(Editor's Note: This article is part of a series following "How Hydrogen Can Fuel The Energy Transition," published Nov. 19, 2020.)
- The emergence of green hydrogen as a sustainable raw material to produce ammonia, and the potential for ammonia as a store and carrier of hydrogen, could disrupt the nitrogen fertilizer industry, albeit only after 2030.
- But for the industry to evolve, operating conditions need to be right, including supportive regulatory frameworks across regions, lower green ammonia production costs, and collaboration and cost pass-through along the value chain.
- Beyond 2030, we anticipate that regions with abundant solar or wind power energy could emerge as cost-efficient locations for green hydrogen production, which could increase competitive threats for ammonia producers or offer partnership opportunities.
Ammonia producers conventionally use natural gas, in an extremely carbon dioxide (CO2) intensive process, to generate the hydrogen needed for ammonia production. This widely used process puts producers at risk of running afoul of internal and government targets (and regulations) to reduce industrial carbon emissions. A "greener" (less carbon intensive) route to generate hydrogen by using renewable energy sources, such as solar or wind, for ammonia production will become more important in the future.
However, this will entail a change in the current manufacturing processes, with attendant risks for the ammonia fertilizer industry. A potentially disruptive hydrogen economy will also bring some credit positives for ammonia producers. S&P Global Ratings believes the potential for green ammonia as a store or carrier of hydrogen, for ultimate use as fuel in nonagricultural sectors, could create new beneficial end markets for ammonia fertilizer producers.
All things considered, the potential disruption risk ultimately depends on the time it will take for green hydrogen production capacity to develop. Over the next five years, small to midsize projects (using electrolysis fueled by renewable power) are likely to become widespread in the European fertilizer industry. But we don't think they will have sufficient scale to shift the overall competitive dynamics or global hydrogen production cost curve. So the near-term impact on companies' credit quality will be minimal.
Industry association, Fertilizers Europe, estimates that--at the current rate--only about 10% of Europe's ammonia will come from renewable hydrogen by 2030. European fertilizer producers may remain at the front line of green ammonia initiatives, given policy momentum and incentives under the European Green Deal as part of the EU's push to make Europe climate neutral by 2050. Companies in the U.S. may be somewhat less willing to be weaned off natural gas, since its low cost in the U.S. provides a competitive advantage. Still, some companies based there are keen to be among the first to move into the hydrogen space.
A Hydrogen Primer
Currently, about half of industrial hydrogen is used for the production of ammonia; and natural gas accounts, generally speaking, for about 80% of the cost of ammonia (see "How Hydrogen Can Fuel The Energy Transition," published Nov, 19, 2020). Ammonia is typically produced through an energy intensive process with a significant carbon footprint, involving the conversion of natural gas into hydrogen and then combining that hydrogen with nitrogen. Grey hydrogen production generates a noteworthy 1.8% of global carbon dioxide emissions, according to The Royal Society, an independent scientific academy in the U.K. As such, decarbonization of ammonia production is vital to achieve net-zero targets by 2050. Today, green ammonia production requires higher capital expenditure than for the grey or blue varieties, due to the need for an additional air separation unit for the supply of nitrogen.
New Rivalry And Partnerships Will Start Emerging By 2030
In the long term, we foresee a pronounced impact on the fertilizer industry from green hydrogen development, with new entrants, and partnerships in regions with access to cheap renewable energy sources. Countries such as Saudi Arabia or Australia, where there's abundant potential for cheap solar power, could become producers of green hydrogen and thus green ammonia, which can store hydrogen and is also easier to ship than hydrogen.
Fertilizer companies with capital to invest in hydrogen projects advantageously located near green ammonia consumers, or those that partner with overseas players with access to cheap renewables, will have an edge over companies without access to such capital or locations. While shifting to the newer landscape of green ammonia, U.S. nitrogen producers are likely to keep their competitive advantage from current technologies involving natural gas, where their access to low-cost gas is a strength.
We also believe U.S. players could become partners in green ammonia production projects overseas, in regions with access to cheap renewables. That said, the cost parity of grey hydrogen (from fossil fuels) and green hydrogen (from renewables) will be reached only by 2030, according to the Hydrogen Council, if manufacturing costs reduce and there are efficiency gains following technological advances in the production process, assuming access to competitively priced renewable power.
Industry Transformation Won't Be Easy, Since It Also Affects End Users
As with other commodity chemicals, pass-through of the higher cost of green ammonia along the value chain, in the form of higher nitrogen fertilizer prices, will pose a challenge. Without the right policy support, steeper fertilizer costs could put pressure on farmers' incomes before ultimately translating into higher prices of agricultural products.
That said, we estimate that the effect on food prices to the consumer would be only marginal, given that the cost of ammonia fertilizer is a small component of the price. What's more, we believe that such products would still appeal to consumers demanding food grown in a sustainable manner, especially in developed economies.
The presence of multiple nitrogen-based fertilizers, some of which generate CO2 emissions after their application in a field presents another challenge. Urea, which is produced from anhydrous ammonia, emits CO2 on application. The production of green ammonia doesn't solve this CO2 emission problem.
The Number Of Green Ammonia Pilot Projects Is Increasing, As Is The Industry's Green Ambition.
Fertilizer producers have so far only engaged in small feasibility studies and pilot green projects, but their awareness and willingness to help reduce the industry's carbon footprint is accelerating.
In early 2021, Norway-based Yara established a Clean Ammonia unit to explore growth opportunities within the green hydrogen and ammonia production, transport, and distribution space. It also signed a letter of intent with Statkraft and Aker Horizons, aiming to establish Europe's first large-scale green ammonia project in Norway. Before that, Yara announced several pilot projects, including:
- A 70 kiloton green ammonia production at its Sluiskil plant in the Netherlands, using offshore wind to produce green hydrogen, in collaboration with the offshore wind developer Ørsted. The project is in the feasibility stage;
- 20 kilotons of green ammonia production capacity at the Porsgrunn plant in Norway, a 5 megawatt (MW) plant in collaboration with NEL Hydrogen, with 20MW under tender. The project is at the concept stage. In addition, at its ESG investor day in December 2020, Yara announced the potential for full electrification of its existing 500,000 tons per year Porsgrunn plant, depending on the right partners and regulation; and
- 3.5 kilotons of green ammonia production at the Pilbara plant in Australia using solar power, in collaboration with France-based Engie. This project is at the concept stage.
Similarly, Dutch chemicals producer OCI N.V., has announced a pipeline of partnerships and projects to enable production of low-carbon ammonia and methanol, including a pilot green ammonia project in Egypt, currently at the feasibility stage. Among other initiatives, OCI is also teaming up with German energy company RWE on two initiatives: one to purchase green and circular hydrogen from mixed waste gasification to reduce the intake of natural gas at some ammonia plants, and the other to produce green hydrogen from methanol through offtake produced by a 50MW electrolyzer directly linked to RWE's wind farm. The company is well positioned to produce renewable energy because the majority of its asset base is located in regions with cost-effective solar and wind energy.
In North America, CF Industries has announced that it intends to produce 20 kilotons of green ammonia per year at its flagship Donaldsonville Nitrogen Complex. The company is also developing other carbon capture and sequestration projects across its production facilities; it is committed to reducing CO2 emissions 25% by 2030, and achieving net zero by 2050.
On the other side of the globe, in Australia, the Asian Renewable Energy Hub project plans to produce 26 gigawatts of onshore wind and solar power generation capacity, with the bulk of energy to be used for green hydrogen production. The project cost is estimated at A$50 billion, with construction planned to commence in 2026.
The allure of green hydrogen has also attracted investments from nontraditional players. This includes Air Products, a U.S.-based industrial gas producer, which recently announced plans to set up a huge $3.7 billion project for a 1.2 million ton per annum green ammonia plant in Saudi Arabia in a joint venture to be commissioned by 2025. The green ammonia will be used as a hydrogen carrier. Air Products aims to convert the ammonia back into hydrogen through a dissociation process (removing the nitrogen content) at its refueling stations before finally compressing it for use as fuel for trucks or buses.
Preparation For Green Hydrogen Adoption Must Start Early
We believe the impact of clean hydrogen on the fertilizer industry will unfold only over the medium to long term. But, clearly, the massive amounts of CO2 emissions generated from the current ammonia production process implies that disruption is coming. As the transition speeds up, we expect to see a shift on the global cost curve and potential for stranded assets, no longer in use but difficult to sell.
In addition, we believe that regulatory changes will take time to implement. This is due to ammonia's global usage, price sensitivity as a basic commodity, and alternative fertilizer products (urea, nitrogen, phosphorous, and potassium), as well as farmers' typically tight budgets. Industry participants' readiness and financial capacity to make the changes needed to meet net zero targets will also be key for them to defend their competitive positions and potentially gain market share.
European fertilizer companies will likely feel the impact first, given the policy momentum in Europe and investment incentives under the Green Deal. They may also transition earlier to green ammonia because the structural cost gap between grey hydrogen/ammonia and green hydrogen/ammonia is lower for them than for their North American peers, given the latter's access to more competitively priced gas. Still, some North American companies have been quick to move into this space, with announcements of plans to set up plants.
Over time, regions with abundant solar energy or excess wind power could emerge as the most cost-efficient locations for green hydrogen production. The former include the Middle East, Asia-Pacific, Southern Europe, and North Africa; the latter include northern Europe. In advanced regions such as North America, where capital, technology, and expertise are available, market participants could make a concerted effort to develop infrastructure or create other conditions that help them maintain a cost leadership position in ammonia.
Editor: Bernadette Stroeder
- The Hydrogen Economy: Industrial Gas Companies Are In Pole Position, April 22, 2021
- The Hydrogen Economy: Steel Producers Have A Long Way To Go, April 22, 2021
- The Hydrogen Economy: Green H2 Offers Energy And Process Technology Majors A Long-Term Growth Opportunity, April 22, 2021
- The Hydrogen Economy: Can Natural Gas And H2 Have A Symbiotic Relationship?, April 22, 2021
- The Hydrogen Economy: Storage Is Paramount For Utilities In The Long Term, April 22, 2021
- How Hydrogen Can Fuel The Energy Transition, Nov. 19, 2020
This report does not constitute a rating action.
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