Enrichment: in the wake of the USEC privatisation27 August 1998
Rapid transition of the uranium enrichment market – with the privatisation of the United States Enrichment Corporation (USEC) and the release of large amounts of Russian highly enriched uranium (HEU) onto the market – is threatening the deployment of new technologies. Increasing competitiveness while the number of nuclear power plant closures in the USA is set to rise, means
The US Enrichment Corporation (USEC) announced bold plans when it made its Initial Public Offering (IPO) in July 1998. The plans include sales of enriched and natural uranium inventories, blending of US highly enriched uranium (HEU), and transition from gaseous diffusion plant (GDP) to atomic vapour laser isotope (AVLIS) technology shortly after the turn of the century. However, the effects of a US government Oversight Committee and the degree to which it could impact USEC’s commercial plans are still unknown.
The number of advanced technology projects narrowed over the last year with Louisiana Energy Services (LES) abandoning its plans to deploy advanced centrifuge technology due to a continuing regulatory stalemate with the US Nuclear Regulatory Commission, and South Africa’s abandonment of the molecular laser isotope separation (MLIS) project.
With excess production capacity, and a market that shows little potential for growth, the years ahead will be challenging for all primary suppliers. Survival of the fittest will be the watchword, with major suppliers aggressively competing for open sales, and large inventories of enriched uranium keeping pressure on prices.
In the US market, nuclear plant closures continued over the last year, as competition among utilities intensified. Some signs of the market restructuring were evident, with the Three Mile Island 1 plant in negotiation to be sold at a substantial discount from book value to AmerGen Energy. However, other nuclear plants that were offered for sale, attracted no buyers. And plants like Unicom’s two Zion units were closed outright by their owners due to their relative economic potential compared with other generating options.
In the Far East, where continued nuclear plant construction was expected to provide a balance to plant closures in the US, economic problems beginning in the autumn of 1997 have spread dramatically, and now threaten nuclear power expansion in these markets.
In addition, nuclear plant closures and delays in Europe, including France, result in a world market where no appreciable sales growth, and perhaps some decrease in demand, is likely during the period 2000-2020. This scenario makes investment and business expansion decisions very difficult to justify.
THE MARKET – SUPPLY & DEMAND
In 1998, Energy Resources International (ERI) estimates SWU (separative works unit) sales will total 34 million. By 2003, ERI estimates total sales of 36 million SWU, driven primarily by increased demand in the Far East. ERI projects SWU demand rising by 2010 to 37.6 million SWU, with a gradual decline to about 37 million SWU in 2020 as US plant retirements balance out growth in the Far East. More pessimistically, the US DOE’s Energy Information Administration projects that world SWU demand in 2020 will be just 26.5 million units, or about 25% lower than in 1998. This estimate is based on fewer new plants in the Far East and more retirements in the US and Europe than are now projected.
On the supply side, new customer orders increased in 1997 and early 1998 over 1996, with ERI estimating sales of 21 million SWU during this period. However, primary supplier backlog continues to decline, with deliveries of nearly 50 million SWU during the same period. Overall, as shown in
Figure 1, 34% of world demand for SWU are uncommitted to any supplier in the year 2003.
In 1998, US utilities increased their buying activity, with some seeking long term contracts extending as far as 2008. However, most concentrated on contracts for the 1999-2004 period.
As shown in Figure 2, in 1997 and early 1998 USEC and Urenco each captured about 38% of the new long term sales. This is good news for USEC; Figure 3 shows that its share of the world market is about 37%. It is even better news for Urenco, which supplied just 11% of world needs in 1998. Cogema/Eurodif captured about 19% and Tenex about 5% of new sales. The Cogema/Eurodif new sales may appear low given their world market share of 23%, but EDF, their largest customer, has long term contracts that run to 2005. Figure 4 shows enrichment requirements by region in 1998.
Over the last year, spot market activity increased, with about 615000 SWU sold in 1997. Although this level of activity is three times 1996 spot market sales, it is still less than the approximately 900000 SWU sold in spot market transactions in 1995, and a far cry from the early 1990s when spot sales were in the range of 2-2.5 million SWU per year.
In the first half of 1998, spot sales were on a par with 1997, with slightly more than 300000 SWU sales. However, a large part of this volume was one transaction involving fabricated fuel in which a US utility sold the SWU component to a fabricator. Spot market demand was driven by US utilities exercising downward contract flexibility with their primary SWU suppliers. These SWU needs, ranging from as little as 5000 SWU to in excess of 50000 SWU were met either through formal bids or in off-market transactions.
Given the current US utility approach, it is not surprising that spot market sales are still dominated by primary suppliers, with the incumbent supplier typically improving the price or terms under the base agreement with the utility, agreeing to meet future spot prices, or by offering attractively priced feed material.
Trading companies or other inventory holders trying to sell SWU on the spot market were faced with a very competitive market in the first half of 1998, with prices dropping as low as $82, as compared to prices in the range of $90/SWU in 1997.
HIGHLY ENRICHED URANIUM
USEC continued to receive LEU derived from Russian HEU (under a contract that is expected to run through 2014) with only a couple of minor interruptions in the scheduled deliveries in late 1997. USEC is expecting to receive 4.4 million SWU in 1998 and 5.5 million SWU per year thereafter, but prices are firm only through 2001. This portends some very difficult negotiations in the years ahead.
The challenges include negotiations with Cameco, Cogema, and Nukem Inc, for the marketing of the feed component, and the problem of the price the USEC is paying the Russians for the SWU, which is higher than USEC’s production costs, adversely affecting USEC’s profitability.
US HEU down blending is about to begin, with a total transfer of 50 t of material from DOE over the period 1998-2003. This HEU contains about 3.4 million SWU. However, counterbalancing this, the 13 t of UF6 HEU blending at the Portsmouth GDP, which contained about 2 million SWU, is about to be completed.
PRIMARY SUPPLIER OVERVIEW
The dominant market news of the year was the privatisation of USEC. Privatisation by IPO (Initial Public Offering) provided some predictability to the market since all current USEC management and policies remained in place.
One of the most contentious issues was the planned pace of natural and enriched uranium inventory sales. The DOE offset its debts to USEC with transfers of HEU and natural uranium to the corporation. After privatisation, USEC will sell these inventories to meet cash flow and dividend targets.
The impacts of these inventory sales began before privatisation was completed, with uranium prices falling. GDP workers, uranium mining companies, and other nuclear fuel companies expressed concerns about the potential impacts on their businesses, and filed a lawsuit against DOE claiming that the transfer was illegal.
USEC faces a number of challenges over the next few years as unit costs of production from the GDPs increase, due to lower production, caused by increased receipt of LEU from Russian HEU. USEC must meet aggressive competition in the market and has taken steps to extend contracts with existing customers in the US and Japan. Over the next year, USEC is likely to offer some very creative terms to its largest customers in each market, including the utilisation of the natural uranium feed in its inventory.
Increases in power costs or environmental concerns may affect USEC’s plans for the continued operation of its GDPs. The issues include the availability of an environmentally acceptable substitute for freon, a known ozone destroyer, as the primary process coolant. According to data released by USEC during the IPO process, at current leakage rates, coolant inventory supplies are adequate to run the plants until 2001, at which time a replacement coolant will be required.
An early sign of USEC’s intention to compete in the long term is its confirmation that it will stick by plans to deploy AVLIS by 2003. Despite challenging technical and regulatory hurdles, USEC plans to select an AVLIS site and to file a licence application with the NRC by 1999. However, USEC acknowledges that the GDPs’ obsolescence is not assured in this time frame if cheap power is available and NRC licensing delays develop for AVLIS.
Over the last year Urenco continued its gradual increase in market share, and expanded its production capability. Urenco’s expansion has allowed it to decrease its unit cost of production through the gradual increase in production capacity.
Urenco produced and delivered 3.6 million SWU in 1997, and passed the milestone of producing its 35 millionth SWU. Urenco plans to produce 4.2 million SWU in 2000, marking a continuation of its policy of modest expansion.
Urenco made progress in each of its three production locations. It completed construction of new enrichment capacity at Capenhurst (UK) in 1997, and produced the first enriched uranium from this plant. In addition, Urenco also received a licence for the Gronau plant (Germany) that will allow an increase in capacity from 1 million SWU to 1.8 million SWU.
Finally, work began on the construction of a new enrichment plant at Almelo (the Netherlands). To support its growth, Urenco more than doubled the production of centrifuges.
Urenco has also continued to make inroads in the Far East market.
Cogema continued its strong presence in the uranium enrichment market, with SWU sales representing almost 25% of the integrated fuel cycle company’s total income in 1997. Cogema’s marketing efforts were successful at consolidating its mid term sales, with contract extensions through 2006 agreed to with two key Japanese utilities. On the supply side, Eurodif’s gaseous diffusion plant continued cost-effective operation, utilising low-cost spot-priced electricity to the maximum extent possible. In contrast to USEC’s plan to close both GDPs by 2005, Eurodif believes that its newer George Besse plant will operate reliably for at least another 15 years. With this prospect in mind, Cogema faces the difficult decision on whether and when to deploy its SILVA technology.
MINATOM continues to operate its centrifuge enrichment plants, both to supply commercial customers and to enrich depleted tails for use as HEU down blending. Tenex, the Russian executive agent, supplies USEC with the LEU resulting from their HEU blending operations. Tenex has competed aggressively in the commercial nuclear fuel markets, to sell the feed component of the blended HEU, and to provide uranium enrichment services to utilities in all markets.
Russian access to commercial markets in the US and Europe is limited, but this situation may change after the turn of the century.
Louisiana Energy Services
The supporters of the LES project to develop advanced centrifuge technology agreed to its termination on 22 April 1998 after a frustrating seven years of work and $34 million in costs, due to NRC licensing delays. This bodes ill for AVLIS, even though the NRC has agreed that USEC’s two year estimated licensing period could be achieved, if USEC’s submittals are timely and complete.
During the past year, the field of enrichment suppliers and advanced technology projects narrowed, due to market and regulatory realities. On the other hand, centrifuge and laser enrichment technologies both made technical advances.
Laser enrichment – AVLIS and SILVA
In the US, the AVLIS team began full scale integrated enrichment tests in October 1997. AVLIS is well into the demonstration phase, with plans to conduct at least four more large-scale tests over the next year.
To address licensing uncertainties, USEC has been holding regular meetings with the NRC, and hopes to file a licence application in 1999. The AVLIS schedule projections are firmer now, following the USEC privatisation, and the ability of the corporation to independently fund AVLIS deployment and to select a site, a predicate to applying for an NRC license. USEC has stated that AVLIS site selection will be made 6 months after privatisation, or in early 1999. This schedule would support an NRC licence application in mid 1999. However, the pace of the AVLIS programme must be endorsed by USEC’s new board of directors, and approval to construct a plant will be challenging given the other financial demands facing the corporation.
During this past year, the AVLIS Fuel Cycle Projects, consisting of the Feed Project and the Product Project, made significant progress, with both projects selecting their process flow sheets and proceeding with pre-deployment activities. The Feed Project has produced more than 40000 kilograms of uranium-iron feed rods for use in demonstrating the AVLIS enrichment process. The Product Project has converted more than two tons of AVLIS uranium-iron product to ceramic grade oxide suitable for fabricating commercial nuclear fuel pellets and a preliminary plant design has been completed. The Feed and Product demonstration projects are entering the final phases during which their process economics and interface with the existing nuclear fuel cycle will be determined. The overall cost impacts and contract modifications with customers are yet to be determined.
In France, the SILVA programme showed continuing progress, although it remains several years behind AVLIS. Enrichment demonstrations in ASTER, a facility commissioned in late 1996, are continuing. The decision on whether to proceed with a large scale SILVA demonstration facility was planned for late 1997, but was deferred by Cogema, who appears to be monitoring USEC decisions on AVLIS deployment before making a firm commitment.
Advanced centrifuge technology
Urenco continued the gradual improvement of its centrifuge technology with plans to install its latest generation of centrifuge, the TC21, by 2000. A test cascade of these machines is now operating. The next generation of centrifuge is being developed by Urenco, for installation by about 2005.
Although improvements in the centrifuge are occurring at a decreasing rate, Urenco believes that it will have the dominant advanced technology for the decade ahead.
USEC continues to financially support the Australian-based Silex technology. This technology has the potential advantages of being simpler and less expensive than AVLIS. It is a UF6-based technology and not a uranium metal technology and therefore would not involve a change from the existing UF6 fuel cycle. Initial Silex tests are to begin in late 1998.
A critical transition in the uranium enrichment market is clearly underway, driven by the recent privatisation of USEC, planned sales of USEC inventories, nuclear plant closures in the US, slowing growth in the Far East, and increased Russian HEU blending. Advanced centrifuges will continue to be deployed by Urenco, and the real question is whether USEC and Cogema will have the funds and the corporate commitment to deploy laser enrichment technology. Also, the inventories brought to market by USEC will present a competitive challenge to all primary suppliers.
All eyes will be on USEC over the next year to measure its progress as a private company and assess what impacts it has on the rest of the market.