“We don’t say that we don’t risk, but the situation on the market makes it possible to think that the give-and-take scheme with OPP will be profitable,” Olexander Horbunenko, General Director of Agro Gas Trading
Yesterday it was announced that Odesa Port Plant (OPP) had a new gas supplier – Agro Gas Trading Company. The gas will be directed for the production of ammonia and carbamide – fertilizers used in the agricultural industry. The contract is signed for 4 months (with the possibility of renewal). The planned supply volume is 60 million cubic meters of gas. The peculiarity of the contract between the contractor and the OPP is the mechanism for repaying the plant’s debt to Naftogaz, which, taking into account fines and penalties, already reaches 2.2 billion UAH.
Kosatka.Media talked with managing partner of Agro Gas Trading, Olexander Horbunenko, who told how and why the company decided to participate in this project, and why, unlike the “predecessors”, they would be able to implement the give-and-take scheme with benefit for everyone.
Tell us in general how your give-and-take scheme project will work?
In principle, everything is very simple, but also difficult. The natural gas supplier must purchase the resource (the gas itself), deliver it to the plant, pay for the processing services, and within one month receive, according to an understandable production schedule, a certain amount of products.
Since the end of March - the beginning of April 2019, a situation has arisen on the market that we were forced to pay attention to the OPP, as a participant of mineral fertilizers, and as a trader, a participant in the market for the supply of natural gas to industrial consumers,. The dynamics of gas prices on the domestic market and the dynamics of the price of fertilizers on the foreign market diverged in their trends and created additional margins. Therefore, the give-and-take scheme aroused our interest, and from our side an initiative arose – to invite the plant to consider us as a supplier.
The scheme still provides real money for the OPP. This is not just gas supply in exchange for products, but the OPP will earn on gas processing, I understand correctly?
Yes! The cost structure of finished products produced in the framework of the give-and-take scheme consists of 3 main elements. The first is the cost of natural gas itself, as a raw material, which must be supplied to the enterprise. The second is the cost of transporting this gas through the trunk or regional transmission system, GTS or GDS. And the third is the cost of processing itself, so, the payment for the fact that the plant turns gas into the product we need, using our aggregates. The third element of our costs will be just that “real” money for the OPP.
How did you get on this project? Did you get some kind of tender? Besides Agro Gas Trading and OPP, did anyone else participate in the negotiations, local authorities, Ukrtransgaz, and other participants?
It was not a tender, it was negotiations that were conducted in accordance with a specific procedure of the negotiation process.
It was an absolutely transparent process. They looked at us from all sides, as on the most thorough diagnosis in the medical center. We found out that we have competitors, about 5 companies. But having taken courage and making sure that the economy was interesting for us, we went to the Board of the OPP and received a proposal from them, in which they said they were ready to listen and consider what we were offering. We offered to hold negotiations in an open format, with the full Board of the OPP. In the end, our proposal differed from the rest, because we spoke not only about the price, but also about the need to provide a mechanism for paying off the debt to NJSC.
First of all, we are going to fulfill all the obligations stipulated by the contract to the OPP, secondly – provided for by the GTS code, which are controlled by the gas market operator Ukrtransgaz and after that already carry out all other actions. We were the first to voice this proposal, and the best of those who eventually made it.
We learned that one of the companies, in violation of the established procedure, provided an offer with a price slightly higher than that offered by us. It was already at the end of the day, with a delay of 5-6 hours. Having learned this, we turned to the management of the plant with a proposal to increase our initial offer to the level that the company indicated to them. And the difference by which we will increase the price, we will transfer to repay the debt to NJSC. This is about $1 per ton of ammonia, and $1.5 per ton of carbamide .
In general, thanks to this scheme, the OPP will be able to pay $130 thousand to Naftogaz to repay the debt.
It turns out that this scheme implies such a margin that it is more profitable for you to work with OPP, paying extra $1, $1.5 for processing each ton of product. More profitable than selling gas, actively working as a trader?
Yes. The positive trading margin arising in the case of processing natural gas on a give-and-take basis for OPP is quite high. We have an understanding of our export market and the fact that the project gives the necessary economic feasibility and the effect to which we strive. It is planned that we will direct about 80% of the produced output to the external market, and about 20% - to the domestic market.
But I will say more. The situation that has developed since March - April 2019 should have become a positive indicator and prompted the state, as a business manager, to start an enterprise (OPP – ed.) at its own expense. The reduction in gas prices and the increase in carbamide prices on the foreign market should have been the main reason to launch the OPP at the request of the state and subsequently brought dividends to its shareholder.
But for some reason, even with such an attractive economy, the state does not deal with this. Therefore, there are players like us who analyze the market, look at trends, and consider their money.
What exactly is this attractive “economy”?
This is a high cost of the product on the foreign market, these are the nearest possible major tenders, in which our product – we are talking about carbamide – will be in demand. The volume of these tenders – 1-1.5 million tons per tender, it is more than we produce.
Without the OPP, we do not export. With it, we understand that the volume of exports of fertilizers produced in Ukraine, including carbamide, can significantly increase compared to today's volumes. At the same time, it is necessary to understand the paradox of the current situation on the market. This export is exclusively opportunistic. So, despite the fact that Ukraine remains a deficit market and imports more than half of the consumed fertilizer, the price on the foreign market is so attractive that it is more profitable to export the product than to cover the demand in the domestic market.
How much fertilizer do you plan to produce and is there a plan to participate in the domestic market?
At the moment, we are not facing the question of shipments to the domestic market. The first month we focus exclusively on the external market. In the case of a change in the conjuncture, as well as an assessment of the situation on the domestic market, taking into account the position of the players already existing on it, we can revise our plans. But before September - October, it most likely will not happen.
Regarding the volume, the total production will be about 300 thousand tons of carbamide and 32 thousand tons of ammonia. For the entire duration of the contract.
The OPP is the only manufacturer of those fertilizers that you are interested in? Or are there any other players?
Today the market of mineral fertilizers is divided into three groups. One of them is associated with a group of DF (Cherkassy Azot, Rivneazot, Severodonetsk Azot Association). The second is the enterprises associated with the Privat group – Dniproazot. These two giants currently control domestic production. In addition to them, there is a group of importers who replace the missing volume in the domestic market – from Azerbaijan, Egypt, Belarus, and the Russian Federation.
Imagine that the last year and a half, while the market was forming into such a structure, the OPP was idle. And its production volume is about 10% of the annual consumption in Ukraine. In the conditions of unstable supplies during this time, the market has shifted, and our Ukrainian farmers have found ways to use alternative types, of course, imported types of fertilizers.
What I am leading to is that there is no other option on the market for work on a give-and-take scheme for processing natural gas into fertilizers than the OPP. We are satisfied with this option and the plant as well judging by the reaction of the OPP.
Now gas prices have fallen. Is this the reason for your interest in the project? And in particular, the reason you enter into an agreement for a rather short period of time – 4 months.
The last three months, the situation with the prices on the market is such that traders import gas in large volumes. Gas is available on the market. But it is difficult to buy it – it is pumped into UGSFs and do not want to sell. Everyone is waiting for the resolution of the issue with transit from Russia. And this to some extent influences the fact that today it is risky to enter the project for more than 4 months.
But at the same time it is much more important to take into account the situation on the fertilizer market. It is important to understand that the lower the price of gas, the lower the cost of the same ammonia. Since the price of gas is the bulk of the cost of its production and as a result of the cost of the product. It turns out, on the one hand, the low price of gas is attractive, and on the other hand, the low price of gas forms a low price for ammonia, which reduces interest in trading. Today, the price of ammonia is quite low in Ukraine. While it is a scarce product, in fact.
But the market also has another, more interesting from an economic point of view, anomaly. With cheap gas prices, carbamide should also be cheap. And it is cheap, but only in Ukraine. And on the international market, it is quite expensive. This is what makes our project attractive. And this is one of the main reasons why we go here. We have an interest to export exactly carbamide.
Who will you buy gas from?
We negotiated with key market players. The final agreement has been reached, but we would not like to disclose more details before the start of production. At the same time, we can say that the best offer was made by a local player in the market. Large and reliable.
Previous companies that have declared participation in the give-and-take scheme in the last 1.5 years have failed to realize their promises. How do you guarantee that you will fulfill your obligations and the OPP will work?
Firstly, we would not like to compare ourselves with any of the predecessors. If only because each of them is definitely a “dark horse”. A number of unsuccessful projects began at the time of the absence of any economy, profitability, and favorable conditions in the foreign and domestic markets. Starting the project in adverse conditions for this immediately suggests that its successful implementation is not the goal.
Today we do not say that we do not risk. But at the moment there are a lot of factors that indicate that our project with the OPP has an economic basis.
What can we add to increase the confidence of market participants in our success? The first is the economic component. It's no secret that profit is the goal of any commercial structure. We want to realize the launch of the plant in order to make a profit. Secondly, even if we do not have direct experience as a supplier, but because of our direct cooperation with ERU (ERU-Trading company acted as a supplier for the OPP in 2017 – ed.), we basically went through all the stages that give us a complete understanding what is a give-and-take scheme. Both in terms of gas supplies, and in terms of control and interaction with the plant’s workforce, and an understanding of the entire complex of industrial processes.
Legally, will you bear any responsibility if you cannot deliver the volume of gas that you promised?
Yes, definitely. This is a direct violation of contractual obligations, which leads to the application of penalties. And vice versa. Provided that the company started, the volume of gas was supplied, and no products were received. Exactly the same sanction applies to the OPP. But the reputational component is also important for us, so we will make every effort to prevent any deviations from our obligations.
What volumes of gas supplies are planned? And how much will these volumes load the OPP capacities for the production of mineral fertilizers?
The maximum volume of production at the plant assumes the volume of supply in the range, roughly speaking, from 105 to 115 million cubic meters per month. This refers to when the company operates at 100% capacity and involves two of the two existing so-called columns, or units, which produce ammonia from natural gas.
But today it is efficient, in theory – and this is one of the risks, which we also take – only one. Physically, we cannot load more than one unit. Plus today there is no economic feasibility of producing more ammonia than we plan under the contract. The main product for us is carbamide. Therefore, the maximum volume, about which we can speak, in the currently selected technological mode, is the volume at the maximum daily load of about 2 million cubic meters. That is 60 million cubic meters of gas per month. Or 240 million cubic meters during the term of our contract.
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