Basin Electric’s Dakota Gasification Company (DGC) is involved in producing natural gas, agricultural fertilizers, lime, and other valuable products, and in marketing lignite. DGC owns and operates the Great Plains Synfuels Plant near Beulah, North Dakota.
Riding a robust market of notably higher natural gas prices in 2000, DGC collected record revenues of $258.2 million and created a positive financial turnaround of more than $22 million. The company recorded a net income of $15.4 million in the past year compared with a net loss of $6.8 million in 1999. A primary reason for that improved performance has been the dramatically stronger natural gas and fertilizer market, and the potential for future benefits from the new project, piping carbon dioxide into Canada for enhanced oil recovery.
According to Basin Electric’s Annual Report, the financial outlook for DGC reached a level of optimism in 2000 not seen since the company was formed nearly 13 years ago. Basin Electric created the subsidiary in 1988 to own and operate the Synfuels Plant, which is the United States’ only commercial-scale facility to produce pipeline-quality natural gas from lignite as well as fertilizers and other products from the gasification process. The Synfuels Plant has been operating since 1984, but after the original owners abandoned it, DGC purchased the plant from the federal government.
Natural gas prices reached dizzying heights in 2000, hitting $13.75 per dekatherm on the cash market in late December at the Ventura, Iowa, trading hub. On the spot market, DGC sold natural gas at an average of $8.74 per dekatherm. Last year, DGC received an average of $3.81 per dekatherm for its natural gas, compared with the previous high annual average of $2.47 per dekatherm.
Several factors pushed market prices for natural gas to post-Gulf War highs. A primary reason is that natural gas storage in the United States in mid-2000 did not match the projected use for the winter of 2000-2001. Projections indicated that the level of storage fell more than 20 percent below the total for 1999. Another factor is that natural gas has become the fuel of choice for the electric generating industry attempting to keep pace with increasing demand for power nationwide. And, finally, higher oil prices in late 2000 contributed to the rebound of natural gas prices. With oil prices climbing, some users have switched to natural gas, adding to the demand for the fuel. The company foresees natural gas prices remaining in the range of $3 to $4 per dekatherm for the long term, about $1 higher than the average in recent years.
Since purchasing the Synfuels Plant, management has sought to stabilize plant operations and potential business opportunities, focusing on ensuring the plant’s future and, thus, its contributions to the Basin Electric family. The company has invested about $350 million for product development, environmental projects and other ventures.
Based on those investments, the Synfuels Plant now has significant revenue from products other than natural gas. In DGC’s first full year of ownership, the Synfuels Plant produced $4.3 million in revenue from products other than natural gas, representing about 2 percent of the company’s total revenue. In 2000 revenue from other products (see Table 1) reached $77.5 million, about 30 percent of total sales revenue.
Today two agricultural fertilizers--anhydrous ammonia and ammonium sulfate--make up a significant part of DGC’s overall business. In the past year, prices for the fertilizers have climbed along with natural gas prices, adding to the company’s encouraging financial outlook. However, at times, natural gas prices rose high enough so the company cut back on its production of anhydrous ammonia to garner even more revenue from natural gas. That flexibility provided additional benefits for DGC.
DGC’s strategy for long-term success has been to mitigate three major risks associated with operating the Synfuels Plant—plant outages, volatile natural gas prices and environmental deficiencies. The strategy has been to improve reliability of the Synfuels Plant, hedge prices for natural gas produced, and resolve the environmental issues.
The company invested in several projects in 2000 to keep the plant reliable. For example, worn-out economizers in two of the main plant boilers were replaced. Economizers are used in making steam for the plant’s steam turbines and for the coal gasification process.
Other projects included renovating the original plant boiler stack and improving the reliability of the sulfur dioxide removal system and the downstream ammonium sulfate manufacturing process.
DGC believes that the investment in maintenance represents a wise use of its financial and human resources. With the Synfuels Plant operating at high levels, the company can better take advantage of the rebounding natural gas market.
With its hedging strategy, the company wants to ensure reduced risk from huge swings in the price for natural gas, further insulating the parent from a downturn in DGC’s profits. That goal was achieved in 2000, and the company reached its objective of locking in a profit for the year.Environmental Issues
DGC also made progress toward environmental solutions in 2000. The company received an operating permit from the North Dakota Health Department for the Synfuels Plant, which had been operating under a variance even before DGC became the owners.
The permit is a result of working with the Health Department for several years on areas of concern regarding the plant’s operation. The permit sets out a road map of requirements that DGC must follow to achieve full environmental compliance at the plant. Among those requirements are better particle removal from the plant’s main stack and improved odor control from the plant’s cooling towers.
To satisfy permit requirements, DGC is installing a Wet Electrostatic Precipitator (WESP) to remove particles from the gases leaving the boiler stack. The equipment uses an electric charge to attract microscopic particles from the stack gases, causing them to attach to a metal plate. Water rinses the particles from the plate, and the particles are then removed for disposal. In addition, a project to control the odor coming from the cooling towers also is under way.
Both projects are on budget and ahead of schedule. DGC expects them to be completed well ahead of their compliance dates: June 1, 2003, for the WESP and December 31, 2002, for the odor control project.Pipeline Project
Financial stability for DGC and the Synfuels Plant was enhanced on October 19, 2000. That was the date DGC joined with PanCanadian Resources in dedicating the 205-mile pipeline carrying carbon dioxide (CO2) from the plant to Weyburn, Saskatchewan, Canada. American and Canadian officials attending joint ceremonies at Beulah, and Weyburn, cited the importance of the project to the two companies and the economies on both sides of the international border.
The dedication signified the startup of CO2 flow northward to PanCanadian for injection into the large Weyburn Oilfield. Under a 15-year agreement, PanCanadian will purchase from DGC up to 95 million standard cubic feet per day, which represents about 40 percent of the CO2 available from the Synfuels Plant. With the CO2 flooding of the 40-year-old oilfield, PanCanadian expects to gain an additional 122 million barrels of oil.
The project also will contribute to the financial stability of DGC and the Synfuels Plant in the future. Unlike DGC’s other products, the revenue from the PanCanadian contract is not subject to fluctuating commodity prices. That means DGC, which invested about $100 million in the pipeline and a compressor station, will be receiving $15 to $18 million per year in net income over the contract period.
Begun in May 1999, the project went smoothly with the pipeline construction finishing on time and under budget in February 2000. However, technical problems arose in late 2000 involving odor, compressors and pipeline valves. DGC and PanCanadian are working together to resolve the issues as quickly as possible.
With PanCanadian buying just 40 percent of the CO2 available from the Synfuels Plant, DGC expects that there could be future customers for the product. The pipeline was built with that in mind by oversizing the pipe and installing extra taps along the way. Prospects exist for selling an additional 70 million standard cubic feet of CO2 from the plant, especially if oil prices remain high.