Despite all of the rhetoric about the need for green hydrogen, we see most of the large ammonia producers pursuing large blue projects – with Nutrien’s announcement yesterday coming on the heels of a CF new facility announcement and the CO2 capture project announced by LSB a couple of weeks ago. While there are some small (proof of concept) green projects in the works, they are very small, tiny when compared with the ammonia need, whether to replace lost material from Russia and Ukraine or whether to supply what could be substantial needs in Asia to co-fire coal plants, or as a shipping fuel, or as a carrier for hydrogen (see third chart below). The ammonia majors are not waiting around for “green” economics to improve as they see meaningful near-term demand that cannot wait for scale efficiencies of available power on the green side. Large-scale sources of cheap renewable power are hard to find, and where they may exist, there is competition from uses that may be able to pay more.
Source: Nutrien – Collaboration Is Key To Our Blue & Green Ammonia Journey, July 2021 Report, May 2022
This is another win for Denbury, and it is possible that all of these agreements if they come to fruition may begin to test the limits of the Denbury’s capacity. That said, Denbury still lacks storage projects and while some are under consideration, the company will need to start permit applications if it wants to be ready with storage once its customers are ready to supply. We focused on CCS in our ESG and Climate report yesterday, noting that the high cost of capture is driving greenfield investments in capacity that generates a pure stream of CO2 versus taking an existing facility and trying to clean up a very dilute stream. Those proposing projects today will likely not move to FID unless the CCS incentives increase or unless customers agree to pay a premium for the blue products, as there are very few situations where 45Q will cover the costs.
Source: IRENA and AEA (2022), Innovation Outlook: Renewable Ammonia, International Renewable Energy Agency, Abu Dhabi, May 2022
Sticking with ammonia, the “renewable” projection above depends on a couple of things – not just the expected learning curve in terms of production costs for renewable power and electrolysis. We remain concerned that the thirst for renewable power will stay ahead of availability and that power construction costs and power will be rate-limited by material availability and installation costs. Consequently, while the chart below may be an interesting case study, in theory, practice will be harder and more expensive. The blue route that Nutrien is suggesting, before conversion to green is a great insurance policy against power costs and availability keeping green ammonia unattractive for longer.
Source: IRENA and AEA (2022), Innovation Outlook: Renewable Ammonia, International Renewable Energy Agency, Abu Dhabi, May 2022
