Agrium stays the course in Egypt

Fertiliser firm thought it had 'perfect site' but protests nearly derail the $1.2bn project to convert natural gas into ammonia and urea.

The proposed Agrium fertiliser plant led to emotional protests over public health concerns.

CALGARY // When Agrium, an international fertiliser company, agreed to build a nitrogen fertiliser plant with the Egyptian state-owned chemicals company Echem, the company's Canadian executives thought they had found the perfect project site. It was a government-designated industrial zone in the Mediterranean city of Damietta, with coveted access to a deepwater port in a country guaranteeing plentiful low-priced gas to industrial customers.

The last thing they expected there was emotional environmental protests, followed by a government inquiry that nearly derailed the US$1.2 billion (Dh4.4bn) project to convert natural gas into ammonia and urea. For a project already 42 per cent complete, cancellation would have been unprecedented. "It was quite a shock to get all our approvals and do everything by the book, and put together a $1bn finance package with lawyers for all the banks, then have this happen," said Don Lauweryssen, the senior director of corporate development and strategy at Agrium.

Problems came to a head in April, when the company was relentlessly attacked in the local press over claims that emissions from the partly built factory would harm the health of city residents and damage the marine ecosystem. Agrium protested that emissions would be half those permitted under Egyptian law. But by late April, most Damietta homes were draped with black banners reading "No to the factory of death" and thousands of residents had taken to the streets in popular demonstrations demanding that the plant be relocated. Soon the protests spread to Cairo.

"Sometimes there were 10 articles per day in the local press. People were in the street protesting and very emotional, and the government was not prepared to use force to protect our 1,200 people on site," said Mr Lauweryssen. "We held a press conference, but nothing we could say as foreigners would be believed." In June, construction was halted to allow a parliamentary commission to investigate. The commission found the project entirely in order. Nonetheless, Egypt's parliament recommended relocation, and the government said it would comply with the request. Infuriated, Agrium said it would aggressively pursue "full recovery of its costs, equity contribution and future lost profits".

Peculiarly, Damietta was hardly a pristine tourist destination. It had been an industry and trade hub since Medieval times, with well developed textile manufacturing and food processing industries. The port had a gas liquefaction plant and LNG export terminal, and the adjacent industrial zone had been mooted for other large petrochemicals projects. However, the gathering storm had been presaged by the replacement of Echem's chairman in May 2007.

"To start with, Echem was very keen to work with us. But then there was a change in management and things went sideways," said Mr Lauweryssen. "The former chairman was moving at a speed commensurate with how you would do business in the West. With the new chairman, there was not the same urgency, and [Echem] wanted proof about us being committed to Egypt. It was an incredible amount of work to ratify the most basic agreement."

Worse came when the governor of Damietta, a local power-broker who had been promoting beach developments, declared that the city's industrial area should be re-zoned for tourism. Agrium soon found itself embroiled in a mysterious dispute over military clearance and the target of unfounded accusations of failure to comply with environmental regulations. A member of Damietta's municipal council took legal action against the company, alleging it had secured approval for the fertiliser plant by paying kickbacks to government officials - charges denied by Agrium that have not been brought to trial.

But just as suddenly as they started, the problems besetting Agrium's Egyptian venture were recently resolved. In August, the government offered a share-swap deal in which the state-owned Mist Oil Processing Company (Mopco), which had recently built a urea plant less than a kilometre from Agrium's Damietta site, would acquire the Agrium/Echem venture. Agrium would get a 26 per cent interest in a new entity that would own and operate the Mopco plant, and expand it by adding two urea production lines, tripling production to 525,000 tonnes a year by 2011.

Keen to avoid protracted international arbitration, Agrium accepted this as "a reasonable second-best alternative". Following the company's agreement to move about 500 metres across a canal, the environmental protests mysteriously died down. Agrium officials said the experience demonstrated that patience and diligence in working to resolve project difficulties could pay off. But troubling questions remain for Egypt's programme to attract foreign investment. Already, the Damietta protests have spurred imitations, with the local council of Al Matariya, in Cairo, recently blocking an Egyptian Oil Refining Company project.

"The ease with which the government caved in to local pressures is likely to breed doubt in the minds of other prospective investors," the Economist Intelligence Unit wrote concerning Agrium. @Email:[e-mail]