Rail challenges drive Western Canada ammonia developer to shift toward USGC

While a rail prohibition is often seen as the major obstacle to exporting low-carbon ammonia to Asia, Transport Canada and sources confirmed that the primary challenge lies in the high insurance costs associated with transportation, prompting a developer to abandon the region.

"For the Canada project, we weren't able to move forward with the next development stage without certainty on the rail situation," the developer, who requested anonymity, said.

Western Canada's ambition to become a key exporter of low-carbon ammonia to the Asia-Pacific region faces challenges similar to those of LNG projects, with domestic rail transportation and insurance costs said to pose significant obstacles to delivering ammonia to markets like South Korea and Japan.

"Ammonia is currently transported by rail and truck within Canada for domestic uses and is considered a dangerous good, subject to the requirements of the Transportation of Dangerous Goods Act, 1992, and associated regulations, with stringent oversight by Transport Canada," a Transport Canada representative told S&P Global Commodity Insights.

"There will definitely be an inflated cost to rail the ammonia and to get insurance since ammonia is a hazard to transport, and the Transport Canada discussions will likely involve increased risk mitigation and insurance provisions," a low-carbon ammonia developer said.

Despite these challenges, Western Canadian projects are said to be competitive due to affordable natural gas and a shorter route to Asia, bypassing the Panama Canal. However, discussions are ongoing regarding rail insurance and whether costly insurance premiums could make them uneconomical.

"Transport Canada maintains a robust regulatory and oversight regime that supports public safety, economic growth and innovation," the Transport Canada representative said.

Projects shift to US Gulf

"In order for us to be involved in a [Japanese] contract-for-difference-eligible project, we opted to put that one on hold and seek investment opportunities in later-stage projects on the [US Gulf Coast]," the developer said.

Japan's CFD scheme, which will begin reviewing applications after Jan. 31, 2025, supports the cost gap between hydrogen production and conventional fuels like LNG and coal. This initiative, backed by the Hydrogen Society Promotion Act and amendments to the JOGMEC Act, offers 15-year subsidies, requiring continued supply for 10 years post-subsidy. Japan aims to achieve 12 million mt/year of hydrogen use by 2040 and plans to integrate hydrogen and ammonia into power generation by 2030-31.

"Many of the projects in early-stage development are contingent on getting the subsidy/offtake from the CFD to move their project forward, and an unsuccessful bid will likely either delay or cancel a fair amount of them," the developer said.

Noting that regulatory and development processes are easier and faster on the USGC compared with Canada contributed to the company's shift as it aims to meet the 2030-31 start date.

"I do know that there are a few US projects in the Gulf Coast, including ours, participating in the Japanese program," a US-based low-carbon ammonia developer said.

Platts, part of Commodity Insights, assessed the blue ammonia premium on the USGC at $29.70/mt on Nov. 27, with an outright blue ammonia price of $538.70/mt, considering the premium and the US Gulf FOB assessment of $510/mt.

The FOB US Gulf low-carbon ammonia price was assessed at $510/mt, considering a maximum carbon intensity of 0.87 kg CO2eq/kg ammonia under a well-to-gate boundary.

Japan's CFD vs. South Korea's auction

Market talk suggested that low-carbon hydrogen and ammonia developers prefer Japan's CFD scheme over South Korea's power auction, as projects shift from Canada due to concerns about government change and an easier approval process in the US Gulf.

Korea Southern Power (KOSPO) was selected as the sole preferred bidder in the South Korean auction results, announced Nov. 22. The auction was said to be undersubscribed, with only 750 GWh, or 11.54%, of 6,500 GWh allocated to KOSPO. This was due to elevated bid prices and insufficient subsidies, with most offers exceeding the ceiling price for low-carbon ammonia. A rerun of the auction is expected in 2025, with the remaining 2024 volumes deferred.

Sources indicated to Commodity Insights that offers for blue ammonia -- ammonia produced using carbon sequestration and storage -- from the Middle East for the Korea Hydrogen Power auction were in the range of $500-$600/mt delivered, under 15-year contracts and with 4 kgCO2e/kg H2. Meanwhile, a USGC source provided an indicative offer for renewable-derived ammonia at $850/mt, also under a 15-year contract.

Market sources speculated that Aramco could be a potential supplier of low-carbon ammonia to KOSPO from its Middle Eastern blue ammonia plant. In terms of green ammonia, Indian and Chinese projects led the bidding in South Korea's hydrogen power auction due to cost advantages.