Reference no: EM131428743

Case Study Coastal States Chemicals and Fertilizers In December 2005, Bill Stock, general manager for the Louisiana Division of Coastal States Chemicals and Fertilizers, received a letter from Fred McNair of the Cajan Pipeline Company, which notified Coastal States that priorities had been established for the allocation of natural gas. The letter stated that Cajan Pipeline, the primary supplier of natural gas to Coastal States, might be instructed to curtail natural gas supplies to its industrial and commercial customers by as much as 40% during the ensuing winter months. Moreover, Cajan Pipeline had the approval of the Federal Power Commission (FPC) to curtail such supplies. Possible curtailment was attributed to the priorities established for the use of natural gas: First priority: residential and commercial heating Second priority: commercial and industrial users that use natural gas as a source of raw material Third priority: commercial and industrial users whereby natural gas is used as boiler fuel Almost all of Coastal States’ uses of natural gas were in the second and third priorities. Hence, its plants were certainly subject to brownouts, or natural gas curtailments. The occurrence and severity of the brownouts depended on a number of complex factors. First, Cajan Pipeline was part of an interstate transmission network that delivered natural gas to residential and commercial buildings on the Atlantic coast and in Northeastern regions of the United States. Hence, the severity of the forthcoming winter in these regions would have a direct impact on the use of natural gas. Second, the demand for natural gas was soaring because it was the cleanest and most efficient fuel. There were almost no environmental problems in burning natural gas. Moreover, maintenance problems due to fuel-fouling in fireboxes and boilers were negligible with natural gas systems. Also, burners were much easier to operate with natural gas than with oil or coal. Finally, the supply of natural gas was dwindling. The traditionally depressed price of natural gas had discouraged new exploration for gas wells; hence, shortages appeared imminent. Stock and his staff at Coastal States had been aware of the possibility of shortages of natural gas and had been investigating ways of converting to fuel oil or coal as a substitute for natural gas. Their plans, however, were still in the developmental stages. Coastal States required an immediate contingency plan to minimize the effect of a natural gas curtailment on its multiplant, operations. The obvious question was, what operations should be curtailed, and to what extent could the adverse effect upon profits be minimized? Coastal States had approval from the FPC and Cajan Pipeline to specify which of its plants would bear the burden of the curtailment if such cutbacks were necessary. McNair, of Cajan Pipeline, replied, “It’s your ‘pie’: we don’t care how you divide it if we make it smaller.” The Model Six plants of Coastal States Louisiana Division were to share in the “pie.” They were all located in the massive Baton Rouge–Geismar–Gramercy industrial complex along the Mississippi River between Baton Rouge and New Orleans. Products manufactured at those plants that required significant amounts of natural gas were phosphoric acid, urea, ammonium phosphate, ammonium nitrate, chlorine, caustic soda, vinyl chloride monomer, and hydrofluoric acid. Stock called a meeting of members of his technical staff to discuss a contingency plan for allocation of natural gas among the products if a curtailment developed. The objective was to minimize the impact on profits. After detailed discussion, the meeting was adjourned. Two weeks later, the meeting reconvened. At this session, the data in Table 4.3 were presented. Coastal States’ contract with Cajan Pipeline specified a maximum natural gas consumption of 36,000,000 cubic feet per day for all six member plants. With these data, the technical staff proceeded to develop a model that would specify changes in production rates in response to a natural gas curtailment. (Curtailments are based on contracted consumption and not current consumption.) Discussion Questions 1. Develop a contingency model and specify the production rates for each product for a 20% natural gas curtailment. a 40% natural gas curtailment. 2. What impact will the natural gas shortage have on company profits?