The race is on3 September 2003
With demand assured and prices stabilised at higher levels, the prospects for building new US enrichment plants appear better than ever. By Clark Beyer and Jeff Combs
In last year's review of the uranium enrichment market (see NEI September 2002, p10), we noted the advantages that Urenco's new Louisiana Energy Services (LES) venture had over USEC in the quest to build a new centrifuge-based enrichment facility in the USA. The Urenco technology was proven, and the venture had the support of three of the largest US utilities, as well as fuel cycle leaders Cameco and Westinghouse. In addition, the marketing of the project stood to benefit from higher US separative work unit (SWU) prices in the wake of the USEC trade case. Meanwhile, USEC struggled to convince the market that its technology would be viable and that it could raise the necessary funds to build a new plant at Portsmouth, Ohio. Many observers found USEC's confidence questionable under the circumstances, since similar assurances had been made regarding the now-defunct AVLIS programme.
What a difference a year makes!
Since the summer of 2002, USEC has met or exceeded every milestone in its joint agreement with the US Department of Energy (DoE) to deploy the new technology, which is based on DoE's Gas Centrifuge Enrichment Plant (GCEP) design that was last tested in 1985. At the same time, LES has suffered a string of setbacks, mostly related to the siting of the plant. These problems are eerily reminiscent of the local battle its predecessor consortium faced in Louisiana in the early 1990s, and the venture's seeming inability to gain local support in Hartsville, Tennessee could threaten the project's viability, or at least its timing. The departure of Cameco from the partnership and the resignation of the project's chief executive further compounded the problem, and has completely altered the battle with USEC over which plant will come to fruition. Thus, the race is now on, and the next twelve to eighteen months will see a number of key hurdles that must be met by both organisations if they hope to succeed.
Across the Atlantic, changes are afoot for the European market as well. After searching for several years for a replacement technology for Eurodif's Georges Besse gaseous diffusion plant, and reaching the same negative conclusions about laser enrichment as did USEC, Cogema has entered into a preliminary agreement with Urenco to use their technology as the basis for a new French centrifuge plant. While details are still pending, the principals appear confident that a formal agreement will be reached this year and the plant could be in operation by 2008. Although the companies have said they will market the output separately, this cooperation could have interesting ramifications for the competitive dynamics of the European market.
Supply and demand
The issue of potential new plants in the USA and France is not only a question of the investments suppliers must make to remain competitive the success or failure of these efforts will be a critical determinant of the overall supply-demand balance for enrichment services after 2010. At present, the enrichment market remains slightly oversupplied. But USEC and Eurodif are operating well below nameplate capacity to control costs, and USEC's 50-year-old Paducah plant is not competitive even at today's prices. Virtually all of USEC's rather thin operating margins come from the markup on the 5.5 million Russian highly enriched uranium (HEU) SWU sold to its customers (as well as uranium inventory sales). These margins should improve as a result of a new pricing mechanism agreed to with Russia, but in order to be competitive, USEC needs to close the Paducah plant as soon as it can. It will require a new facility to accomplish this.
Urenco continues to gradually expand its European capacity, and is now producing at a rate of almost six million SWU from its three plants at Capenhurst (UK), Almelo (the Netherlands), and Gronau (Germany). It is likely that the company will continue to expand in Europe, especially if it were to abandon plans for a US facility. Similarly, Russian centrifuge capacity is reportedly increasing slightly, despite the continuation of trade barriers in the USA and, to a lesser degree, in Europe. Total capacity at Russia's four enrichment plants is around 22 million SWU, and on one occasion last year an official of the Ministry of Atomic Energy (Minatom) reportedly stated that they would increase capacity to 26 million SWU within the next few years.
This expansion prompts the question of why Russian capacity is increasing when Russia is totally blocked from selling commercial SWU in the USA. The answer lies in the many interesting ways that Russia is employing its excess capacity. Direct exports of enriched uranium to customers outside the former Soviet Union take up about half of total capacity. The balance is used for making low-enriched blend stock for the HEU blending operation, enriching tails for Urenco and Cogema under contracts dating to the early 1990s, and producing SWU for Russia's internal reactor demand. Adding up each of these sources shows that Russian overcapacity is far less than it would have appeared in the mid-1990s due to the trade barriers.
Figures from Ux Consulting show primary production of enrichment services (using economic or marketable capacities) of 38 million SWU in 2003, compared to 35 million SWU of world demand (see Figure 1). This supply includes 5.5 million SWU from Russian HEU, delivered annually to USEC under the contract that is set to expire in 2013. Having touched upon the questions regarding future supply capabilities, the figures show that demand for enrichment services should grow modestly over this decade, increasing to 39 million SWU by 2010. Thus, demand is aligned fairly closely with economic supply in the near-term. However, by 2020 reactor requirements will increase to almost 45 million SWU. To glimpse the supply-demand picture beyond 2010, therefore, requires answers to a number of questions, including:
• Will a new USEC centrifuge plant enter operation to replace Paducah, and if so, when?
• When will a replacement plant for Georges Besse begin operation, and at what capacity?
• Will an LES plant be built in the USA, and if so, when?
• How much will Urenco continue to expand in Europe, with or without a new LES facility in the USA?
• Will Russia's access to the US and European markets improve in the next ten years?
As is clear from the above questions, there are tremendous long-term uncertainties on the supply side for enrichment, and the decisions made in the next five years will be critical to the future supply-demand balance. It is not clear the degree to which utility buyers appreciate the importance of this yet.
The spot market for SWU remains moribund. The shift in market power to the primary enrichers since the exhaustion of secondary inventory supplies in the early 1990s has dried up what was once a robust and heavily discounted spot market for SWU. A few spot deals have taken place over the last year, but at a premium of about three dollars per SWU over long-term prices. A few small inventory sources have also been unearthed from time to time. In Japan, Tenex has had some success with a few spot transactions. Some Japanese buyers have tested the waters to see whether purchases from Russia are reliable and acceptable to regulators. Those successes should lead to long-term contracts for Tenex within the next few years, since Japanese utilities highly value diversification and are able to buy from any of the four primaries without restrictions. But overall, the scarcity of spot supplies and the preference for long-term, requirements-type contracts for SWU are likely to preclude any resurgence in the spot enrichment market.
Utility contracting review
Enrichment contracting in the USA remains relatively quiet in the wake of the USEC trade case. Tenex and Cogema are blocked from the market as a result of the suspension agreement and high duties, respectively, and Urenco faces a small duty but has little excess supply in the near-term. Therefore, US buyers with near-term needs have had almost no alternative to signing up with USEC, and USEC has used this market protection to sign up some attractive long-term deals as well. In June 2003, USEC announced that it had reached a new agreement with Chicago-based Exelon, the largest US nuclear operator, that will cover about half of the utility's SWU needs through 2010. This is also notable in that Exelon is a partner in the LES venture. Of course, it is not surprising that a company with 17 reactors wants to have as many viable suppliers as possible.
According to US Energy Information Administration figures, US utilities took delivery of 11.5 million SWU in 2002, only 15% of which came from actual USEC production. The balance of USEC's Paducah production was delivered to non-US
customers, such as Japanese utilities, who refuse to take delivery of HEU SWU from USEC. Russia (via USEC) was the largest supplier to US utilities, and Cogema and Urenco each supplied close to two million SWU. Fully 97% of deliveries were made under long-term contracts (defined as greater than one year in duration).
Outside the USA, there has been little activity of late. The European market has seen some evidence of higher prices over the last year as suppliers digest the impact of the US market dislocation. The strength of the euro relative to the dollar has been a contributing factor in the price strengthening. Russia continues to face restrictions in Europe, where European utilities are limited to purchasing roughly 20% of their needs from Tenex. As a result, prices in Europe generally reside somewhat above the $90 per SWU level, but are unlikely to reach the level of prices in the USA.
In theory, Asia should be the most competitive market under the circumstances, as all four enrichers battle for market share in Japan, Korea and Taiwan. At present, however, most of these utilities are covered under long-term contracts that will not need to be renewed until later in the decade.
Figure 2 shows the annual volumes of long-term and spot SWU contracting over the last eight years. As can be seen, overall contracting activity has dropped sharply since the USEC trade case, as utilities wait for the outcome and exercise upward quantity flexibilities under existing contracts. Requirements should increase significantly by 2005, so the level of contracting is expected to rise over the next few years. As shown in Figure 3, SWU prices have held steady since the large run-up that began in mid-2001. Spot purchases in the USA, while sporadic, continue to occur at a premium to long-term prices.
The HEU agreement
The major development in the USA-Russia HEU blending programme was last year's renegotiation of the pricing structure to incorporate a market-based approach. Alarmed by the drop in long-term SWU prices in the late 1990s, combined with the fixed price with escalation contained in its HEU SWU purchase contract with Tenex, USEC pursued a dual strategy, and has been successful on both fronts. First, to stem the decline in SWU pricing from the upper $90s to the low $80s per SWU, USEC initiated an antidumping case against Urenco and Cogema. Within a year of this action, US SWU prices rose to $105 per SWU and have stayed there ever since. And upon the expiration of the original pricing provision with Tenex, at which time the agreement called for a renegotiation of the pricing clause, USEC obtained US government backing for a move to a market-based pricing structure.
The new pricing provision with Tenex was concluded in June 2002, as the USA and Russian governments approved an amendment to the HEU agreement that instituted new market-based pricing terms for the remaining twelve years of the contract. The market-based mechanism took effect in January 2003, replacing a fixed price that had escalated to $90.42 per SWU for 2001 and 2002. The price under the USEC-Tenex contract is now determined by using a discount applied to a moving-average basket of equally weighted US and world price indicators, both long-term and spot (the Ux SWU price and Ux RU SWU price are two of those seven indicators).
Thus, the price USEC will pay Tenex in 2003 is expected to be significantly lower than in 2002, of the order of about $80 per SWU. Clearly, then, this amendment will provide a major boost to USEC's earnings, since USEC will buy 5.5 million SWU from Tenex in 2003 that will cost about $50 million less than the same quantity cost in 2002. Combined with the concurrent rise in USEC's average sales price over the next year or so due to the trade action, USEC's aggressive business strategies will have more than paid off (although the full effect of the lower purchase costs may not be immediately apparent because of the company's inventory cost-accounting methodology and the size of its inventories).
Some have speculated that this significant reduction in USEC's purchase price, at a time when SWU prices have been rising overall, may lead to Russian dissatisfaction with the price Tenex receives. The amendment included a measure to alleviate Russian concerns over price by mandating a review at the end of 2007 to determine if any adjustments are necessary. Moreover, the USA has committed to ensure that Russia receives at least $7.6 billion for the SWU component over the entire 20-year term of the contract. And while the HEU transaction has always been controversial in certain quarters in Moscow, some believe that the Russian government has grown quite dependent on this large source of cash as a key component of the national budget. No doubt the US side counted on the latter rationale to improve its stance in the price negotiation. Nevertheless, unpredictable political obstacles could impede the HEU deal in the future, and Russian dissatisfaction with the new pricing terms could lead to instability down the road.
Finally, there was some progress on the topic of an "HEU-2" deal, or extension of the current arrangement beyond 2013. In May 2002, presidents Bush and Putin executed a new arms-reduction initiative known as the Treaty of Moscow. While avoiding specifics regarding the commercial markets, it committed both sides to further cuts in nuclear weapons. A joint US-Russian group of experts was assigned to examine the issue of further HEU blending and sale in the commercial markets. The group appeared to lean towards an extension of the deal beyond 2013 as the best course of action, as opposed to an increase in blended quantities entering the market in the near-term. No doubt this is also the position of the major uranium suppliers and USEC. However, few concrete details have emerged to date, and no action has been taken on the commercial side regarding the quantities for sale or which companies would be involved.
So, while it is still possible that there will be an acceleration of the HEU blending that could release additional material on the commercial markets, it is most likely that any "HEU-2" deal will only enter the market after 2013. Interestingly, those with a very long-term view of the market would be wise to consider what might happen if no agreement at all can be reached with Russia on additional HEU. In some areas of the nuclear fuel supply chain, particularly UF6 conversion, supply from a second HEU deal may be critical to meeting the projected demand in that period.
Status of trade cases
There has been some gradual progress by the European enrichers in their attempts to overturn the antidumping and countervailing duties applied by the US Department of Commerce (DoC) in November 2001. While Urenco's duties are minimal and not a serious impediment to sales in the USA, Cogema's 32% duties (on the value of the enriched uranium, or approximately 50% on the value of the SWU) effectively preclude any new sales in the US market, and create an onerous cost burden both for Cogema and its customers just to effect deliveries under existing contracts.
In early 2003, the Europeans filed an appeal in the Court of International Trade (CIT) alleging that the DoC investigation and findings were flawed. On 30 March, the CIT remanded (sent back) the case to DoC for further explanation. DoC was ordered to provide further arguments as to, among other things, why it considered the enrichers' contracts for enrichment services to be sales of a product, against which dumping duties could be applied. (Dumping duties cannot be applied to services, but USEC's arguments apparently convinced DoC that enrichers actually sold LEU and took cash and natural uranium as payment.) The tone and speed of the CIT decision led some legal observers to believe that the CIT took a rather sceptical view of DoC's position, as the nuclear fuel industry has always viewed the enrichment business quite clearly as a tolling service.
The CIT ruling had no effect on the duty structure, and in its June 2003 response, DoC stuck to its guns in an attempt to persuade CIT of its logic. The Court is expected to make a final ruling later this year, but USEC can appeal that decision, and may have other options at its disposal if the DoC duties are overturned.
The Europeans are also pursing challenges in the World Trade Organization and other venues, but even if they are victorious, it is likely that USEC will continue to appeal their appeals. In short, USEC's strategy largely depends on maintaining these trade restrictions for as long as possible to increase its market share and average sales price in advance of deploying a new plant, and the company appears willing to spend as much money as necessary on legal and lobbying efforts to accomplish this. Thus, this battle is likely to continue for at least another year before any relief is granted.
There has been even less progress in the original antidumping case against Russia, which resulted in a voluntary suspension agreement that suspended the imposition of duties (in that case over 100%) in lieu of other highly restricted market-access mechanisms. Based on the amendment that was signed in March 1994, the ten-year term of the suspension agreement is due to expire in March 2004. However, no one, even staffers at the DoC, seems to know exactly what will happen upon its expiration. Russian uranium is not really a concern anymore not only is there no longer a US uranium industry to speak of (except for small Wyoming and Nebraska operations that are owned by Cameco, Russia's partner in the HEU feed disposition), but Russia is no longer an exporter of natural uranium aside from the HEU feed. Moreover, even that material is limited to certain predictable annual quotas (12 million pounds U3O8 equivalent in 2003) under the terms of the USEC Privatization Act.
However, Russian SWU is a major concern for USEC, and understandably so. Even without the HEU contract, USEC would probably try to block Russian access to the US market anyway, just as it has succeeded in blocking Cogema. But with 5.5 million HEU SWU purchased by USEC annually, the prospect of additional sales into the USA by the Russians is anathema to USEC as well as various government officials responsible for energy security and the viability of the HEU deal. One State Department official went on record last year to declare that roughly half of the US market being supplied by Russian HEU was sufficient, and the US government would not welcome additional market access, whether by Russia directly or by USEC making additional commercial purchases from Tenex.
Having said that, the exact mechanism for blocking Russian access is not yet apparent. Most likely, if no new voluntary agreement were reached between DoC and Russia in the meantime, USEC would re-file the dumping case and call for a new DoC investigation. However, the changed circumstances in Russia's transition to a market economy, as well as the lack of Russian sales data in the USA since 1994, would lead to another lengthy, complicated and costly case for both petitioners and respondents. Meanwhile, although Tenex and Minatom officials have periodically called for some additional commercial (non-HEU) access to the US market in recent years, there does not appear to be a concerted effort developing on the Russian side to fight this battle. Russian negotiators may already understand that the HEU volumes weaken their chances for additional access, and thus are not wasting a lot of energy on this issue. So while highly unpredictable, it appears that the status quo will remain for Russian commercial SWU, at least for the next few years.
France Turns to Centrifuge
After abandoning its efforts to commercialise laser enrichment, and exploring several different options for obtaining a viable centrifuge technology, Cogema and its parent company Areva have reached a preliminary cooperation agreement with Urenco. In October 2002, Cogema announced plans for a joint venture with Urenco to supply centrifuge technology for a replacement facility for the Georges Besse gaseous diffusion plant. Details on the venture have been sketchy to date, but an announcement with further information is expected before year-end. While Urenco reportedly rebuffed Cogema's entreaties a number of years ago, the USEC trade case may have helped unite the two, as did the interest of the Dutch and German governments in liquidating their shares of the Urenco ownership.
What is known is that Cogema will build the plant at the Tricastin site, and it is likely to be sized around the 8 million SWU level, or roughly the existing production level at Georges Besse. Although the 20-year-old diffusion plant has a nameplate capacity of almost 11 million SWU, it has operated near the 8 million SWU level for some time to optimise production costs. Proponents believe that commercial operation of the new facility could begin as soon as 2008. In addition, the parties announced that the marketing of the plant's production would be conducted separately, no doubt a mandatory condition to receiving regulatory approval from the European Union's competition directorate. The two erstwhile competitors together control more than 80% of the European enrichment market. So far any competitive concerns about this venture on the part of utilities, particularly in Europe, have not been apparent. Buyers may simply be withholding judgment until more details are announced. It does signal, however, that the already concentrated enrichment market is becoming a stronger oligopoly, and prices are unlikely to drop to the levels seen in the mid-1990s given all of the capital projects facing the enrichers.
The LES siting debacle
In last year's article, we discussed the LES venture's considerable advantages over USEC in the effort to build a new centrifuge enrichment facility in the USA. Its proven technology, strong customer partners, and financing options all appeared superior to USEC's options (and frankly, still do). However, LES has stumbled badly in the critical area of siting the facility, and shows no outward signs of gaining public support in Tennessee after more than six months of mostly bad press. That these problems are reminiscent of the first LES battle in Louisiana is not encouraging given the ultimate outcome of that effort. In addition, the venture has encountered problems and delays in negotiating its partnership agreement, submitting its licence application, and even in the makeup and management of the coalition itself. As a result, any advantages LES might have had are rapidly evaporating, breathing new life into USEC's chances.
The siting issue appears to stem from a fundamental miscalculation about the Hartsville, Tennessee site. As is the case in any nuclear project these days, outside opposition forces tend to move swiftly in rallying local opposition to the facility. Nuclear companies must move quickly and effectively to build support among local residents, unions, regulators, politicians and other interested parties. By all accounts LES has failed to accomplish this to any meaningful degree. As an example, an allegedly independent nuclear waste consultant hired by the commissioners of five counties that adjoin the proposed site has exhibited considerable hostility towards the project from the beginning, and the manner in which some LES officials dealt with the local populace was widely criticised as arrogant and heavy-handed.
Furthermore, LES has been unable to win over a majority of the five county commissioners, or anyone of note in the state's political structure (while Tennessee resident and former vice president Al Gore has predictably spoken out against the project). In contrast, USEC quickly garnered the vocal support of Ohio's governor and US congressmen, as well as local officials and union representatives around its Portsmouth, Ohio site. Although LES has been unable to publicise much active support from anyone in Tennessee, at any political level, it did attract the support of powerful New Mexico senator Pete Domenici. Domenici offered his home state, some 1500 miles west of Hartsville, as a possible alternative for the plant if LES is unsuccessful in getting site approval in Tennessee. It appears LES is actively pursuing this as an alternative to Hartsville, but no announcement has been made. A move to New Mexico would likely cause further scheduling delays, but could breathe new life into the project.
In perhaps the last nail in the coffin for Tennessee, the 17-member Trousdale county commission recently voted unanimously to adopt the consultant's Draconian recommendations regarding air and water discharges and on-site tails storage. These conditions are virtually impossible for LES to meet for example, the recommendation would require zero air and water emissions, and no more than 2000t of depleted tails could be stored on site, and only for a maximum 90 days. LES previously indicated the need to store up to 39,500t of tails. LES officials did not even attend the meeting where the vote was held, a sign that they may already be focused on the New Mexico alternative.
Other complications also emerged over the course of the year. With delays in the conclusion of its partnership agreement and the ongoing siting uncertainties, LES postponed the planned submission of its NRC licence application from January 2003 to March; it still has not been filed. Then in March, uranium producer Cameco decided to pull out of the LES venture, citing that the project no longer met its requirements for investment. Finally, with the siting battle worsening, LES president and CEO George Dials abruptly resigned in May 2003.
Whether or not it packs up and moves to a site in New Mexico or elsewhere, LES may be able to fix these problems over the course of the next few years. But if it cannot, this second attempt to build a Urenco-based facility in the USA could be significantly delayed or possibly even doomed to failure.
In stark contrast to the LES problems, USEC has put together a string of public relations successes in its attempts to bring its centrifuge project to fruition. Since the execution of a new cooperative research and development agreement with DoE in 2002, it has met each of its milestones, sometimes well ahead of schedule.
Late last year, USEC rebranded the GCEP-based project as the "American Centrifuge", and took a number of steps toward its quest to demonstrate and license this technology before signing up partners to help with the financing and construction of a new 3.5 million SWU facility. In January 2003, USEC formally opened its new Centrifuge Technology Center in Oak Ridge, Tennessee. At this site, engineers will design and manufacture parts that will ultimately be used in a pilot programme in Portsmouth, Ohio. USEC also signed a lease with DoE for use of the K-1600 building at Oak Ridge National Laboratory, which houses some of the equipment and infrastructure from the previous centrifuge R&D efforts. Most notably, USEC submitted its NRC licence application for the American Centrifuge demonstration facility in Portsmouth some two months earlier than anticipated. USEC hopes to secure NRC approval for the facility by March 2004. The demonstration facility will consist of up to 240 centrifuge machines that USEC will deploy to test the design and operation of the commercial machines in a closed cycle. And in its most recent quarterly report, USEC announced that it would accelerate its licence application for the commercial plant to August 2004, which should enable the plant to begin operation in 2005, a year earlier than planned.
But technology questions still remain. USEC will employ machines of the same dimensions (about 13m high) as used in the GCEP programme, but with improved internal components. However, while the GCEP machines were tested for a number of years in the 1970s and 1980s, they have no commercial operating history. The machines are much larger and operate at much higher rotational speed than either the Urenco or Russian designs. Therefore, questions about machine longevity and stability over the long-term are likely to remain for some time. During its development and demonstration phases, USEC intends to make as many incremental improvements as possible to the basic design in order to achieve the proper balance of low component manufacturing costs, low production costs, and low machine failure rate.
Financial issues are also at the forefront. Although USEC's credit rating was recently raised from "negative" to "stable" by Standard & Poor's, its significant long-term debt and meagre operating margins will make it difficult to raise the necessary funding on its own. Some combination of project finance with strong partners, or perhaps outright government support in the form of loan guarantees or other incentives, will be necessary to realise this project.
Which leads to USEC's ace in the hole. Although both plants are probably necessary in the long-run, LES maintains an advantage due to its proven technology and partners willing to commit to some 50% of the output. This of course assumes the siting problem can be resolved. However, if LES cannot overcome the siting problem, and decides to once again abandon this project, it then becomes a national imperative for USEC to succeed in building a new facility. US policymakers are not likely to sit still if the country's last remaining enrichment plant has to be shut down it is too critical to national energy security and the security of the HEU deal. Hence USEC would be in a stronger bargaining position to obtain loan guarantees or other government support for the new plant. So while it remains a two-horse race for now, the favourite is stumbling and may not finish. If that happens, the long shot may get the sort of assistance that assures it of reaching the finish line.