Listen: Where is the clean ammonia market headed?

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Vincent Valk:
Hi, and welcome to the Chemical Week Podcast. I'm Vincent Valk, and here is what we'll have our eye on over the next couple of weeks. Second quarter earnings season is here, which means some of the industry's biggest names will be reporting results soon. Dow reports on Thursday morning and BASF reports on Friday. Next week we'll have Ecolab and industrial gases producers Air Products and Linde. Different factors appear to be pushing in different directions this earning season. The demand environment has been fairly soft, and the end of last year's destock cycle didn't provide much of a boost. But there is little sign that demand is weakening, and raw material costs do seem to have finally stabilized.
Earlier results have been mixed, and we'll see what the big producers have to say about Q2 and the outlook. Looking ahead, we've got our annual feature on executive compensation, complete with a cool new infographic coming up in early August, as well as some podcasts teed up about renewables and talent management. This week's episode and this week's print cover story focus on clean ammonia. We talk about the promise of clean ammonia, the role of incentives and regulation in growing this nascent market, and why some projects have had trouble getting off the ground. Please note that this episode was recorded on July 11th, as it references some news about Fertiglobe that was released that day. I'll now turn it over to our own Jameson Croteau to lead the discussion.

Jameson Croteau:
Hello, and welcome to the Chemical Week Podcast. I'm Jameson Croteau, assistant editor at Chemical Week. Today we're jumping into the nascent clean ammonia market. We'll discuss what support clean ammonia needs, what regions serve as its best markets, what the global trade map of clean ammonia will look like, and how projects are moving toward final investment decisions. I'm very pleased to be joined by a wonderful panel today. We have Chemical Week's markets editor, Mark Thomas, S&P global commodity insights, global lead of nitrogen pricing Mark Astley, commodity insights senior energy transition reporter James Burgess. How are you all doing today, guys?

Mark Astley:
Very good, thank you.

Mark Thomas:
Very well, thank you.

Jameson Croteau:
Great to have you here. I guess we'll just hop right into it. Currently, the production of ammonia makes up roughly 2% of all global greenhouse gas emissions. With the industry expected to grow by at least 40% by mid-century, it's paramount to start reducing emissions as quickly as possible. Broadly speaking, what are some of the main challenges in the build-out of the clean ammonia market and what can be done to help support it?

Mark Astley:
Well, I think obviously there's an established market for ammonia, although the main applications are fertilizers and petrochemicals. The future sexier applications lie in power and the fuel of ships. So I think one of the main hurdles that the industry faces is infrastructure. There are obviously animals in place and pipelines that enable the transportation of ammonia, but I think this will need to be expanded massively to deal with all the additional ammonia that it's going to be moved around the world. I think that's definitely one hurdle that's come up a lot in conversations recently anywhere.

James Burgess:
And jumping in from the energy transition and renewable side, I think underpinning production is scaling up the alternative hydrogen supplies, so trying to decarbonize that hydrogen feedstock for ammonia production. And there's two main pathways to do that. One is through electrolysis of water powered by renewables, so splitting water into oxygen and hydrogen, or you use the conventional technique of steam methane reforming, and then you capture the associated CO2 emissions. Now, both of those technologies are in their infancy, and we've seen quite a few challenges in getting those projects off the ground and up and running. And we'll probably come onto this in a bit more detail, but those barriers are around policy implementation, rising costs, and supply chain issues to do with scaling.

Mark Astley:
I suppose for clean ammonia to really get off the ground, there needs to be some incentive, or I guess the risk of penalty as well, because these products are going to be a lot more expensive than the conventional gray products that's currently delivered around the world. And I suppose there is in Korea, in Japan, price support mechanisms are proposed, and in the EU there's going to be the risk of penalty, with import duties to be paid on products with a high carbon intensity. But I guess more of that probably is needed really for the market for clean ammonia to really get going.

Mark Thomas:
Yeah, I think that's a great point, Mark. From our point of view at Chemical Week, I think the main issues that we've been hearing related to low carbon ammonia, clean ammonia over the last year or so in particular, though, remains really this overarching level of uncertainty about the state of the markets, the forecasts, the number of projects which I think are actually going to be built. There seems to be a lot of uncertainty and a lot of debate about how many of the projects that are being announced, and there have been many announced globally, but the issue appears to be that many of the companies that are likely to produce some of the initial low carbon ammonia, they are essentially casting doubts on whether enough projects are going to be built in the short term to meet demand. But we have companies such as OCI, Fertiglobe, and others, and the CEOs of these companies have cast real doubt over the number of projects that are actually going to happen.
I think they're talking about less than 30% of those that have been announced actually reaching FID. And out of those, a certain number more after FID will drop out. So I think from the chemical industry perspective, the difficulty is trying to assess how much definite product is going to arrive both in Europe and elsewhere and how soon. I don't know what the opinion of yourself, Mark and James, is, but there seems to be a great deal of expectation that there's not going to be enough low carbon ammonia produced to meet demands by 2030. That is a view that's debated depending on who you speak to, but I just wondered what your thoughts were on on how you see projects progressing in the short and medium term.

James Burgess:
That definitely chimes with what we're seeing on the upstream hydrogen projects where, of the huge volume of announcements we've seen in the last three or four years, less than 10% have got to a final investment decision. And that's in terms of numbers of projects. In terms of volumes, it's substantially less than that. So yes, there's a great degree of uncertainty. There's also uncertainty, I think, about the offtake and the end users. As the infrastructure evolves, especially around Europe where there's a potential hydrogen pipeline network being developed, project developers who were initially looking at ammonia offtake volumes are now eyeing perhaps pure hydrogen offtake into the pipeline network. So there's a lot of uncertainty even at that level. Once you get projects signed and under way, it's not clear how the economics and how the offtake is going to pan out.

Jameson Croteau:
Great. I think if we wanted to jump back a bit to the policy side of things, there has been some murkiness about the differences between blue and green ammonia, what constitutes as clean enough, especially when legislation and policy are the focus. So how has the murkiness around defining what clean ammonia is, how has that affected or slowed policy?

Mark Astley:
I know that's something that comes up a lots at clean ammonia conferences, and I guess probably clean hydrogen conferences as well, that for green, it's pretty clean cut, it's ammonia or hydrogen produced using renewable energy. But the definition of blue is definitely, as you'd said, a little murkier still. I guess the majority of those that have got an interest in blue ammonia would say that blue requires carbon capture and sequestration. But then I guess the question is, what rate of capture? So there's still a lack of clarity on that side of things, and I guess that's maybe why there's also been a bit of a shift away from the ammonia color charts and towards carbon intensity as a means of classifying the different grades of low carbon ammonia. But then again, the goal posts are still always moving as well. Japan, they just recently adjusted the maximum carbon intensity requirement for low carbon ammonia. So yeah, it seems like that's something else that seems to be standing in the way of big decisions being made around clean ammonia projects for sure.

James Burgess:
And even within definitions of green ammonia and hydrogen, there's been quite a lot of wrangling and delays and uncertainty around that. So yes, it's powered by renewables, but as we saw in Europe, there's quite a lot of debate about how that relates to local production and the grid, the matching between renewable power generation and hydrogen and ammonia production, and then the scope for bringing online plants within a certain timeframe of the renewables. So although the overall idea is quite clear cut, how that pans out in terms of implementation in a jurisdiction isn't certain, and that's what you're seeing in the US now. So when the Inflation Reduction Act came out, and guys, feel free to jump in here, there was quite a lot of excitement in the industry that it was a much simpler mechanism than the EU came up with. But now a couple of years later, the US is going through the same process of the debate over how stringent the matching of renewables with ammonia and hydrogen deduction should be. So it's not always a clear cut definition even once you've agreed it's going to be green.

Jameson Croteau:
Sure, yeah. And that I think especially on the IRA side, there has been, the payouts on these tax credits have delayed and cast a wave of uncertainty over a lot of, especially clean hydrogen and now clean ammonia projects. I guess if now we can move to break it down by region, what regions are leading this adoption to clean ammonia and what factors are contributing best to the regional advantages?

Mark Astley:
Well, I guess Japan is really leading the drive on the adoption of ammonia in power generation. They seem to be strides ahead of anyone else. But I guess, yeah, on the adoption side, at least anywhere, I suppose any country that's already imported money and has the infrastructure I guess will be well placed to start bringing in clean ammonia whenever that might be. And I guess we've seen that over the last couple of years. We've had cargoes of ammonia that's been certified low carbon from the Middle East especially that's made its way to places like India and to South Korea and Taiwan, Bulgaria, and these are all established markets for ammonia. So I guess having the infrastructure in place as well definitely helps. Although I think it really does depend who you ask as well. I think the blue ammonia cargoes that have been ... Well, the cargoes that have been dubbed blue ammonia and have been delivered, I think you probably would, some people would debate how blue those blue cargoes actually are. But yeah, that's for another podcast, I think.

James Burgess:
And I think within Europe, whether the legislation is really tailored towards hydrogen and then the various industries that consume it, we're seeing ammonia emerging as a leading offtaker for some of the early projects that have secured backing under auction mechanism. So we had very recently the European Hydrogen Bank first auction, which supported 1.5 gigawatts of electrolysis over 10 years. And the majority of those projects have ammonia as their offtake. There are large scale production plants planned in Portugal and Spain. So they've got access to low cost, relatively low cost renewables tapping into existing market and existing infrastructure. So yeah, again, you see the incumbent uses and industries and offtakers really driving that forward.
And yeah, just touching on the question around blue and carbon thresholds and definitions, there is interest in that in Europe, but again, the definitions aren't quite there yet. So the European Union hasn't pinned down its definition of what constitutes low carbon hydrogen. And as Mark was just saying, the shipments out of the Middle East have certified their cargoes as blue, but they've not really gone into detail of what percentage carbon capture they're using in that process. So that will be key information before that part of the market really picks up.

Jameson Croteau:
Great. I think if we step back a bit, and as the market develops, because right now the global ammonia trade market sits around 10% of its total production, and there's expectations out there that the global trade will increase by tenfold by mid-century. How do we see the global trade map for clean ammonia as the industry develops? I know Japan will probably have to be a great importer if they were trying to get to their fully green electricity by mid-century, but how do other countries shake out? Who will be big exporters and then who's going to be a big importer?

Mark Astley:
Well, I think at the moment, I guess if you look at the current ammonia market, basically wherever you find gas, you're going to find ammonia production. So the main supply hubs would include the United States, Trinidad and Tobago, north Africa, Europe, Russia, the Middle East, southeast Asia. And I suppose a lot of these gray ammonia suppliers will also play a big role in the clean ammonia market, which makes sense. They have the gas and I guess they have the geological resources required for CCS as well. And I guess you can also see that as well in the projects that have been announced. So in the US, for example, about 60% of the projects that have been announced there are blue rather than green.
So I guess, yeah, the markets that exist, the supplier markets that exist already, they will play a big role in this. But then you'll also see the Middle East will play a massive role because they've also got a lot of green projects. India as well, rather than being an importer, is emerging as a big supplier of green ammonia. And the same with China as well. It's always been a massive producer of ammonia, although the majority was always used, the vast, vast majority was always used in the country to produce fertilizers and petrochemicals. But it seems like they've got green ammonia projects and they're looking like they might be one of the cheaper supply options as well. And of course Australia, not forgetting them.

James Burgess:
I think that's reflected in some of the early commercial deals and partnerships we've seen across ammonia and hydrogen, where you've got, as you were saying, you've got essentially export hubs, future export hubs emerging in the Middle East. And also, interestingly, I think in North America, where they've got, like you say, they've got high potential for carbon capture and storage and also the renewable side. And then you've got the demand centers we've touched on. And we've seen a lot of companies signing either provisional offtake or firm offtake agreements for ammonia and other hydrogen derivatives into Europe and east Asia, particularly Japan and South Korea, as we mentioned.
It might be worth mentioning just here the German H2 global tender. So that's a fund that's supporting green ammonia and other hydrogen derivative imports. And we've just had the first auction results from that, where Fertiglobe are going to be supplying into Europe. To look at the volumes, they're looking at a price of 1,000 euros per ton. Compare that with the conventional markets and it's a substantial premium, but that's the point of this auction mechanism, to go some way to bridging that price gap.

Jameson Croteau:
Yeah, That's the hot news this morning. Any initial reactions to Fertiglobe's win of the auction?

Mark Astley:
Nothing. Nothing so far from the existing ammonia market, but I would imagine the price probably won't come as a great surprise to many. I think the price ideas that we've been hearing for green ammonia over the past couple of years have been at around $800 to $1,000 per metric ton FOB. So to see $1,000 delivered to northwest Europe from the Middle East is more or less in line with that, factoring in the cost of freight. So I'm sure it'll be welcome news, quite reaffirming for a lot of project owners.

Jameson Croteau:
I think we'll circle back to Mark Thomas. You were talking about how the financial investment decisions for a lot of these green ammonia projects are not, they're hitting at a lower rate than expected. Why are many of these projects not getting to FID and not breaching buildout? I know we've had in the last month Nutrien drop their Louisiana low carbon ammonia project. Why are we seeing these producers struggle to get their projects fully past feasibility study to do FID?

Mark Thomas:
Yeah, thanks, James. And that's a great question, because stepping back a bit, if you again go back to when some of the initial projects started being discussed, it was remarkable at the time, and I think it still is, to see the initial intensity of interest that there was in low carbon projects, low carbon ammonia projects. I think there's no doubt that everyone understands there's an urgency to decarbonize, whether that be in maritime, hard to abate industries like the chemical sector, fertilizer, and so on. And I don't think anyone debates that the technology is out there and it can be progressed. So with the ammonia market now extending or potentially extending well beyond its traditional fertilizer and chemical sectors, you'd think there would be not much to stand in the way of these projects.
But at the same time, and again, I talk about this more from I guess the chemicals perspective, you've got a huge number of projects that are required to decarbonize at the same time from the chemical industry perspective. It's absolutely on the floor at the moment as an industry. You are looking at an industry which is in one of its most severe down cycles in decades, and this is forcing companies to close many of their traditional plants in established areas. Again, I'm looking perhaps at Europe in particular here, where a number of conventional ammonia plants have been shut down over the last couple of years. So you've got this sort of juxtaposition of companies knowing and needing to decarbonize and investing in no carbon ammonia projects, for example. At the same time, they are hamstrung by finances.
There are also simple challenges that many projects are facing not only in terms of low carbon but all areas. That is simply that with inflation rates still very high, build and construction costs are still rising. There are supply chain issues in terms of the equipment that's required. There is also a shortfall in terms of the availability of companies with the appropriate technology and the licensing technology to work on more than a certain number of projects at a time. And in addition to that, you still have this regulatory uncertainty in many areas, which is just causing people to pause before they reach a point where they take an FID. So you have a situation where I think all can see that these projects, many of these projects need to progress. But I think there's a real dose of realism now that there is just not the financing and there is not the personnel, in many cases, for these projects at a more realistic level than I think was talked about initially.

James Burgess:
Coming in on what Mark was saying, I think realism is the word. There is an awful lots of hype around the whole market since around 2020 or so. And then you had Russia's invasion of Ukraine and the radical rewriting of energy policy in Europe. Everyone thought, "Yeah, okay, so first of all you've got to respond to energy security in the first instance." But then part of their whole policy was a push to renewables. But I think what we're seeing, that clearly has a big momentum and is going ahead with pace, and it's taken some time to establish that in legislation, which has led to some of the delays. But now you have quite a clear framework within Europe and, critically, demand side consumption mandates. So 42% of hydrogen used in industry has to come from renewable sources by 2030. Now, we're still waiting to see how member state introduce that at a national level into law, but we know that's coming.
So there's that mandate, which is now helping to underpin some of the security, some of the certainty to get these projects going. But those other barriers are still there. So cost increases, project costs rose something like 50% in two years through supply chain issues, through energy feedstock costs, but also because of the scale of this project, which a lot of them are first of a kind large scale renewables, some of these industrial scale ones. I think the companies and developers are learning as they're going. There's going to be hiccups, there's going to be learning as they go. There's going to be delays, there's going to be redesigns, issues about integrating, balance a plant. So it's not just bringing an electrolyzer into an ammonia plant and exchanging the feedstock. There's a lot of engineering that has to go with it at that scale.
So it's this more realistic phase that Mark mentioned that we're now entering. So the scale of development is much less than we initially thought, but what we're seeing go through now I think has a firmer footing.

Jameson Croteau:
Great. I think definitely a lot of information there and a lot of, as we can see why the outlook is a bit uncertain, especially for producers. But I guess I'll go around the horn. Is there any last final closing thoughts you have on the nascent clean ammonia market?

Mark Thomas:
Renewable ammonia, low carbon ammonia, we all know it's an important part of the decarbonization puzzle. But I think as James just said there, developing it at scale just takes time. I think there is clearly a deadline approaching. 2030, we have to get a large number of projects at least under way. And I think there are lots of things that need to be done on multiple fronts, especially with regards to blue ammonia as a really critical stepping stone to decarbonize. So I think we all can see that the green transition will require huge investments and regulatory support. But I think from the chemical industry perspective, I think there's also an understanding that the chemical industry can play a part in the transition and not just be a customer, but also very much be a producer and part of the solution. So I guess that's my view on the situation of present.

Jameson Croteau:
Fantastic. Certainly a lot to look out for in the clean ammonia market, and I'm sure we could certainly talk for another hour or two about it. So I just want to say thanks again to our panel, Mark, Mark, and James. This is Jameson Croteau signing off for Chemical Week.