Question

In June 1980, Harry Sinclair, General Manager of the Texas Division of Agri-Chem Corporation, received notification from Ben Elliot of Enerco that natural gas supplies were being rapidly depleted. In the event of a shortage, Enerco, the main producer and distributor of natural gas in the Gulf South region, would allocate gas to its customers under the following provisions established by the Federal Power Commission:

First Priority: Residential and commercial heating and cooling

Second Priority: Commercial and industrial firms that use natural gas as a source of raw material

Third Priority: Industrial firms that use natural gas as a boiler fuel

Elliot related to Sinclair that most of Agri-Chem's uses were in the second and third priority classifications. Hence, Agri-Chem would probably be subjected to "rolling brownouts", temporary and periodic curtailments of natural gas supplies. Enerco planned to monitor its pipeline pressures and order reductions to maintain minimum levels. Elliot preferred that Enerco's customers initiate the reduction process to minimize the effect on their industrial processes. Enerco was authorized, however, to curtail supplies unilaterally if pipeline pressure fell below minimum levels.

The natural gas shortage was created by the unprecedented heat wave of the summer of 1980. Electrical generating plants were operating at capacity to supply electricity to operate air conditioning and refrigeration units. Although long-range plans called for these utility companies to convert to coal, oil, or nuclear fuel, natural gas remained the dominant boiler fuel.

CURTAILMENT PLAN

Agri-Chem's problem was to determine which of its complexes would be least affected by a gas curtailment. Its Texas Division is located in the greater Houston area; plants are located in the suburbs of Deer Park and Battleground. Both of these areas would be included in the curtailment region in the event of a brownout. Except for Agri-Chem's ammonia operations, all gas purchased was used as boiler fuel. In its ammonia plant, gas was used as a source of raw materials. (The manufacture of ammonia uses natural gas in the steam reforming process.) In a detailed discussion with Elliot, Sinclair learned that Enerco would not specify the products to be curtailed. The curtailment procedure would be based primarily on a customer's usage pattern. Hence, Agri-Chem had the flexibility to absorb curtailments where they would have minimum impact on profits.

Based on this information, Sinclair called a staff meeting to discuss a contingency plan for allocation of natural gas among the firm's products if curtailments became a reality. The specific objective was to minimize the impact on profits/overhead contribution. After a week of study, the information in Tables 1 and 2 was presented to Sinclair.

TABLE 1 Contribution to profit and overhead
Product	$/Ton
Ammonia	80
Ammonium phosphate	120
Ammonium nitrate	140
Urea	140
Hydrofluoric acid	90
Chlorine	70
Caustic soda	60
Vinyl chloride monomer	90

TABLE 2 Operational data
Product	Capacity (tons/day)	Production Rate (% of capacity	Natural Gas Consumption
(1,000 cu. ft./ton)
Ammonia	1,500	80	8.0
Ammonium phosphate	600	90	10.0
Ammonium nitrate	700	70	12.0
Urea	200	80	12.0
Hydrofluoric acid	800	70	7.0
Chlorine	1,500	80	18.0
Caustic soda	1,600	80	20.0
Vinyl chloride monomer	1,400	60	14.0

Agri-Chem's contract with Enerco specified a maximum of 90,000 cu.ft. X 10³ per day for its complexes. However, curtailments are projected to be based on actual usage rather than contractual maximums. The current natural gas usage is 85,680 cu. ft. x 10³ per day. Enerco projects curtailments in the range of 20 to 40 percent.

1.Which of Agri-Chem's complexes would be least affected by a gas curtailment?

Answer 1

Product	Capacity (ton/day)	Production %	Actual capacity (ton/day)	Price ($/ton)	Natural gas used (cuft*106-3/ton)	Price/Natural gas used ($/cuft)
Ammonia	1500	80	1200	80	8	10
Ammonium phosphate	600	90	540	120	10	12
Ammonium nitrate	700	70	490	140	12	11.6
Urea	200	80	160	140	12	11.6
Hydrofluoric acid	800	70	560	90	7	12.8
Chlorine	1500	80	1200	70	18	4
Caustic soda	1600	80	1280	60	20	3
Vinyl chloride monomer	1400	60	840	90	14	6.5

=> Maximum $/Natural gas = 12.8 for hydrofluoric acid. Therefore, Maximum effect on Revenue % per supply change of Natural gas occur for Hydrofluoric acid