There is the potential for the ammonia thirst (please don’t drink it) to surpass opportunities to build cost-effective capacity for the medium term. Consequently, the shortages we see today could extend and become more severe. Co-firing coal-based power facilities in Asia is one of the more obvious ways to start decarbonizing a predominantly coal-based power region. The experiments in Japan, if successful, will drive a step-change in demand for blue or green ammonia, and this should drive much more new capacity than we have seen announced to date. The power-based demand comes on top of expected growth in fertilizer-driven demand and a possible rise as a shipping fuel. The issue for investors is that green ammonia at scale is economically challenging, especially with the recent shortfalls in renewable power generating plans and what now looks like rising power costs for a while. Blue ammonia is much easier to think about at scale, but we are still hamstrung by expensive carbon capture costs and a lack of incentives – either in terms of tax breaks or taxes or in terms of a customer willing to pay more, to get most ideas and plans past the “wouldn’t it be nice” phase. In the meantime, as indicated above, installed ammonia capacity is making abnormal returns.
We have not spoken much about the agriculture industry and its emissions footprint – but it is significant and the sector is coming under greater focus as a consequence. It is not clear to us that the chart below is complete as it does not appear to include the carbon footprint of the fertilizer used in farming unless it is included in the fossil-fuel category, which seems unlikely. Much of the renewable natural gas planning in the US is relying on farm-based production, and there are initiatives to increase the amount of “low-tillage” farming as it has the effect of releasing far less CO2 from the soil than heavy tilling/plowing. Some of the categories listed below can be addressed through better land and waste management, but others will require offsets, another reason why the offset market needs work. For more on carbon offsets see today's ESG and Climate report.