Inside Fertilizer Analytics: Green ammonia, Jun. 2021

Author Argus

The currently embryonic but potentially huge market for ammonia as a low or zero carbon energy carrier is generating high levels of interest in the global energy industry and across multiple commodity markets.

Join Andrea Valentini, Principal – Projects and Tim Cheyne, VP – Fertilizers as they discuss the key questions facing the exciting green ammonia sector. We start with a high level view on green ammonia pricing, the commercial application of green ammonia and how it could be priced. We discuss similarities to how the LNG market first developed (at least in the short term), with pricing linked to project economics. We then review what green ammonia could cost per tonne in terms of levelized cost, in comparison to grey ammonia production costs. We assess the potential for carbon tax, regulation or incentives to bridge the gap in production costs – perhaps the key initiative to unlocking the potential of green ammonia projects. We analyse whether the green ammonia market will impact grey ammonia pricing and capacity, and assess how blue ammonia could fit into the market with the potential for parallel markets – including the role of certification of origin. We finish with a look at how far away we are from the first production and contracts for green ammonia.



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Tim: Welcome to the latest issue of our "Inside Fertilizer Analytics" podcast. We usually talk to one of the editors of our Argus Analytics Publications about developments in their markets. But today we're gonna do something slightly different and we're gonna tackle an issue that's just been rising up the agenda very rapidly in the global energy industry, and also within Argus internally. And that's to do with the energy transition and the very interesting topic of green hydrogen and green ammonia. And to discuss this topic with me today, I'm joined by Dr. Andrea Valentini, who joins me from our office in Singapore, where he's been hitting up a lot of our work in this new area. He's been looking at project work and exploring opportunities for our customers in terms of production, and trade, and projects. And so he's really, within the last 12 or 18 months, been very deeply involved in the issue of green ammonia and green hydrogen. And so really well placed to share some insights with me today, and with our listeners, and also to explore some of the more controversial points to do with green ammonia and green hydrogen. So Andrea, welcome to the podcast today. How are you?

Andrea: Hi, Tim. Thank you very much. And hi, everyone.

Tim: So we're gonna assume, Andrea, as we discussed earlier, we're gonna assume that our listeners have a fairly good understanding of green ammonia. But maybe as a quick 30-second intro, I'll just say what we mean by green ammonia. We're thinking here of really ammonia made from hydrogen produced from renewable power through electrolysis, and therefore really intending to be zero carbon products, and therefore useful as a way of storing renewable power in a more safe and cost-effective way than hydrogen itself. And also more cost-effective and safe way of moving hydrogen around the world in terms of transportation, simply because of the chemical product is easier to move more stable and established. It has established infrastructure. So that's a kind of quick elevator explanation of what green ammonia is.

But since we have limited time, I wanted to talk today with you, Andrea, about some of the unknowns or some of the uncertain issues to do with how this new market's gonna develop. And I'd like us to jump straight into pricing. I know it's a topic that you're often asked about, I'm asked about. And so let's start there right at the most complicated points. We know there's a very well-established gray ammonia market, it's used as a chemical intermediate. It's used in petrochemical production around the world, it's quite widely traded, maybe 20 million tons of trade. What do you think is gonna happen in the future in terms of how green ammonia will be priced? I mean, do you think it's gonna be priced as a straightforward commodity? Is it gonna be linked to existing fossil-based ammonia? What's your thoughts?

Andrea: This is a very interesting point, Tim. And this is one point of discussion which is becoming particularly relevant to go beyond the hype generated by net-zero strategies and by the wave of project announcements. We really need to start on trying to understand what is the commercial application of green ammonia, and how much it will cost first of all and how it will be priced. There isn't a lot of clarity on this point. But we can start making some scenarios and looking at a few different options. Obviously, from the point of view of project developers, since this is a new technology, some of these projects are very large and require very large capital costs.

From the point of view of these developers, we see a scenario similar to how the LNG market first developed where the first few large projects relied on long term fixed contracts to cover investment costs and guarantee a return on investment. So this could be a potential scenario, especially in the short term. If that is the case, obviously, pricing considerations, first of all, will be linked mostly to project economics. And secondly, in the short term, we wouldn't have any liquidity in the market and we wouldn't be talking about a market price at all.

Tim: Yes, I can see that the huge capital requirements, especially for closely projects would really push for a longterm contract arrangement like we've seen in LNG in the decades past. Just in terms of pure production costs, do you have a sense yet for what green ammonia could cost per ton? Just a rough scale? Is it gonna be 100% more than the most competitive gray ammonia production costs? Or are we talking $300, $400? Are we talking $7,000, $8,000 a ton of ammonia? What's your sense?

Andrea: It really depends on the location you're looking at, the timeline you are considering. Part of the potential drivers of adoption of green ammonia is the degree to which electrolyzer technology will mature in the future, which obviously will bring levelized cost of hydrogen down and therefore green ammonia prices down, all the costs down. As of today, based on today's technology and the achievable scale, depending on the location, we are not looking at anything below $600 to $800 per ton of green ammonia in terms of levelized costs. So including capital costs, which is obviously a major obstacle for the adoption of this product. Obviously, we need to make some assumptions on how technology will mature. How much cheaper renewable energy will be in the future. And then for the very long term, we can make some assumptions about the convergence between gray ammonia costs and green ammonia costs.

Tim: Looking at the long term, looking in your crystal ball, do you think that renewable energy costs will reach parity with, like, fossil fuel energy costs in the really well-resourced areas of the world like Western Australia, or Chile, or the Middle East, Morocco? Do you think thosecountries will get renewable energy production costs levelized, renewable energy prices down feeding into green ammonia process down to, sort of, fossil fuel levels, you know, like, gas-based power consumption costings?

Andrea: Eventually, it's possible, especially with economies of scale and more investment in the sector, especially in the countries and regions which you mentioned. So Middle East, Australia, some places where there is room and potential for very large scale dedicated renewable power projects.

Tim: Yeah, I tend to agree, I think the scale issue is something it's only just being explored, and I think we will see some improvements. But it sounds to me...and tell me if I'm wrong, but it sounds to me like you don't really see a future where green ammonia production costs ever quite reach current gray ammonia production costs simply because the technologies is gonna be more expensive when it's levelized with the capital costs. So there's always gonna be a gap between the green ammonia production cost and gray ammonia production costs, which of course, hints to the need for some kind of regulation, or carbon tax, or some kind of incentive to push...

Andrea: [inaudible 00:07:58]

Tim: Yeah. Yeah. So how do we bridge the gap? What's your thinking about the way that that gap could be bridged in the most practical way, given the complication you have with this structure?

Andrea: The way the industry would be incentivized is perhaps the key to unlocking the potential for most of these projects without very clear incentives. Most of these projects on green ammonia are not going to be viable at all. So we definitely need a more structured approach from regulators on what kind of support will be given to this industry, especially to kickstart. Perhaps as a parallel we can think about renewable energy 20 years ago when it was extremely expensive compared with other power sources, but with the right sort of support subsidies and feeding turrets we managed to encourage more investment and more economies of scale. So a similar trajectory can be expected for hydrogen and green ammonia as well.

Tim: I mean, we do see moves towards more aggressive carbon pricing in Europe and even the carbon border adjustment mechanism that's been discussed in Europe and in other regions that are talking about some ways of pricing carbon. Let's assume that there will be some measure of carbon pricing in the future. And let's develop the idea of you mentioned earlier about the long-term contracts, kind of, initial phase of green ammonia. Over time, you'd expect that the market will develop in the direction of all commodity markets and there'll be some spot trade. Do you think the green ammonia market will affect the gray ammonia market pricing? Do you think the gray ammonia price conventional ammonia market will continue, you know, oblivious and its happy direction, current direction, or do you think there's gonna be quite serious disruption to conventional ammonia pricing globally?

Andrea: Yea, it's a good point. Right now it's hard to foresee how any spot green ammonia trade will take place and price that. In theory, purely theoretically, we could think that if green ammonia is going to be used as a fuel, and gray ammonia will still be used as a fertilizer raw material, then we could have two parallel markets and two separate prices. But I don't think that's going to be the case because inevitably there will be some spillover effect between green ammonia and gray ammonia, especially if there is some carbon tax or carbon border adjustment involved, like the European Commission is discussing.

So for example, if you're going to penalize, effectively, gray ammonia imports into any given region by applying a carbon border tax, that will raise gray ammonia prices for all the domestic end-users. So there will be an immediate effect, which will be brought by green ammonia onto gray ammonia, if that is the mechanism. So then the question is what kind of...if you look at gray ammonia, if end users of gray ammonia like farmers are going to see the price of one of their key inputs suddenly skyrocket, what kind of measures will be taken to mitigate that risk? So that is also becoming a political issue.

Tim: Yeah, exactly. And you can already see signs of gray ammonia leaking into green ammonia, if I can put it like that, because we're seeing some traditional fertilizer producers like CF Industries announcing conversion of some of their production in Donaldsonville to green ammonia. So there's some capacity supply-side changes that are gonna reduce gray ammonia capacity and switch across to green ammonia. So even on the supply side, we could see some effects of green ammonia drawing capacity across from gray ammonia. Do you think that there' there a mechanism which could connect the process through the gray and green ammonia price through the carbon price? I mean, do you think that over time, the green ammonia price will trade roughly above the gray ammonia price by the carbon price? Or do you think there are markets where green ammonia will be demanded beyond just its carbon price value in the carbon traded sense, you know, like in Japan for co-firing with power with coal or as a marine fuel. Do you think they'll be customers that will pay more for green ammonia than just gray ammonia plus the carbon price?

Andrea: It's possible, but also regional local differences will play a difference because there might be some fragmentation in terms of how much some of the end-users might be willing to pay for the green premium. Japanese power utilities might have completely different approach from, let's say, industrial users in Europe. In an ideal world, there should be some kind of mechanism such as certifications of origin, which should provide some uniform playing field and some kind of way to measure the carbon intensity of the product, and therefore provide the tools to traders and the end-users to have a verified product effectively. But that it doesn't exist yet. We see several companies being interested and trying to develop a mechanism like that, but it's quite early.

Tim: Before we get onto that origination point, which is really interesting, I wanted to just jump back to the carbon price thing. I guess you'd have to say the current situation, which is, of course, very early, is a situation where gray ammonia price plus the carbon price is nowhere near high enough to justify investments in green ammonia, right? It's like almost half, let's say, of your predicted green ammonia price. So the current situation, gray ammonia price plus the carbon price is not enough of an incentive. So there has to be a bridge, there's gonna have to be people, and customers, and companies that are prepared to pay far more for green ammonia than the current market structure allows. And then presumably, over time, the carbon price will become more intrinsically embedded in this energy transition and will start reflecting the actual cost of zero-carbon options, which it doesn't really yet. Do you think that's true?

Andrea: Yeah, I agree. Certainly there are some end-users, for example, the shipping industry where the adoption of low carbon fuels and zero-carbon fuels is seen as inevitable. So, the green premium will have to be paid and then passed on to the final user. With regards to the current levels, the current price levels for carbon pricing, yeah, today's carbon pricing is far from being enough to cover the difference between gray ammonia and green ammonia. But we are already seeing some indications that carbon pricing might increase substantially in the future. If I remember correctly, the European Investment Bank, for example, is assuming a shadow carbon pricing of over 200 euros per ton as a mechanism to think about long-term investment in the sector, which has already given you an indication of where carbon pricing might be going in the long term.

Tim: I think there is a sense that truly net-zero and a move away from fossil fuels requires a carbon price in a different paradigm to where we are at the moment where carbon pricing is more to do with just offsets like agricultural, forestry and so on, rather than the cost of actually moving to net-zero fossil fuel energy system. Going back to the origination point, do you think that the green ammonia market will develop in a similar way through renewable power where the product moves separately from the certification? So we could see ammonia...would we see ammonia physically traded in different patterns to the verified zero-carbon production? So, you know, a buyer of...just to explain, a buyer who wants to buy green ammonia in Europe might be able to just buy conventional gray ammonia but by certification of origin from a producer in Australia, and therefore, be genuinely zero-carbon but not physically taking the zero-carbon ammonia. Do you think it will happen?

Andrea: That is possible and it would simplify part of the trade, right? Because from the point of view of traders, if you start trading green ammonia and, alongside green ammonia, blue ammonia or gray ammonia, it will be different to...effectively, the molecule is the same. But what we need to really focus on is the carbon content of what you're trading. So there might be a situation which certificates of origin might be a more viable and practical way of dealing with this rather than focusing on green ammonia shipments versus blue ammonia shipments or gray ammonia shipments.

Tim: Yeah, you've raised the point that I wanted to ask you about, which is this issue of the colors of ammonia. And green ammonia, I think everyone agrees, needs to be truly net-zero in some verifiable way. But blue ammonia is this intermediate product, right, which has less carbon footprint or carbon emission than gray ammonia but more than green. How do you see that fitting into the market? How do you see that being even traded? Because you pointed the fact that we could, especially initially, have parallel markets, we could have this long-term contract to green ammonia alongside gray ammonia spot traded? Where does blue ammonia fit in?

Andrea: Yeah, there's so much uncertainty on the blue side of things. Because, first of all, there are so many many definitions for what blue hydrogen or blue ammonia are and so many doubts about the lifecycle impact of each production process or CCS process. It would be extremely complicated to differentiate one shipment of blue ammonia from another one coming from another location or another CCS facility, it would be an impossible task.

Tim: Do you think that the system of certification of origin could develop where a blue ammonia producer could sell like half a green ammonia certificate if they were verifiably 50% emission of conventional ammonia? Would that allow blue ammonia to have a role in this transition?

Andrea: That could be possible, yes. I guess in the end, it would depend on how acceptable this practice will be on a regional basis, would ammonia traded this way be acceptable for European users, for example? It really will depend on how regulations in this market will evolve.

Tim: Some of the green ammonia project developers point to the lifecycle emissions of natural gas as being one of the unexplored issues. You know, the fact that natural gas EMP produces methane emissions before the point of use. So through exploration and production, pipelines have methane emissions. I wonder if those emissions will be considered if you're thinking about a blue ammonia project where the gas is used to produce the ammonia, but then like the CO2...well, some of the CO2 is captured and stored. Do you think that those upstream lifecycle emissions will be considered in the blue ammonia certification or definition, or should they be?

Andrea: They should be, they should be. I mean, if it's a true lifecycle assessment of the emissions of their product, they should be. But the same is true for everything downstream from there. If you think about CCS itself, one of the most economically viable way of storing carbon today, and this is what several blue ammonia projects are going to be based on, is enhanced oil recovery. You could argue that, yes, you could safely store CO2, but only to enable the production of more CO2. So...

Tim: That's a minefield.

Andrea: Yes. So there could be a scenario in which some countries or regions might not consider that as true CCS, effectively.

Tim: Yeah. What about turquoise ammonia? Have you heard of turquoise ammonia with this idea of using methane to produce hydrogen and solid carbon?

Andrea: I have seen that there are a few projects exploring this way of production. To be frank, I don't know much about it yet. What have you heard about this?

Tim: Well, I've heard the company...there are some very important companies looking into it. I know BSF is looking into it as one example. For what I've seen, one of the challenges of making hydrogen from methane pyrolysis is the energy thing because one of your products...the energy balance I mean. And one of your products is solid carbon, which has a very high energy value. So you'll end up having to use a load of energy to effectively crack methane into carbon and hydrogen. So you'll end up losing a lot of renewable power or burning some of the hydrogen you've made to fuel that process, in which case you're just generating a lot more carbon. And then what do you do with the carbon? You know, the carbon is extremely pure. So you can make some products with it, but the volumes you'll be producing are massive. So people talk about putting it back into coal mines got to make sure it doesn't burn, of course, because that's counterproductive. I think it'll be much trickier, personally, than blue ammonia from natural gas, steam methane reforming and carbon capturing storage.

Andrea: It's very interesting. Yeah, that's definitely something to keep an eye on.

Tim: In terms of where we are market-wise, do you have a sense of how far we are away from the first production and contracts for green ammonia in the markets?

Andrea: In terms of project activity, we know that there are several projects, even very large ones that are targeting 2026 or 2025-2026 as starter production. Whether that is possible or not given the level of maturity of the technology, well, it remains to be seen. I think that there's quite a lot of uncertainty on that. On the demand side, one of the most recent developments is that we have seen some Japanese utilities that are planning to start using ammonia as a fuel as early as 2024, which is quite exciting. But then the question that we should ask is, is there going to be any green ammonia available by then? We don't know yet. And in fact, we already know, we already heard from some of these companies that they're willing to simply procure gray ammonia as an interim solution, gray ammonia as a fuel. So I think we're in for a few surprises and perhaps a few price shocks if suddenly new users of gray ammonia, which will add to current trade flows.

Tim: Well, though, there certainly is leakage across from gray ammonia to green ammonia.

Andrea: Exactly.

Tim: And that there's gonna be certainly an impact. Because we're talking about millions of tons, aren't we? Even in Japan for co-firing with coal. And given your expectation of early green ammonia prices being, sort of, very high, hundreds of dollars a ton, those utilities probably will have a strong incentive not to start with green ammonia because I can see the problem.

Andrea: Exactly. I mean, I can see the point, it would make sense to start with gray ammonia to establish the supply chain. But yes, then we go back all the way to the initial point about the influence of green ammonia versus gray ammonia. And yeah, we are definitely going to see something interesting happening.

Tim: I don't know, we haven't even discussed fertilizers. I mean, there is, of course, the need for fertilizers to decarbonize. So even conventional gray ammonia markets need to become green, in the end, because food production needs to become lower carbon or net-zero carbon in the future. And therefore, the impacts are so complex. Andrea, we're at the end of time, we could have spoken for hours. So we do need to wrap it up. Thanks very much for your time. I know pricing is one of the key issues we look at at Argus, and so it's important to us. I'm glad we had the chance to discuss it.

If you've been listening to the podcast today and you'd like to know more, we are doing lots of things in this area. We've just launched a green ammonia constructive price assessment, which is in this week's "Argus Ammonia" and "Argus Marine Fuels" publications. Get in touch if you'd like to know more. We've also launched the green ammonia strategy report, which is a new report which will be the launch of our green ammonia forecast covering bunker fuels, power gen, and conventional uses of ammonia that could switch to green ammonia. It also covers production costs, price forecasts, and all the other aspects that you'll need if you are looking into getting into green ammonia and you need a comprehensive coverage of the new topic.

We're also covering green ammonia through project work that Andrea is doing from Singapore and also through our offices in Europe and the U.S., and we're very busy in that area. We cover green ammonia through our Ammonia Analytics Service, which is a quarterly forecast service looking at medium and long-term trends. In fact, everywhere we cover ammonia and nitrogen, we are looking at this green ammonia issue because it's so crucial. So all of those services are available through Argus Direct, if you're a subscriber, or get in touch with your account manager to subscribe and we can get you more information.

I hope you enjoyed the podcast today. I really did. Andrea, thanks for your time. If you'd like to keep in touch with us and hear the next episode of "Inside Fertilizer Analytics," please like or follow the podcast so that you get alerted for the new episode. And we thank you for your time today. We hope you enjoyed listening. And until next time, goodbye.

Andrea: Bye, everyone. Thanks, Tim.