Explainer-Why record high British natgas prices caused a crisis over CO2 supplies

By Nigel Hunt

LONDON (Reuters) - Britain warned its food producers on Wednesday to prepare for a 400% rise in carbon dioxide prices after paying tens of million of pounds to get CF Fertilisers to restart production in a deal that will last for three weeks.

The deal buys Britain some time to secure suppliers from other sources as it seeks to prevent the shutdown on production of a wide range of food and drinks.

WHY IS CARBON DIOXIDE IMPORTANT?

The food and drink industry is the largest user of carbon dioxide with the gas used in a wide range of beverages including beer and soft drinks.

In the meat sector, it is also used to stun animals prior to slaughter while bakers often use it in a packaging process which prolongs the life of products such as crumpets and cakes.

The gas has many other applications outside of food and drink including in medicine where it is used during a wide range of procedures from non-invasive surgery to the removal of warts.

The energy sector is also an important consumer with the nuclear industry, for example, using it as a coolant.

HOW IT IS PRODUCED?

Carbon dioxide is a by-product in the production of some fertilisers and biofuels.

In Britain, the largest sources include U.S. company CF Fertilisers' plant in Billingham in northeast England and the company's Ince plant in north-west England.

HOW IT IS TRADED?

Fertiliser producers sell carbon dioxide to industrial gas companies such as Linde and Air Liquide who purify it to the required standard before selling it to consumers.

Carbon dioxide is sold through a mixture of contracts and spot sales.

WHY IS THERE A SHORTAGE?

CF Fertilisers halted production at its two British fertiliser plants last week due to soaring prices of natural gas, a key input in the production process.

British wholesale gas benchmark prices have more than tripled this year to record highs due to several factors including low inventory levels, strong demand in Asia, making it difficult to get liquefied natural gas shipments and maintenance issues.

This effectively removed a large chunk of supply from the market and there have been reports that carbon dioxide suppliers were not scheduling beyond 24 hours in advance.

Many consumers only have sufficient reserves of the gas to last a few days and this created fears that production of a wide range of products could be quickly brought to a halt.

CAN IMPORTS FILL THE SUPPLY GAP?

Britain does import carbon dioxide from Norway and the Netherlands but supply from these sources appears uncertain. Norway's Yara announced last week it was curtailing fertiliser production following the rise in natural gas prices while available supplies from the Netherlands may remain within the European Union as the shortage of carbon dioxide spreads across the continent.

WILL FOOD AND DRINK PRICES RISE?

Carbon dioxide accounts for only a small proportion of the overall cost of producing food and drink so a rise in its cost is unlikely to lead to a significant jump in prices.

However, the rise in energy prices which led to the shortage of carbon dioxide is likely to stoke inflation as it makes it more expensive to grow, process and transport food and drink.

(Reporting by Nigel Hunt; Editing by Veronica Brown, Edmund Blair and Marguerita Choy)