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Urea plant upgrade hangs in the Ballance

The ban on new offshore gas exploration is another spanner in the works for a major upgrade of New Zealand's only ammonia-urea production plant.

Fertiliser cooperative Ballance Agri-Nutrients has been planning a $1 billion rebuild of its urea plant at Kapuni for several years, but has been stymied by cost increases, low urea prices and the withdrawal of a cornerstone investment partner. Now it says the government's decision to end new offshore exploration permits is another risk factor for the project.

Natural gas from the nearby Maui gas field is a feedstock for the Kapuni plant, which produces about a third of New Zealand's total urea needs. Urea is the most widely used fertiliser for dairy farms and is also used to produce resins for wood manufacturing. 

Knowing “how much gas is out there is important for our long-term investment decisions,” Kapuni site manager Glenn Johnson says. “When we start to look at 20- or 30-year investment type projects, [the ban] has made things a lot murkier."

“We can’t afford to invest in a project that doesn’t have a feedstock in 15 years time. That wouldn’t stack up.”

Kapuni produced a record 277,224 tonnes of urea in the year to May 2017, according to the latest annual report, with the rest (640,512 tonnes) being imported.

Ballance said while future redevelopment wasn't completely off the cards, a staged investment would be more prudent.

“We have not ruled [a rebuild] out at all", Johnson says, but the government’s announcement “challenges it.” Ballance is still in talks with international investors and “international investors are asking us questions about what does it (the ban) mean for reserves," he says.

Johnson says Ballance is asking itself the same questions: “We can’t afford to invest in a project that doesn’t have a feedstock in 15 years time. That wouldn’t stack up.”

Before to the government's announcement "we were very clear on where things were tracking. We are now back to consulting with our gas suppliers and the government," he says.

Woodward Partners energy analyst John Kidd says the government's announcement does "impact the long-term outlook for gas supply that Ballance would require to support any future rebuild and expansion of its existing ammonia-urea plant at Kapuni."

Even if a rebuild doesn't eventuate, Ballance expects to spend about $300 million over the next decade to keep the existing plant running, Johnson says.

"Obviously what we want is clarity." The government's announcement created uncertainty around the reserve development plans gas suppliers may or may not implement in the wake of the announcements, and also around climate change policies, he says.

"If I have certainty around reserves and I have clarity around what the climate change policies are, I can commit to investment. This will further reduce and improve our efficiencies and reduce the amount of carbon emissions we have," he says.

Johnson says building a new plant would cut emissions by 20-to-30 percent. Those are the "exact outcomes" required as New Zealand aims to be carbon neutral by 2050.
Producing urea at Ballance's plant is also more efficient than importing it, "because I don't have to transport it thousands of miles across the ocean to get it to New Zealand", he says.

Ballance isn't the only New Zealand company concerned about the impact of the exploration ban. Gas fires electricity generation and manufacturing, including several of Fonterra's factories. Ministers claim the ban won't stifle existing investment and is simply the start of a 30-year transition away from fossil fuels in pursuit of a net zero emissions economy by 2050.

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