the full production cost. With amortisation, of the higher cost of capital will provide a net cost advantage of say 20 per cent for ammonia and 12 to 15 per cent for urea (say $50 per tonne of ammonia and approximately $25 per tonne of urea or ammonium nitrate).
Ammonia is moved in dedicated vessels and unlike urea and ammonium nitrate (that can be moved in bulk and 1.2 and 2.0 tonne Bulka bags respectively allowing for backloading) is accordingly not a desirable product to be exported from the north west. Typical rates for such dedicated vessels are US$35 000 per day and a cost of exporting ammonia from the NW to India might be US$50 per tonne, increasing its cost by 30 per cent.
Urea and ammonium nitrate
Moving urea to India would be US$20 per tonne, increasing its cost by 15 per cent.
Ammonium nitrate is commonly moved in Bulka bags that might cost in Australia some $5 per tonne to be handled on the wharf. In comparison, urea by conveyer belt is $2 per tonne. Freight to destination such as India in 35 000 tonne vessels could be around A$25 per tonne in bulk or $25 to $30 per tonne in Bulka bags.
Freight to Fremantle could be anticipated at $10 per tonne in bulk plus the above premium for Bulka bags and wharf-handling rates.
As above to Queensland from Pilbara around $12 per tonne in bulk. Australia's cabotage laws has inflated this price by $6 per tonne and its review could improve the competitiveness of the Queensland market.
Calculated on an ammonia basis, the lower cost of energy in the NW provides PRCL an advantage over Wesfarmers of $A60 per tonne while scale provides a further A$15 to $20 per tonne. For ammonium nitrate and urea each of these advantages could be anticipated to be approximately one-half as the ammonia represents about one-half of the final mass of the product (though urea is not produced by Wesfarmers).
Construction cost (recovery over seven years) and manning cost penalties (for operating in the NW compared to Kwinana) can be anticipated to be around $15 per tonne of ammonia. On this basis clearly the net ex plant advantage over Wesfarmers is then around $60 per tonne of ammonia (again one-half that for the ammonia derivatives, urea and ammonium nitrate).
This ex plant advantage is quickly eroded by freight costs that notably for the ammonia derivatives leaves at best a balance with Wesfarmers in the W.A. region and a small advantage against Incitec in the east. Again to be noted is that Incitec is evaluating a project in Victoria that would that would be lower cost than PRCL and with comparable freight costs. Incitec also has well established infrastructure and marketing outlets.
Access to overseas markets is equally problematic. While freight costs are in effect a little lower than for the domestic markets (expressed on per tonne of ammonia basis), port handling and required infrastructure costs are significant. Gas producing regions such as Qatar provide energy at even lower prices than available in the NW (A$1.20 per gigajoule).
It is not clear what role the Indian partner will have in providing access to the protected Indian market. Outside India, PRCL will have only a small freight advantage over the Middle East suppliers for the closer Asian markets - an edge of A$8 to A$15 per tonne of urea or ammonium nitrate (one-half that if expressed as units of ammonia). That edge is however also about the same value as the penalty of higher gas prices incurred in Australia (say $10 per tonne). Therefore the net delivered cost to Asian countries is about the same as from the Middle East assuming similar construction and manning costs.
Given rejections for the project by the stronger local market players, Orica and Wesfarmers, the success of PRCL will hang heavily on the marketing strength of Chambal.
Given its new partnership arrangement with Chambal, that has a captured market for urea in India, PRCL is now less likely to be acquired by Orica or Wesfarmers though both (Orica through Incitec) have a dominant influence in the fertiliser and explosives markets. Both Wesfarmers and Orica (and Incitec) have evaluated an investment comparable to the PRCL project. Construction costs of A$700 million compared with A$500 million in Victoria and manning costs some 30 per cent higher have been identified that would erode some of the advantage offered by access to cheaper natural gas.
There is also the question of access to markets and transport and storage related infrastructure. Both Orica (including the new ammonia facility at Yarwun, Qld) and for Wesfarmers have access to facilities to service the Australian market.
The importance of marketing and infrastructure is illustrated by the fact that BHP sold its Moura ammonium nitrate explosives venture to well established Wesfarmers. Equally WMC only commenced its ammonium phosphate fertiliser operation in Queensland after a creating a presence in the Australian market with its HiFert fertiliser import and marketing business over the preceding decade. Even then, WMC still plans to sell half its output overseas though the Australian market easily could absorb all of its production.
PRCL is clearly a project that will succeed based on competitive energy (gas) prices and the marketing advantage provided by its venture partner, Chambal. That single source of advantage must pay for higher construction and manning costs in the Pilbara and transport costs to generally distant markets. It would appear that its advantage in the home market is at best marginal against Wesfarmers in W.A and Qld and it will face pressure of potential low cost producers in Qld and Victoria. One that basis, its aim of selling 50 per cent into the home market is unlikely and it will need to compete against low cost Middle East producers with some possible advantage for closer markets such as Thailand and China.
The high cost of transporting ammonia will encourage it convert as much of the ammonia to the cheaper to transport urea and ammonium nitrate. The balance will be influenced by international shipping costs of dedicated vessels required to move ammonia.
As signalled by the rejection of the project by Incitec and Wesfarmers, fundamentally stronger in the home market, it will be Chambal that holds the key to its success in obtaining access to otherwise closed markets.
A case could be made for assistance by government given the stimulation benefits for other petrochemical projects. The case would be strengthened if most production were to be exported so the assistance would not prejudice Australian producers.
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