Inside Fertilizer Analytics: Blue ammonia, Aug. 2021

Author Argus

Low-carbon or blue ammonia has seen growing numbers of projects announced, and is perceived as at least a stepping stone towards a carbon-free ammonia market in the future.

It is a complex topic however, leading to industry uncertainty, and has raised key questions that Argus has been addressing for our clients. In our latest podcast we tackle these questions and uncertainties, assessing the opportunities and hurdles facing this sector.

Join Andrea Valentini, Principal and Tim Cheyne, VP – Fertilizers as they start with analysis of why production of low-carbon ammonia will need a level of certification, verification and a methodology that will give clarity to the whole value and supply chain. In terms of technology we look at the benefits of adopting autothermal reforming (ATR) technology for ammonia production rather than steam methane reforming (SMR), and assess what role existing conventional ammonia plants will play. We discuss carbon capture, and to what extent future blue ammonia production will be based on enhanced oil recovery (EOR) – and related levels of carbon credits. 

We then move to the customer view, and our analysis of how certification systems could develop. We discuss whether this could delay investment in blue ammonia projects, where we expect to see the fastest blue ammonia investments – and why. We then pivot to the question of pricing and whether it will be structured relative to grey and green ammonia. We finish by exploring a long-term scenario where green ammonia could trade at a premium compared to blue ammonia (even considering relative carbon intensities), due to customer priorities and requirements.



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Transcript:

Tim: Welcome to the latest episode of the Argus Fertilizer Inside Analytics podcast. We are today going to return to the topic of ammonia, in particular low and zero-carbon ammonia. And I'm very glad to have Andrea Valentini join me from Singapore. I'm here in London, Andrea in Singapore. Welcome, Andrea.

Andrea: Hi, Tim. Hi everyone.

Tim: Great to have you back. We did cover green and blue ammonia a little while back but we're returning to the topic because of this, there's an issue which we often come across during our discussions with customers and our networks. And, so, I think we certainly know there's some uncertainty and some open questions to be answered. So we're gonna try and tackle some of those today. We'll see how well we do because there's no clear answers. But we are gonna focus in on blue ammonia, as it's sometimes called, or low-carbon ammonia, as opposed to the 0-carbon 100% renewable green ammonia, which is often the topic of news. But there's lots of developments going on to do with looking at how to make reduced carbon CO2 ammonia.

And it's an interesting topic, Andrea, because, you know, it wasn't long ago that even say "natural gas" would've been considered a low-carbon energy. Right? A lot of the world moved to natural gas for power generation because it's got so much lower CO2 footprint than coal. And I think, you know, a few years ago, it was seen as a transition product to get us towards an ultimate zero-carbon end game. And even LNG in shipping is still a very viable and popular fuel because it's got lower-carbon footprint than conventional bunker fuel. So, blue ammonia is definitely an important topic, but let's talk today about, you know, the opportunities in blue ammonia and some of the hurdles. And maybe starting from the point of view of investors in the sector because there's an incredible amount of invested interest in the sector, started with hydrogen but it's moved quite quickly to ammonia as an energy carrier. You know, how do you see the pros and cons of blue-ammonia projects compared to green-pneumonia projects? When you're talking to our customers or to potential investors, you know, how do you see the landscape comparing for these very different technology options?

Andrea: It is a very interesting topic. And it is increasingly becoming interesting from an investor's point of view because, up until a few months ago, most of the project activity in terms of planned projects was seem to be focused on green ammonia with large-scale blue-ammonia projects lagging behind. But we now have seen a few large projects been announced in several regions, especially in the Middle East. And similarly to blue hydrogen, there is a perception that blue ammonia should play a role at least in terms of being a stepping stone towards a carbon-free product in the future.

It is quite a tricky topic, however, because there are several uncertainties regarding how blue ammonia will be perceived from a regulatory point of view and whether the terminology "blue ammonia" will be relevant in the future. And there are several issues that we can discuss throughout this conversation, which we look at the technology, the methodologies used for producing blue ammonia, life-cycle emissions, for example, and the type of support given to this type of production and this product and potential market acceptance.

Tim: Let's start with perhaps one of the easiest conclusions we can reach during this discussion. I would suggest that almost anyone who spends a serious amount of time looking at this new market would agree that labels are a bad idea and we should dismiss them as soon as possible. So, would you say the same, the sooner we can lose the blue and green labels, the better? Just in the sense that they don't particularly help and the range of carbon intensity you could find for a potential blue-ammonia product, you know, could be enormous. You could have a blue-ammonia product with anywhere from, you know, 0.1 tons of CO2 per ton of ammonia through to, you know, almost 1.5 and you could potentially still call it blue. So, can we agree that's a good starting point would be to get scientific about this and look at some more precise measure of carbon footprint?

Andrea: Yeah, I think this would be necessary to avoid potential confusion and mislabeling of ammonia's "blue" rather than a different color. The confusion starts right at the beginning from the production point because a key advantage of ammonia production is that, for example, CO2 in SMR-based ammonia production is quite easy and inexpensive to capture. So, the process CO2 in most ammonia plants represents, let's say, 50% to 70% of an ammonia plant's CO2 emissions. And this 50% to 70% of CO2 emissions can be easily and cheaply captured. The trick part is the flue gas emissions, so, flue gas CO2 which becomes very expensive to capture.

So, the first key point to clarify is whether blue ammonia is meant to be ammonia produced by capturing that 50% to 70% of CO2 produced as part of the process gas or a much higher percentage, let's say over 90%. I think, to make things clear, we need to move towards a certification system that measures the level of carbon intensity at the production stage, so, how much carbon is actually captured.

In terms of technology, this might be solved in the future by adopting, rather than SMR-based ammonium production, ATR, which would allow for the capturing over 90% of CO2 from the process of ammonia production. But again, most of the existing ammonia plants are based on steam methane reforming, which means that this initial clarification about the percentage of carbon that is actually captured at the production stage will be vital to understand the labeling that can be applied to that blue ammonia.

The second important point to make is about the life cycle emissions of that low-carbon ammonia produced. We can talk about several stages of the CCS process that can be potentially problematic. For example, one potential area of risk, from a regulatory point of view, for potential producers is the way that CO2 is stored. There is the possibility that, in the future, CO2 stored for enhanced oil recovery might be treated differently from CO2 stored permanently in depleted oil and gas fields or other non-fossil fuel producing solutions. So, that is another regulatory risk for investors in this area. And finally, the whole life cycle emissions, in terms of downstream uses of that low-carbon ammonia, will have to be considered as well. Because, obviously, if we are using that low-carbon ammonia for the production of plastics, for example, or other chemicals which might end up releasing CO2 at a later stage in the supply chain, that will be problematic. So, effectively, the production of low-carbon ammonia will need a level of certification and verification and a methodology that will give clarity to the whole value chain and supply chain.

Tim: Yeah, great points. You said many things there, so, just to try [inaudible 00:08:53] on a few, I suppose one of the interesting points is your last point. If we were to use the CO2 captured from ammonia production in, let's say, the production of e-methanol, which was then used as a fuel, that's not even a viable permanent carbon capture. So, there's an easy example of a non-blue ammonia product which could potentially get that label if there wasn't proper certification.

Going back to the supply side, if we do think about the supply for a bit longer, I think that point you made about SMR is fascinating because the world's ammonia production is largely based on gas and, where it's based on gas, it's almost always based on steam methane reforming. I find it interesting because that's, you know, in the case of SMR, the hydrogen produced comes from the gas feed but also from steam, you know, the hydrogen in water. And that happens to be the most energy and capital effective way of producing ammonia. But, as you say, in the future, we probably are moving to a world where ammonia plants might be increasingly based on autothermal reforming where all the hydrogen comes from the gas, ironically, in this case, given that's a fossil fuel. But that means that almost all carbon can be captured. And, you know, there's a really fascinating technology discussion, which we don't have too much time for, but I do agree, I think we see technology suppliers pushing ATR technology for the advantage where you can capture more than 90-95% of the CO2. Where does that leave existing assets? You know, do you think conventional ammonia plants which are able to capture their carbon will have a role in low-carbon ammonia markets?

Andrea: Existing producers located in areas where carbon capture and storage will be feasible and cost-effective will certainly play a role in this. We are already seeing existing ammonia producers in certain parts of the U.S. being incentivized financially through quite generous tax credit to sell CO2 for enhanced oil recovery through the 45Q tax credit system. And that in itself is quite a powerful tool because, as far as I'm aware, that's the first large-scale commercial CCS program implemented by any government. So, that is going to be a really interesting test bed for the production of low-carbon ammonia.

Tim: And am I right saying there are existing ammonia plants already actively capturing and storing CO2 in EOR programs in the U.S.?

Andrea: Yes, that's correct. We are counting at least 4 ammonia plants in the U.S. that are selling CO2 for enhanced oil recovery and, therefore, getting a $35 per ton tax credit for this.

Tim: That's incredible, that really is an early example of, let's say, blue ammonia production, if we do use the term "low-carbon ammonia" production. But let's delve into that EOR example because it's clearly controversial using CO2 to expand or enhance the production of crude. It's kind of counter-intuitive if you're looking to reduce CO2 emissions. How do you see future low-carbon blue ammonia production being based on EOR? Do you think it will be a major element of production?

Andrea: EOR is going to be...well, obviously, it's the form of carbon storage that is perhaps most readily available and cost effective and accessible for many existing ammonia producers that have significant production assets in several parts of the world, including the U.S., Middle East, perhaps Russia. So, understandably, it is a methodology for carbon storage that is quite attractive for many ammonia producers. And, in the short term especially, it's expected to be very attractive to produce low-carbon ammonia. The problem with EOR is that we might come to a situation, especially in places like Europe, where low-carbon ammonia produced by storing CO2 for producing an additional barrel of oil might not guarantee a certain level of credits or certification as low-carbon ammonia produced in other cleaner ways or more clear-cut ways of storing CO2. There is, in fact, a debate about whether EOR has a net environmental benefit. So, if EOR, as a carbon storage solution, can be zero or negative in terms of CO2 emissions.

Tim: Yeah. You know, we were talking about this a little while back. If you look at the EOR scheme, the one you mentioned earlier, the 45Q, is it, in the U.S., I find it interesting that the credit you get for an EOR, for a ton of EOR CO2 is, like you said, $35. Whereas, if you sequester that more permanently in a depleted field, you get...is it $50? So...

Andrea: Yeah.

Tim: There's an assumption even built into the U.S. system which shows that the EOR sequestration is not as permanent or not the same, has the same impact. There's a kind of ratio, something like 35 over 50. So, in future, you know, you'd have to wonder whether customers would...or certification schemes would consider every ton of CO2 put to EOR as a ton of CO2 saved. There might be a ratio, potentially, of, you know, two-thirds or some kind of middle ground.

Andrea: In addition to the regulatory aspect of things, so, how EOR will be perceived by regulators, I think there will be also an induced perception of these practices because some end users of low-carbon or zero-carbon ammonia might want to show that they are more focused on the zero-carbon side of things rather than low-carbon product. So, they might end up preferring purchasing green ammonia once it becomes more cost effective.

Tim: Yeah. Let's turn to the customer side because I think that's gonna be the crucial point. And certification is gonna be the customer champion, I guess, because customers are not gonna have the resources to verify CO2 emissions for particular producers. So, there's gonna need to be agencies or companies or groups that verify certification. Who do you think is gonna be successful at developing a certification system? Will there be a system per region, say, a Japanese system and, you know, a European system separately? Or do you think there will be a neutral agency of some type that forms and who sets the rules?

Andrea: The end goal, theoretically, should be a universally-accepted system of certifications. Because, when companies will produce blue and green ammonia or low and zero-carbon ammonia, this would be a global market. So it wouldn't make sense to have regional standards and certification systems. Although, inevitably, that's how things will get started.

In terms of how fragmented things could become, I think you can look at the voluntary carbon market situation today where there is, essentially...I mean it's extremely fragmented, there is no universally-accepted methodology and verification methodology for trading voluntary carbon credits on a global level. It's very much conducted on a bilateral level or within specific geographies. So, there might be a situation in which trading low-carbon ammonia, zero-carbon ammonia will follow a similar trajectory. So, there will there might be a lot of confusion in the short term.

Tim: Yeah. I guess it might be down to needs and urgency from the biggest early buyers. So, potentially, Japan or the EU, there might need to be some system that's accessible for a group of customers and then that could, potentially, expand in future. It does seem to be a long way away, would you agree, there's no clarity yet.

Andrea: Having a well-structured market and certified market might be a long way away, certainly. Having a market for low-carbon ammonia might happen in the short term. However, it might be difficult to verify the environmental credentials of that particular blue ammonia cargo when it's traded in absence of clear regulations and certifications, which might be controversial.

Tim: Do you see this holding up the investments in blue ammonia projects or do you see projects progressing fairly quickly? And if so, where do you think we're gonna see the first or the fastest blue ammonia investments?

Andrea: This is quite interesting because I think what we are seeing in the market in terms of project developments I see two or three different categories of projects. There are projects...I'm aware, for example, of one project, very large project in Europe, which, in theory, should be the perfect scenario for a blue ammonia production. So, it's a green field ammonia plant which plans to capture most of its CO2 emissions in a depleted oil and gas field. So, it's quite clear-cut in terms of its environmental credentials.

There are other projects being developed in the Middle East, for example, which have a strong incentive from the end-user side. So, some of these projects might be developed in partnership with potential end users in Northeast Asia, for example, particularly in Japan, where these life cycle carbon emissions of blue ammonia might be less of a concern in the short term. So, those projects might be viable purely because their main end users might not scrutinize life cycle emissions of blue ammonia so closely. So, perhaps these are the two main scenarios that we see. So, projects that are developing in jurisdictions where the environmental credentials of low-carbon ammonia are going to be scrutinized more closely, such as Europe, and other projects whereby the end-users might not be as fussy as Europe.

Tim: Yeah. I think that's two really good ways of thinking about it. I mean and to start with the second category, you can imagine projects which have either stakeholders who are customers or long-term contracts or very strong connections with customers from the outset would have an advantage because they know that they have offtake, which accepts, you know, their low-carbon credentials. And that gives you the green light to go ahead and invest. And there is an environmental benefit because that's moving from gray to some lower carbon emission product. And I think that makes entirely good sense as a transition to some sort of ultimate net-zero point.

And then the first category you mentioned is in jurisdictions where there's, you know, more structural reason to reduce emissions, that's a great reason. And, looking at the commission and its ambitions on reducing free allowances for ammonia production in Europe and introducing carbon border-adjustment mechanism, all those measures are going to make the reduction of carbon emissions from ammonia in Europe essential. I think almost every ammonia plant in Europe is gonna need to look at some way of capturing the carbon, you know, if they carry on in production, given the increase in CO2 prices in Europe.

I'd add a third category just while we're brainstorming, which is there are many companies that have a corporate goal to reduce their carbon footprints across all their operations and all their business. And, you know, if you're a corporate and you have ammonia production in your portfolio, it's gonna be near the top of the list of your CO2 emission. So, you may just have to look at blue ammonia as one of the only methods of reducing your CO2 footprint as a company. And shareholders are expecting that so we might see this as a corporate measure, even apart from customers.

Andrea: Yeah, I agree.

Tim: Let's turn to pricing because...how do you price a product that's still lacking definition, how do you think we're gonna see blue ammonia priced in future? Do you think there's gonna be some structure relative to gray ammonia and green ammonia?

Andrea: That's an interesting point. And again, there's not much clarity, especially because, if you compare low-carbon ammonia with zero-carbon ammonia or green ammonia, the green ammonia size is slightly clearer with regards to pricing, if we link it to costs. So, we can see a scenario in which green ammonia price could be linked to the levelized cost to producing green ammonia, which is relatively easy to calculate once you have a good estimate of the levelized cost of electricity and, therefore, the cost of hydrogen and then the end product.

When it comes to blue ammonia, the cost factor is trickier to look at because, depending on the project configuration, the ammonia producer might not be responsible for the whole cost of the CCS. So, effectively, there are several...there are already several ammonia producers which sell their CO2 to external parties and, therefore, get a credit actually for the ammonia they sell to these other companies. So, in that case, there wouldn't be a cost justification for an increasing price for the end product, for the ammonia produced by that particular producer. Again, in that case, any price premium for blue ammonia or low-carbon ammonia will have to be linked to a certification of the carbon intensity or the carbon reduction that will result from producing that one ton of ammonia.

Tim: Yeah, yeah. I think I agree. Let me throw a scenario at you and see if you agree. Maybe in the future we will see zero-carbon ammonia, so-called green ammonia, based on long-term contracts being supplied to customers who demand zero-carbon product. And that price initially certainly might not move much, it might be mostly long-term contracted. And then maybe we'll see the intermediate product, the low-carbon pneumonia, trading alongside gray ammonia plus some differential somehow linked to carbon prices in certain jurisdictions. And, potentially, we could see green ammonia trading at some premium because it has better environmental credentials and that's why people are buying it. So, maybe we will see, depending on the volatility of gray ammonia, but most of the time we might see green ammonia with the premium that it earns through its green credentials. How does that sound as a scenario?

Andrea: I think inevitably, in the longer term, it will have to work like that. Green ammonia should be rewarded proportionally to its level of carbon intensity or the lack of carbon intensity, effectively.

Tim: Just a thought experiment, one arbitrage that might keep the market honest would be the fact that you could, potentially, if blue ammonia was defined scientifically based on its carbon intensity, you'd then be in a situation where you could, potentially, blend blue ammonia, so-called blue ammonia, from gray and green. Right? You could blend any CO2 intensity ammonia you like by using two sources of conventional and green ammonia. And, therefore, you'd always find a situation where the blue ammonia price would be some blend of gray and green because companies would arbitrage, trading companies would mix products either physically or certificates and generate the right CO2 intensity, blue, and, therefore, earn any potential gain if there was some gap in the pricing. So, my feeling is, based on my thought experiment, blue ammonia will only ever trade up to its reduced CO2 footprint but never above. And I think, on that basis, green ammonia will probably be a premium product, even in the long term, even considering its zero CO2 footprint. How does that sound?

Andrea: Yeah, it's a good scenario, a good theory. It should work like that, effectively, because, when you trade this product, the molecule is going to be exactly the same, regardless of how you produce it. So, there has to be effectively a two-tier trading system, one for the product itself, for the physical product, and then another one for the certificate that you trade when you produce that ton of ammonia. So, again, I think the conclusion here is that we need to move away from the blue label and then think how certification system can be effectively developed.

Tim: Exactly. So, that's probably our conclusion, right It's that those products will need to move to a certification system where the trade of those certificates is the primary tool and they might not move in parallel with a physical product that doesn't particularly matter. Even though that's quite complicated for customers to understand, potentially, or the public, it is the most efficient system and, therefore, we need that certification system in place. But it will come.

Andrea: Inevitably, yes, it will have to come. It's probably one of the key factors for this lower and zero-carbon ammonia market to actually materialize in the future. If we don't have a good system, a good certification system and clear regulations, this market will remain limited to effectively pilot projects or a market...

Tim: [inaudible 00:29:26] projects.

Andrea: Yes, exactly, a market driven by companies, CSR initiatives, and that would be not enough to justify investments in multi-billion-dollar assets.

Tim: Yeah. Fascinating. I think we're out of time, I see that the clock's reached the limit. But thanks, Andrea. I know that you've been super busy with this topic. You've been wrapping up the green ammonia strategy study, and I just wanted to check how do we cover, so-called, blue ammonia in our studies. Is that a topic that you look into and is it something that our listeners could get hold of?

Andrea: We are certainly tracking blue ammonia in the strategy report, especially from a supply point of view. So, we are listing all the projects that are looking at producing blue ammonia. The existing production facilities that already theoretically produce low-carbon ammonia through carbon storage, carbon capture and storage, the incentives that are being given to these producers, and the potential hurdles to the adoption of blue ammonia versus green ammonia. So, we're certainly looking into it.

Tim: Great. So, if you're interested in understanding more about this topic, then please do contact your account manager or look on the Argus Media website to find more about that green ammonia strategy study, which also covers blue ammonia. Also, if you're tracking this market, then we have a regular news in Argus Ammonia, the market report. Our [inaudible 00:30:56] is continuously updating project news and all kinds of other news, policy news. So, that's a good way of keeping up to date. And of course we do cover ammonia in our Ammonia Analytics product, which is a quarterly deep dive into, you know, the forecast and outlook for ammonia in general. So, there's green ammonia coverage in there too.

So, thanks, Andrea, for this fascinating discussion. We'll circle back again in a few months once some of this has become clearer or less clear, depending on how things go. And, if you listen to us today, thanks for listening, I hope you've enjoyed the discussion. Do follow us or like the podcast on the platform you're using so you get alerted to the next episode. And until next time. Stay safe.

Andrea: Thanks, Damon. And thanks everyone for listening.

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