INDUSTRY INSIGHTThought Leadership

Crunch time for clean ammonia

By Tim Cheyne, SVP – Global Head of Fertilizers, Argus

Ongoing interest in clean ammonia is being increasingly faced with the lack of clarity over the timing and magnitude of future demand. Is it time for a reality check for the industry, and how can GCC ammonia producers and project developers position themselves in this phase of this promising market’s development?

Two years ago, Argus published a relatively conservative demand forecast for clean ammonia ranging between 7 and 15 million tons by 2030, and highlighted the fact that the project pipeline for green ammonia alone greatly outstripped our demand expectations. At the time, this led us to conclude that only a limited number of projects with cost competitive economics, infrastructure, and proximity to end use markets would be able to tap this market opportunity within this decade. The Middle East, and in particular the GCC region, ranked very high based on these criteria.

Graph 1: Global green ammonia capacity forecast, 2023-37

Our latest forecast, published in Argus’ Ammonia Analytics, has largely remained faithful to our original assumptions and demand projections, and presents a base case of around 12 million tons of clean ammonia consumption by 2030. What has changed over this period of time however is the supply side, and the number of announced clean ammonia projects, which now amount to over 120 million tons of announced green and around 40 million tons of announced blue ammonia capacity.

Blue ammonia projects in the US in particular boomed after the announcement of the generous Inflation Reduction Act (IRA) subsidy mechanism in mid-2022, which would incentivize both green and blue hydrogen/ammonia production. In the short term this represents a significant opportunity for gas-based blue ammonia projects, with a cluster of project announcements in the US Gulf region.

This growth in investment interest took place despite the fact that key potential markets for clean ammonia, notably Japan and South Korea, have not yet established mandates nor determined a clear support mechanism for bridging the gap between the price of the fossil fuels that they intend to substitute with ammonia (in particular, coal) and the potential cost of clean ammonia imported from the most likely supply clusters, namely the Middle East and North America.

Demand prospects elsewhere are also uncertain in the short term. The EU’s Carbon Border Adjustment Mechanism (CBAM) does represent a great opportunity to create a transparent and liquid market for clean ammonia that transcends “color” labels and end use differentiation, but the 10-year implementation timeline to introduce the full impact of the EU’s ETS carbon pricing means that the premium buildup for clean ammonia might be too slow for the project developers’ pressing financing requirements of project financing.

Chart 2: Blue ammonia speculative timeline

Chart 3: Clean ammonia demand forecast (2030)

As for fertilizer and chemicals, we expect that the key market opportunities will be mostly limited to nitrates-based fertilizers and chemicals downstream requirement for ammonia in Europe. This could eventually become a sizeable export opportunity for Middle Eastern (and North American) exporters especially if Europe’s ammonia capacity declines due to profitability concerns. But as mentioned above, clean ammonia’s role in this market will largely depend on the carbon-driven premium that will form as a result of CBAM, as mentioned above.

We also maintain conservative expectations for ammonia as a marine fuel, which we are not forecasting as a significant source of demand within this decade due to the availability of alternatives that will be sufficient to reach IMO 2030 targets (in particular, biofuels and methanol), although longer term potential, on the back of IMO 2050 targets, could be significant.

This has led to concerns about the timeline of clean ammonia’s demand buildup in the short to medium term. In the absence of mandates or steep compliance carbon pricing implemented in multiple regions it is difficult to have bullish expectations for demand prospects. The results of this uncertainty are starting to manifest: as of Q3 2023, only a miniscule fraction of green ammonia projects have reached FID (less than 1% of total announcements) and projects that were considered as frontrunners such as Nutrien’s US Gulf blue ammonia project are being delayed. And at the same time, if this uncertainty leads to more project developers delaying their final investment decisions, as investors find more attractive ways to deploy capital, particularly sustainability focused funds, market development will be frustrated in a chicken and egg problem. Ambitious plans such as East Asia’s ammonia power generation co-firing targets might struggle to come to fruition due to concerns about the lack of supply.

On a positive note, some breakthroughs might start appearing in 2024, especially when South Korea and Japan’s support policies for ammonia co-firing should be made public, and that should lead to the first sizable clean ammonia tenders for fuel ammonia. This will provide much-needed clarity to the market, and undoubtedly investors in the Middle East will be carefully watching these developments.

Eventually, once the dust settles and we start seeing more clarity in the market, the Middle East will still possess a number of qualities that should maintain its role as a frontrunner in this market, regardless of the speed at which it develops. The region is endowed with a mix of resources that should make the region a prominent supplier of these products, since it is already a key producer and exporter of natural gas-based grey ammonia (with CCUS potential) and has huge potential for using relatively low-cost renewable energy to produce green ammonia. A phased investment approach that will leverage synergies with existing ammonia production facilities will also provide further cost advantages. Last but not least, stable and sustained government support, either direct or indirect (e.g. through the development of world-class export infrastructure), will also be a key success factor for the region.

In addition to the competitiveness factors mentioned above, we also think that Middle Easter producers can adopt several other measures to help develop the clean ammonia market and increase their appeal for potential buyers:

1. Place additional emphasis on developing the infrastructure needed to trade clean ammonia: we know that one of the Middle East’s key advantages is the ability to capitalize on its existing ammonia export infrastructure, but import infrastructure development should not be overlooked (this is particularly true of Japan, for instance, where building large-scale ammonia import infrastructure will be challenging).

2. Transparent price-setting mechanisms that protect the interests of both buyers and sellers: fixed pricing structures might be appealing for project financing purposes, but ultimately the market will develop some liquidity and participants should prioritize pricing structures that will allow for risk mitigation and spot trading opportunities. In this context, price linkages to specific commodities (including ammonia) would be desirable.

3. Thinking ahead in terms of product certification and lifecycle emissions: clean ammonia and some of its end uses are already being scrutinized in the public domain, and additional care should be placed to claim emission reductions that will stand up to such scrutiny. Regulations on these matters will only get stricter, and dubious environmental claims can undermine and slow the development of the industry in the longer run.