Focus: Fertilizer company OCI bets big on climate-friendly ammonia
10/07/2023 12:00
By Rod Nickel and Victoria Klesty
July 10 (Reuters) - Without a single sales contract in
hand, Dutch fertilizer company OCI OCI.AS is building a $1
billion plant in Texas to produce ammonia with low greenhouse
gas emissions, a gamble requiring heavy government subsidies,
new markets and a contingency plan.
OCI's plant would be the world's first new commercial
facility to capture and sequester 95% of the emissions produced
from making ammonia. The hydrogen and nitrogen compound is
mostly used as fertilizer.
But the lure for OCI and others of making ammonia with a
smaller carbon footprint is a business with potential beyond the
farm. That includes production of fuel for coal-burning Asian
utilities and for ships, both uncertain but potentially
lucrative commercial possibilities.
"'Are you crazy?' is the question, and I think it's a
good question," OCI CEO Ahmed El-Hoshy told Reuters, when asked
why his company is betting on producing so-called "blue
ammonia."
Producing blue ammonia costs up to $119 per metric ton
more than the conventional method, but U.S. Inflation Reduction
Act (IRA) subsidies worth roughly $145 per ton cover the
difference, said CRU Group fertilizers analyst Alexander
Derricott.
To make the economics of his Beaumont, Texas plant work,
El-Hoshy said he also needs Asian utilities paying premium
prices to justify the capital cost.
The $430 billion IRA aims to cut carbon emissions across the
U.S. economy, mostly through technologies that are uneconomic
without subsidies.
But even with U.S. support, blue ammonia economics hinge on
further government incentives. This time the incentives are
expected from Japan and South Korea for utilities to produce
electricity with less emissions, using coal and 20% ammonia.
That is the percentage utilities consider technologically
feasible for now without causing emissions of another pollutant,
nitrous oxide, to increase.
If utility premiums don't emerge, OCI plans to use its Texas
blue ammonia to make fertilizer in The Netherlands, where the
company has under-utilized its plants due to high natural gas
prices. It can also sell it to industrial buyers looking to
decarbonize, or sell it in the United States, El-Hoshy said.
OCI's Texas plant, to start production in 2025, will
produce 1.1 million metric tons annually.
Global ammonia demand looks to climb 10% by 2030 from 2021
to 203 million tons annually, according to TD Cowen and Yara
data. Demand then soars to 294 million tons by 2040 and 470
million by 2050, according to the data.
Others are tiptoeing into the sector. Fertilizer rivals CF
Industries CF.N , Yara YAR.OL and Nutrien NTR.TO are
mulling building their own U.S. Gulf Coast plants, but are at
least a year from breaking ground.
Japanese utility JERA has signed non-binding agreements to
buy low-emissions ammonia from CF and Yara, with commercial
production slated around 2027. Mitsui 8031.T is a partner with
CF on its Gulf project and Mitsubishi 8058.T has signed a
non-binding offtake agreement with Nutrien.
CF has committed $285 million to capture emissions at two
U.S. ammonia plants and says it has firm buyers for all the blue
ammonia it would produce from the possible new plant with
Mitsui.
Investors and analysts are not yet convinced. Yara last
month postponed an initial public offering of its clean ammonia
business, citing low market valuation.
"Probably the biggest unknown is if the end markets will
really be there," said Stephan Werner, senior portfolio manager
for Germany's DWS Group.
If new markets do develop, however, "for sure these
companies will be worth far more than they are today," Werner
said.
Japan and South Korea are expected in the next year to
create incentives for utilities to reduce emissions, unlocking
premium prices for blue ammonia, El-Hoshy said.
"The question will be, how sufficient will the incentives
be?"
TECHNICAL QUESTIONS
Technology incorporating 20% ammonia in co-generating
electricity with coal is still in development. Special burners
are required for power units as ammonia burns more slowly than
natural gas. Such plants would still spew double the air
pollution of plants that use gas and steam, according to energy
analysis firm TransitionZero.
Co-firing ammonia could result in extended life for coal
plants, rather than phasing them out, said Katrine Petersen,
senior policy advisor at environmental group E3G.
"Ammonia co-firing is unlikely to ever become a widely
deployed approach to power-sector decarbonisation," Petersen
said.
JERA said in a statement that it will begin demonstrating
co-firing with 20% ammonia this fiscal year.
"The question is, when will this hit, not will this hit,'"
said CF Chief Financial Officer Chris Bohn.
SHIPPING DEMAND
Member countries of the International Maritime Organization
on Friday adopted a revised strategy for shipping that sets a
net zero emissions target "by or around 2050."
The first ammonia-fueled ships are due to be piloted next
year, but the toxic gas, also comes with higher safety issues
and higher costs, two big impediments, said Oystein Kalleklev,
CEO of ship-owning companies Flex LNG and Avance Gas. Kalleklev
nevertheless ordered ships this spring that can burn ammonia as
he weighs future options for his fleet.
Routes for ammonia-fueled ships along so-called "green
corridors" can likely become workable with subsidies from
national authorities, said Harald Fotland, CEO of Odfjell
ODF.OL , a tanker company involved in an ammonia pilot project.
However, using ammonia for ocean-going ships looks
unprofitable for the foreseeable future and the fuel first needs
to become readily available globally, he said.
"We go to hundreds of ports," Fotland said. "So to get (ship
owners) to go for an ammonia solution, that I think is very far
in the future on deep sea."
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FACTBOX: Fertilizer companies race to US Gulf to make
low-emissions ammonia L1N38E256
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(Reporting by Rod Nickel in Winnipeg, Manitoba and Victoria
Klesty in Oslo; additional reporting by Yuka Obayashi in Tokyo
and Seher Dareen in Bengaluru; Editing by Anna Driver)
((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs;))