36085955 Primer on Ammonia Nitrogen Fertilizers and Natural Gas Markets

AEDE-RP-0053-05

A PRIMER ON AMMONIA, NITROGEN FERTILIZERS, AND NATURAL GAS MARKETS

Aleksander Abram and D. Lynn Forster*

Department of AED Economics The Ohio State University

Abstract: We describe the U.S. and international supply and demand situation for ammonia, its pricing characteristics, and more importantly its fundamental dependence on natural gas. We also explore linkages between alternative nitrogen fertilizers (e.g., urea, ammonium nitrate, and ammonium sulfate) and ammonia. Finally, we review long-term projections for natural gas production and pricing.

September 30, 2005

* Respectively, graduate research associate and professor, the Department of Agricultural, Environmental, and Development Economics, The Ohio State University. Contact author: D.L. Forster, 2120 Fyffe Rd., Columbus, Ohio 43210; E-Mail: [email protected]; Phone: 614-292-6340; Fax:614-292-0078.

OSU AED Economics (AEDE-RP-0053-05)

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TABLE OF CONTENTS

INTRODUCTION

BACKGROUND

AMMONIA PRODUCTION

AMMONIA USES

AMMONIA WORLDWIDE

AMMONIA IN THE UNITED STATES

AMMONIA PRICING

NATURAL GAS PRODUCTION AND USE

MORE ABOUT NATURAL GAS

CONCLUSION

………………………………………………………………3

………………………………………………………………4

………………………...…………………………….6

……………………………………………………….13

…………………………………………..…..25

…………………………………………………………...33

……………………...………………………...…40

……………………………………………………………...…48

………………………...…………………………………….8

……………...………………………...…37


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INTRODUCTION

Nitrogen (N), being a part of all animal and plant proteins, is simply an essential

element of life. As a component of the DNA and RNA molecules, it is an indispensable

constituent of each individual’s genetic blueprint. As an element in the chlorophyll

molecule, nitrogen is vital to a plant’s ability to engage in photosynthesis – the infamous

process that “keeps the life on Earth going.”1

Some crop plants, such as alfalfa, peas, peanuts, and soybeans can convert

atmospheric2 nitrogen into a usable form by a process referred to as “fixation.”3

However, most of the nitrogen that is available for crop production comes from

decomposing animal and plant waste or from commercially produced fertilizers, which

are based on nothing else but ammonia and some nitrite deposits. Anhydrous ammonia is

commercially produced by reacting under certain conditions4 nitrogen (N), which is taken

from the air, with hydrogen (H), which is derived from a variety of raw materials, but

most importantly from natural gas feedstock.5

Anhydrous ammonia is a manufactured nitrogen fertilizer, as are such products as

urea, ammonium nitrate, urea-ammonium nitrate solutions, ammonium sulfate, and other

more complex compounds like diammonium phosphate (DAP) and monammonium

phosphate (MAP). Recently, soaring natural gas prices have once again become a cause

of concern for nitrogen fertilizer users.

1 Arizona State University: “http://photoscience.la.asu.edu/photosyn/Default.html” 2 Air consists of 80% of nitrogen. 3 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen.” Open-File Report 2004-1290, U.S. Department of the Interior, U.S. Geological Survey, August 5, 2004. “http://pubs.usgs.gov/of/1290/2004/” 4 High temperature and pressure. 5 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen”


4

Our objectives are to describe the U.S. and international supply and demand

situation for ammonia, its pricing characteristics, and more importantly its fundamental

dependence on natural gas. We also explore linkages between alternative nitrogen

fertilizers (e.g., urea, ammonium nitrate, and ammonium sulfate) and ammonia. Finally,

we review long-term projections for natural gas production and pricing.

Much of the information used in our discussion comes from array of major

government agencies such as: USGS6, USDA (FAS, NASS & ERS)7, Census Bureau,

DOE (EIA)8, USITC9, EPA10, FERC11 and non-profit business associations or societies

with the most important being: TFI12, IFA13, IFDC14, NGSA15, NPC16, INGAA17, and

AGA18. When specialized information could not be located, advice from industry and

government agency professionals was sought. USGS, EIA, Simplot and PotashCorp

employees helped extensively.

BACKGROUND

Neither ammonia production, nor its application constitutes a new concept. Salts

of ammonia have been known from very early times – the term “Hammoniacus Sal”

6 United States Geological Survey ( US Dept. of Interior): “http://www.usgs.gov” 7 US Dept. of Agriculture: “www.usda.gov” (Foreign Ag. Service, National Ag. Statistics Service, Econ. Research Service) 8 Dept. of Energy: “www.energy.gov” (Energy Information Administration : http://www.eia.doe.gov) 9 U.S. International Trade Commission: “http://www.usitc.gov” 10 Environmental Protection Agency: “http://www.epa.gov” 11 Federal Regulation and Oversight of Energy: “http://www.ferc.gov” 12 The Fertilizer Institute: “http://www.tfi.org” 13 International Fertilizer Industry Association: “http://www.fertilizer.org/ifa” 14 International Fertilizer Development Center: “http://www.ifdc.org” 15 Natural Gas Supply Association: “http://www.ngsa.org” 16 National Petroleum Council: “http://www.npc.org” 17 Interstate Natural Gas Association of America: “http://www.ingaa.org” 18 American Gas Association: “http://www.aga.org”


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appears in the writings of Pliny.19 In 1777, Karl Wilhelm Scheele showed that it

contained nitrogen, and Claude Louis Berthollet, in about 1785, ascertained its

composition.20 A century later, in late 19th and the beginning of the 20th century,

ammonia research emerged again when the world was looking for a substitute for the

Chilean saltpeter (NaNO3) - the only discovered and usable nitrogen source of substantial

quantity that time. From the 1920s until 1944, ammonium sulfate – a by-product from

coke-oven gases - became the most important nitrogen fertilizer, but it began to yield

market share to ammonium nitrate as the Second World War was coming to its end.21

Finally, with the commercialization of the Haber-Bosch process for producing ammonia

in the 1950s, ammonia became more plentiful and thus came to be the principal source of

nitrogen in fertilizers in the United States.22

Ammonia (NH3) contains 82.2 percent of nitrogen23 and 17.8 percent hydrogen.

At standard temperature and pressure (STP),24 ammonia is a colorless gas with a pungent,

readily identifiable odor, when it is present in concentrations of greater than 50 parts per

million (ppm). Its boiling point is –33.35º C, and its melting point is –77.7º C.25

Ammonia can be very harmful when in contact with human skin or if digested.

19 Gaius Plinius Secundus, known as Pliny the Elder, was an ancient author and scientist who wrote Naturalis Historia. 20 Wikipedia: “http://en.wikipedia.org” 21 Ammonia production was not fully commercialized thus more costly. Therefore, it was not applied directly in farming but through compounds with lower nitrogen content. 22 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 23 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen”& Wikipedia: “http://en.wikipedia.org” 24 In chemistry STP denotes an exact reference temperature of 0°C (273.15 K) and pressure of 1 atm (defined as 101.325 kPa). 25 Wikipedia: “http://en.wikipedia.org”


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AMMONIA PRODUCTION

Ammonia is primarily produced using air, natural gas and water.26 The process is

illustrated by the figure on the next page. It is called a STEAM REFORMING PROCESS, and it

is utilized by about 75 to 80 percent of ammonia plants worldwide.27 It consists of the

following five steps: 1) desulfurization, 2) primary and secondary reforming, 3) shift

conversion, 4) CO2 removal & synthesis gas purification, and 5) ammonia synthesis and

recovery.

1) In the first step, sulfur compounds in the natural gas are removed to avoid a

potential threat to catalysts that are used in the remaining part of the process.

2) Two reforming steps follow. These steps are designed to break down CH4

(methane) in the natural gas into H2, CO2, and carbon monoxide (CO).

3) Before ammonia is produced, the CO and CO2 must be removed from the gas

mixture. This is accomplished in a two-step shift conversion, which converts the CO to

CO2, followed by a CO2 removal step. Water vapor in the gas mixture often reacts with

some of the CO to produce more H2 and CO2. The gas mixture then is fed to a low-

temperature shift converter that operates at temperatures that range from 200º to 250º C.

Here, most of the remaining CO is converted to CO2.

4) The CO2 removal operation also is done in two steps: A) a bulk CO2 removal in

which the CO2 concentration is reduced to a few parts per million, and B) a final

purification step. The most common bulk CO2 removal operation is performed by

scrubbing the gas with a methyldiethanolamine or monoethanolamine solution. The

26 3CH4 + 6H2O +4N2 � 8NH3 + 3CO2 27 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen”


7

remaining CO2 and CO is removed from the gas stream by converting the CO2 and CO

back to CH4 by introducing H2 gas with a nickel catalyst.

Cryogenic purification is used to remove the methane from the gas stream. In

cryogenic purification, the gas is dried to a very low dew point, and then cooled and

expanded in a turbine to liquefy a portion of the stream. The vapor from the partially

liquefied stream is scrubbed in a rectifying column to remove almost all the CH4 and

about one-half of any unreacted CO2.

Source: USGS: Mineral Commodity Profiles – “Nitrogen”

Natural gas

Desulfurization

Primary reforming

Steam

AirSecondary reforming

Shiftconversion

Carbon dioxide removal

Carbon dioxide

Methanation Methane

Synthesis gas compressor

Synthesis gas converter

Separator

Nitrogen and hydrogen gases

Ammonia storage

Ammonia


8

5) At this point the gas is compressed to between 136 and 340 ATM28 (2,000 and

5,000 PSI29) and then passed over an iron catalyst where the nitrogen and hydrogen react

to form ammonia. The design of the ammonia synthesis section varies from plant to plant

and is dependent upon such factors as pressure chosen for synthesis, capacity of the plant,

and thermal requirements for process operation. During the ammonia synthesis, not all

the nitrogen and hydrogen are converted to ammonia. Unreacted gases are separated from

the ammonia and recycled to the compressor. The ammonia then is chilled to liquefy it

and stored in tanks at atmospheric pressure.

AMMONIA USES30

AGRICULTURAL INDUSTRIES are the major users of ammonia, accounting for over

85% of all ammonia produced in the United States. Depending on the particular crop

being grown, up to 200 pounds of ammonia per acre may be applied for each growing

season. Ammonia may be directly applied to the field (anhydrous31 or aqua32 ammonia),

or it could be further used in processes that result in alternative nitrogen-based fertilizers,

all capable of providing essential nitrogen. Urea (46 – 0 – 0)33, ammonium nitrate (34 – 0

– 0), UAN34 (32/28 – 0 – 0), ammonium sulfate (21- 0 – 0 – 24S35), DAP36 (18 – 46 – 0),

28 When expressed as a measurement, an atmosphere or standard atmosphere is a unit of pressure roughly equal to the average atmospheric pressure at sea level on the earth. It is defined as the pressure under 760 mm of mercury. 29 Pounds-force per square inch (lbf/in²) 30 R.M. Technologies: “http://www.ammoniapro.com” 31 Anhydrous ammonia (82%N) is a liquid under high pressure and must be injected at least six inches deep into a moist soil because it becomes a gas once it is released from the tank. In soil, ammonia reacts with water to form the ammonium (NH4

+) ion, which is held on clay and organic matter. Anhydrous ammonia is generally the cheapest source of N; however, the method of application is less convenient and requires more power to apply than most other liquid or dry materials. 32 Aqua ammonia (21% N) is a liquid under low pressure and must be incorporated into the soil to prevent the loss of free ammonia to the atmosphere. It is possible to lose all of the free ammonia if it is not incorporated. Aqua ammonia has advantages over anhydrous ammonia: placement need not be as deep, and high-pressure applicators are not required 33 N – P – K = nitrogen, phosphorus and potassium 34 Urea Ammonium Nitrate


9

and calcium nitrate (15.5 – 0 - 0) would constitute good examples. There are many

more.37 The following diagrams illustrate nitrogen-fertilizer38 conversion routes and the

the worldwide ammonia use distribution.

GENERAL NITROGEN-FERTILIZER CONVERSION ROUTES

Source: USGS: Mineral Commodity Profiles – “Nitrogen”

35 Sulfur 36 Diammonium phosphate 37 For more information please visit: “http://www.canr.msu.edu/vanburen/e-896.htm” 38 Starting with ammonia

Ammonia plant

Nitric acid plant

Nitrophosphate plant

Phosphoric acid plant

Sulfuric acid plant

Urea plant

Ammonium nitrate plant

Calcium nitrate plant

NPK fertilizer plant

Ammonium phosphate plant

Natural gasWater

Air

WaterAir

Phosphaterock

Phosphaterock

Sulfur

AmmoniaCarbon dioxide

Potash

Nitric acidAmmonium nitrate

Sulfuric acid

Ammonia plant

Nitric acid plant

Nitrophosphate plant

Phosphoric acid plant

Sulfuric acid plant

Urea plant

Ammonium nitrate plant

Calcium nitrate plant

NPK fertilizer plant

Ammonium phosphate plant

Natural gasWater

Air

WaterAir

Phosphaterock

Phosphaterock

Sulfur

AmmoniaCarbon dioxide

Potash

Nitric acidAmmonium nitrate

Sulfuric acid


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“Fertilizer Market Outlook” by PotashCorp confirms a high degree of utilization

of ammonia production by the fertilizer industry. Worldwide use is depicted in the graph

to the left, which

shows about 81% of

ammonia used in

the production of

upgraded fertilizers,

16% in non-

fertilizer uses, and

3% applied directly

as a fertilizer.

Source: PotashCorp: “Fertilizer Market Outlook 2004”

Ammonia and urea are used as a source of protein in LIVESTOCK FEEDS for

ruminating animals such as cattle, sheep and goats. Ammonia can also be used as a pre-

harvest cotton DEFOLIANT, an ANTI-FUNGAL AGENT on certain fruits and as PRESERVATIVE

for the storage of high-moisture corn.

Ammonia is used in the manufacture of NITRIC ACID; certain ALKALIES such as

soda ash; DYES; PHARMACEUTICALS such as sulfa drugs, vitamins and cosmetics;

synthetic textile FIBERS such as nylon, rayon and acrylics; and for the manufacture of

certain PLASTICS such as phenolics and polyurethanes.

Ammonium Nitrate besides its fertilizer usage is widely employed in the

production of EXPLOSIVES.


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Ammonia is used in such METAL TREATING operations as nitriding, carbonitriding,

bright annealing, furnace brazing, sintering, sodium hydride descaling, atomic hydrogen

welding and other applications where protective atmospheres are required.

The PETROLEUM INDUSTRY utilizes ammonia in neutralizing the acid constituents

of crude oil and for protection of equipment from corrosion. Ammonia is used in the

mining industry for extraction of metals such as copper, nickel and molybdenum from

their ores.

Ammonia is used in several areas of WATER and WASTEWATER TREATMENT, such

as pH control, in solution form to regenerate weak anion exchange resins, in conjunction

with chlorine to produce potable water and as an oxygen scavenger in boiler water

treatment.

Ammonia is used in STACK EMISSION CONTROL SYSTEMS to neutralize sulfur

oxides from combustion of sulfur-containing fuels, as a method of NOx control in both

catalytic and non-catalytic applications and to enhance the efficiency of electrostatic

precipitators for particulate control.

Ammonia is used as the developing agent in PHOTOCHEMICAL PROCESSES such as

white printing, blue printing and in the diazo duplication process.

Ammonia is a widely used refrigerant in INDUSTRIAL REFRIGERATION SYSTEMS

found in the food, beverage, petro-chemical and cold storage industries.

Ammonia is used in the RUBBER INDUSTRY for the stabilization of natural and

synthetic latex to prevent premature coagulation.

The PULP AND PAPER INDUSTRY uses ammonia for pulping wood and as a casein

dispersant in the coating of paper.


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The FOOD AND BEVERAGE INDUSTRY uses ammonia as a source of nitrogen needed

for yeast and microorganisms.

The decomposition of ammonia serves as a source of hydrogen for some FUEL

CELLS.

Ammonia is used by the LEATHER INDUSTRY as a curing agent, as a slime and

mold preventative in tanning liquors and as a protective agent for leathers and furs in

storage.

Weak ammonia solutions are also widely used as COMMERCIAL AND HOUSEHOLD

CLEANERS AND DETERGENTS.

The following USGS & PotashCorp-based visualizations show principal

downstream products of ammonia and their uses.

Source: USGS: “Mineral Commodity Profiles – Nitrogen”

Explosives

Animal feed

Fertilizer

Plastics, fibers, and resins

Ammonium phosphates

Nitric acid[HNO3]

Urea[NH2CONH2]

Ammonia[NH3]

Adipic acid

Toluene-diisocyanate

Methylenediphenyl

diisocyanate

Melamine

Hydrogen cyanide[HCN]

Caprolactam

Ammonium nitrate

[NH3NO3]

Ammonium sulfate[(NH4)2SO4]

Acrylonitrile

ExplosivesExplosives

Animal feedAnimal feed

FertilizerFertilizer



Ammonium phosphates

Nitric acid[HNO3]

Urea[NH2CONH2]

Ammonia[NH3]

Adipic acid

Toluene-diisocyanate

Methylenediphenyl

diisocyanate

Melamine

Hydrogen cyanide[HCN]

Caprolactam

Ammonium nitrate

[NH3NO3]

Ammonium sulfate[(NH4)2SO4]

Acrylonitrile


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AMMONIA WOLDWIDE

Nitrogen is used in virtually every country in the world and as a result many

countries have the facilities for producing ammonia. In 2003, a little over 146 million

short tons of ammonia were produced in 75 countries, representing all continents but

Antarctica.39 Total production worldwide nearly doubled in the last 25 years. Global

capacity utilization rate of production facilities hovers around 82%. The largest

producers of ammonia in descending order are: China, India, Russia, and the United

States with production40 in short tons/capacity utilization rates41 as follows:

39 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 40 2003 the most recent data 41 2002 the most recent data


Note: All tons equivalent to 2,000 LB (Short Ton)


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40,487/100%42; 13,015/85%; 12,200/79%; and 11,757/74%, respectively. Together,

these countries account for about 50 percent of the total world ammonia production

capacity, and 55 percent of the actual production. Continent-wise, Asia is the largest

producer of nitrogen, followed by North America and Europe.43 Individual capacity

utilization varies considerably across countries. In Central Europe, capacity is lower due

to high energy costs and inefficient plants. In North America, approximately one-quarter

of capacity remained idle due to soaring natural gas prices.44

World Amonia Production

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Prod

uctio

n: S

hort

Ton

s ('0

00)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Ann

ual G

row

th in

%

World Ammonia ProductionAnnual Growth

Source: Data outsourced from USGS.

42 100% simply means that all known capacity is utilized. 43 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 44 PotashCorp: “Fertilizer Market Outlook 2004”


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Natural Gas Reserves

Middle East, 2,528 - 39.3%

Eastern Europe & Former U.S.S.R.,

2,328 - 36%

Africa, 448 - 7%

Asia and Oceania, 447 - 7%

Western Europe, 177 - 2.8%

North America, 265 - 4%

Central & South America, 245 -

3.8%

USGS ammonia production data provides an interesting picture of what has

happened to the ammonia industry worldwide in the last 25 years. Profitability45 of

ammonia production is governed primarily by natural gas prices, which make up around

90 percent46 of the total ammonia production cost, and secondarily by other factors such

as industrial efficiency, market power, or the effectiveness of distribution networks.

The map to the left

shows the price of natural

gas in 2003 in US Dollars

per MMBtu47.

It is easy to see that

it does vary internationally.

It may be as low as $0.40 in

North Africa or reach $5.50 in Northern America, which is a very large difference that

undeniably should have an effect on distribution of ammonia plants around the world.

Why is the natural

gas so cheap in some

places compared to the

U.S.? Natural gas is

inexpensive in many

countries simply because

it is very plentiful (e.g.,

45 Ammonia production is governed by nothing else by the capitalistic desire to make profit. In that sense it is no different from any other industry. 46 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 47 10,000 million British thermal units

Source: PotashCorp: “Fertilizer

Market Outlook 2004”

Source: EIA (Trillion Cubic Feet)


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Middle East, Former U.S.S.R) and/or there is a small industrial base or infrastructure to

consume it. Many countries just flare the gas (burn it as it escapes from oil wells). Often

these countries convert natural gas into other products such as LNG or LPG (Liquefied

Natural/Petroleum Gas) or fertilizer manufacturing (NH3 – Ammonia production) for

export. Production and prices are usually controlled by governments and seen as a way

to bring much needed cash into their countries.

Again, Asia is the largest producer. China, India, Indonesia, Pakistan, Bangladesh

and Malaysia produced: 40.5, 13, 5.6, 3.2, 1.2, and 1.9 million short tons, respectively in

2003, which constitute 45 percent of the world production. Their production has

increased steadily since 1980s. Countries such as Uzbekistan, Kazakhstan, Turkmenistan

and Azerbaijan, are expected to strengthen the supply of ammonia in the near future due

to their large natural reserves and their economic and political transformations. One of

the reasons behind Asia being the largest manufacturer of ammonia is the size of the

world population that continent hosts, and thus needs to feed. Not all countries though

produce a lot of NH3. South Korea and Japan decreased their production. Philippines,

Thailand and Vietnam do not participate at all.

In North and South America, production is shifting. The United States is the

fourth largest producer of ammonia in the world, but production has been decreasing at a

rate of 9% annually since 1998 when its peak production was 18.5 million short tons.

Mexico has also been drastically reducing its production of ammonia from an average of

1.8 million in the 90s to only 0.44 million in 2003. Trinidad & Tobago with its 4.8

million short tons and 9% annual growth in both the 5-year and the 10-year time periods

emerges as the biggest success story. Argentina follows with nearly 1 million short tons


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and over 53% growth on annual basis in last 5 years. Canada and Brazil, with 6.1 million

short tons annually, have kept their production on a rather stable level for the last several

years.

Western European48 production of ammonia decreased tremendously in the last

10-15 years with the exception of Belgium and Germany, potentially due to their

closeness to the oil & gas deposits,49 and efficient plants with strong distribution

networks. Central and Eastern Europe, including Former Soviet Republics, show rather

mixed results. Poland, particularly in 2003, produced more due to successful

restructuring of the chemical industry leading to efficiency improvements. Ukraine since

its independence in 1991 has been producing around 4.5 million short tons of ammonia

annually. Its strength comes from its cheap natural gas, and could easily be increased if

the plants were upgraded in terms of machinery and/or general capacity. Ukrainian

neighbor, Russia, has been also one of the biggest producers of ammonia, again due to

low natural gas prices in that country, but also because of some recent industrial

upgrades. Its production increased 40 percent from the low in 1998. Countries such as

Hungary, Romania or Bulgaria have cut down their production by at least 50 percent

since the mid-80s due to uncompetitive status of their chemical industries after the

downfall of communism, and their failure to make the transition. Finally, states such as

Lithuania, Czech Republic, and Ireland have kept steady low production.

Europe’s southern neighbor, Africa, is an enigma. Although the price of natural

gas in Africa turns out to be the lowest compared to any other parts of the world,

ammonia production is relatively small. Egypt produces the largest quantity of ammonia

48 Particularly in France, Italy and the U.K. 49 Germany and the Benelux countries have around 42% of the natural gas reserves of the Western Europe


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in Africa (2.4 million short tons in 2003), and its industry has experienced the highest

growth in the last 10 years both in terms of volume and percentage-wise. Libya and

Algeria follow with total production reaching not even 800,000 short tons each in 2003.50

Nigeria, undeniably, a major oil producer with approximated natural gas reserves equal to

35% of the continent’s reserves, produces no ammonia. South Africa, the continent’s

most industrialized country, has also been cutting down its production. Astonishing low

levels of ammonia production are caused mainly by lack of infrastructure, know-how and

political instability.51 Also, the cost of natural gas in South Africa is high because it has

no natural gas reserves, and Africa has no international pipelines that would transport the

cheap gas to the south.

The energy Mecca of our times - the Middle East - where natural gas is priced

very low, produces little ammonia. Saudi Arabia, Iran, and Qatar produce the most

ammonia with their production equal to 5.4 million short tons (less than 4% of the world

market) with 43%, 30% and 27% production split, and annual growth in the last 10-year

period: 5%, 7% and 4%, respectively. United Arab Emirates, Kuwait and Syria have

been accelerating in recent time but their volume is still quite low. Bahrain produces a

steady amount of 420,000 short tons, which much understate its potential. Israel

produces no ammonia, and Iraq’s production was halted by the war.

Tables with individual countries, their production statistics from 1976, 1980, 1990

and 2003, three annual growth figures and 2002 capacity utilization ratio52 are showed

below. 53

50 Algeria has 37 percent of natural gas reserves in Africa: around 165 trillion cubit feet 51 Gas is very cheap because the countries do not have the capabilities to deal with it. 52 Some of the ratios pass the 100% mark which naturally does not make sense as one cannot employ non-existent capacity. This error comes from the incompleteness of the worldwide data set illustrating ammonia


19

China 5,472 13,393 23,461 40,487 7.41% 4.72% 2.30% 100%India 2,561 2,978 9,398 13,015 5.98% 6.34% 1.37% 85%

Russia NA NA NA 12,200 NA NA NA 79%US 16,892 19,707 17,026 11,757 -1.29% -2.13% -1.53% 74%

Indonesia 248 1,258 3,740 5,698 11.84% 6.50% 1.77% 90%Ukraine NA NA NA 5,228 NA NA NA 90%Canada 1,687 2,810 4,089 4,888 3.87% 2.33% 0.75% 79%Trinidad 219 615 2,038 4,791 11.66% 8.93% 3.63% 101%Germany 3,996 4,325 3,606 3,758 -0.22% -0.58% 0.17% 92%Pakistan 438 576 1,622 3,160 7.31% 7.35% 2.82% 86%Poland 2,314 1,981 2,628 2,555 0.35% 1.07% -0.12% 57%Egypt 280 536 985 2,400 7.97% 6.44% 3.78% 96%

Netherlands 2,654 2,512 4,277 2,346 -0.44% -0.28% -2.47% 95%Saudi Arabia 137 224 1,263 2,337 10.67% 10.27% 2.60% 96%Bangladesh 198 188 940 1,862 8.33% 10.03% 2.89% 83%

Qatar 122 560 783 1,602 9.63% 4.47% 3.03% 131%Romania 2,224 3,014 2,400 1,582 -1.21% -2.65% -1.72% 34%France 2,388 2,795 2,132 1,546 -1.54% -2.44% -1.33% 71%

Iran 308 292 563 1,495 5.80% 7.04% 4.15% 96%Japan 2,998 2,829 2,051 1,413 -2.65% -2.85% -1.54% 74%

United Kingdom 1,806 2,189 1,542 1,400 -0.91% -1.85% -0.40% 74%Brazil 193 472 1,258 1,259 6.93% 4.17% 0.00% 82%

Malaysia 58 55 307 1,220 11.52% 13.79% 5.92% 81%Belgium 723 727 367 1,172 1.74% 2.01% 4.95% 100%

Uzbekistan NA NA NA 1,093 NA NA NA 46%Australia 413 473 516 1,055 3.41% 3.40% 3.02% 80%Belarus NA NA NA 1,026 NA NA NA 103%

Venezuela 341 483 747 981 3.85% 3.00% 1.14% 63%Argentina 50 87 94 971 11.21% 10.57% 10.22% 91%Algeria 28 40 386 775 12.57% 13.12% 2.95% 69%Libya 0 201 268 774 NA 5.77% 4.51% 98%

South Africa 630 736 611 661 0.17% -0.45% 0.33% 112%Italy 1,634 1,873 1,609 637 -3.31% -4.40% -3.79% 78%

Lithuania NA NA NA 618 NA NA NA 126%Kuwait 566 287 391 595 0.18% 3.09% 1.76% 68%Austria 611 657 550 590 -0.13% -0.45% 0.29% 116%Mexico 960 2,075 2,896 590 -1.72% -5.11% -6.41% 24%Spain 1,409 995 625 579 -3.13% -2.23% -0.32% 84%

United Arab Emirates 0 0 395 564 NA NA 1.49% 134%Norway 635 690 578 475 -1.04% -1.55% -0.82% 84%Bulgaria 1,235 1,109 1,756 430 -3.69% -3.87% -5.69% 34%Bahrain 0 0 436 418 NA NA -0.17% 116%Turkey 122 247 500 387 4.21% 1.90% -1.06% 53%Croatia NA NA NA 354 NA NA NA 64%Portugal 213 268 265 328 1.56% 0.85% 0.89% 81%

Czech Republic NA NA NA 315 NA NA NA 72%Hungary 942 1,066 594 311 -3.88% -5.00% -2.66% 73%Slovakia NA NA NA 308 NA NA NA 106%

Syria 31 52 139 216 7.20% 6.09% 1.84% 56%Cuba 98 182 188 181 2.22% -0.03% -0.15% 71%

New Zealand 0 0 94 172 NA NA 2.55% 102%Georgia NA NA NA 168 NA NA NA 27%

Capacity Utilization

20022003 (Sorted By)

% Annual Growth 1976-

2003


2004


2005Country 1976 1980 1990

production. We did include the original calculations but for the purpose of this exercise please cut of all ratios at 100%. 53 Data from USGS


20

Greece 319 303 345 165 -2.33% -2.50% -3.02% 25%Korea, Republic of 807 1,137 551 160 -5.63% -7.86% -5.03% 23%

Colombia 122 94 121 149 0.71% 1.94% 0.88% 102%Korea, North 365 603 670 134 -3.51% -6.07% -6.49% 12%Turkmenistan NA NA NA 114 NA NA NA 23%

Estonia NA NA NA 109 NA NA NA 24%Vietnam 0 NA 48 107 NA NA 3.38% 73%Finland 227 94 31 80 -3.63% -0.64% 4.08% NA

Switzerland 60 60 43 39 -1.56% -1.81% -0.41% 80%Tajikistan NA NA NA 27 NA NA NA 15%

Peru 101 83 121 7 -9.22% -9.96% -11.35% 11%Iceland 11 9 11 0 -100.00% -100.00% -100.00% NA

Iraq 182 670 322 0 -100.00% -100.00% -100.00% 25%Ireland 46 341 530 0 -100.00% -100.00% -100.00% 98%Israel 86 72 56 0 -100.00% -100.00% -100.00% NA

Kazakhstan NA NA NA 0 NA NA NA 0%Nigeria 0 0 543 0 NA NA -100.00% 0%Taiwan 428 556 290 0 -100.00% -100.00% -100.00% NA

Country 1976 1980 1990Capacity

Utilization 2002

2003 (Sorted By)% Annual

Growth 1976-2003


2004


2005

Source: Data from USGS.

From a historical perspective, the general trend seems to be the relocation of

production towards countries where the price of natural gas is lower such as Asia, Eastern

Europe, Middle East, and Latin America. This transfer comes at the expense of Northern

America and Western Europe.

The table accompanied by a pie-chart on the next page shows the percentage of

ammonia production capacity by world region for 1999 and 2002 and a forecast for 2008.

China is separated because of its importance in the world nitrogen industry, and it has

seen the greatest changes. The most significant gains in production capacity during the

10-year period (1992-2002) were in Asia. China increased its share of the world total to

23 percent from 17 percent.54 In the rest of Asia, the percentage of total world capacity

has increased to 19 from 15 during the same period. Significant contributors to the

increase were India and Indonesia. Europe’s55 ammonia production capacity dropped

during this period to 14 percent from 19 percent of the world total. Significant declines

54 Some of this increase, however, may not actually be an increase; it may have resulted from additional knowledge gained during this time period about the number and size of the ammonia plants in China. 55 Western and Central Europe


21

occurred in Eastern Europe after the dissolution of the Soviet Union. Some of the least

efficient plants were closed, and some plants did not have enough financial support to

operate. Production capacity in Western Europe declined as well—to 8 percent from 11

percent of the world total. Ammonia production capacity in the United States has

increased to 18,400 short tons in 2002 from 16,700 short tons in 1970, although it

fluctuated quite a bit during this time.

1992 2002 2008China 17% 23% 22%Asia 15% 19% 18%

North Am. 19% 16% 14%FSU 21% 15% 14%

Middle East 3% 5% 9%Western Eu. 11% 8% 7%Latin Am. 3% 5% 6%Central Eu. 8% 6% 5%

Africa 3% 3% 3%Oceania 0% 0% 2%

Source: Data from USGS.

North America14%

Central America and South America

6%

Western Europe7%

Former U.S.S.R.14%

Middle East9%

Asia (excluding China)18%

China22%

Central Europe5%

Africa3%

Oceania2%

2008


22

PotashCorp predicts that while over the long run demand growth is expected to

outstrip new capacity,

2006-2008 will likely

experience a period of

slight imbalance as China

and the Middle East

increase their capacity. It

requires about three years

to start up a new plant.56


Furthermore, operating rates57 are expected to remain stable until 2008 as the

market absorbs new capacity from China and the Middle East. After 2008, operating

rates are expected to rise as the new capacity is absorbed by increases in demand.58

In 2008, according to USGS, Asian countries are to continue their dominance.

FSU, Western and Central/Eastern Europe will to lose some capacity.59 Middle East,

Latin America will build new plants. And, surprisingly, Oceania supported by cheap

natural gas in the area will assume 2 percent of the world capacity.

56 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 57 Capacity utilization rates 58 Demand is expected to rise by approximately 22.9 million tones over the next seven years, an average rate of over 2.5% per year 59 Former Soviet Union Republics very often are included in this-type analysis; lost capacity in FSU indicates reform failure.


23

In 2003, Asia was the largest consumer of ammonia, essentially being self-

sufficient. North America was the second largest consumer, using more than it produced

and relying on imports. The

distribution of natural gas supply

and the challenges of shipping

make ammonia still a largely

domestic or regional product,

with only 13% of world

production traded among

countries.

Source: PotashCorp: “Fertilizer Market

Outlook 2004”

The map on the next page constitutes another way to show ammonia production

network worldwide. We can easily pinpoint big producers: North America, Former

Soviet Union, the China-India region, Northern South America, and the Middle East.

International ammonia trade concentrates around FSU republics, Middle Eastern, South

American and Indo-Chinese hub.


24


25

US Ammonia Capacity in 2004

LA, 5,098 , 31%

OK, 2,681 , 17%AK, 1,416 ,

9%

IA, 832 , 5%

TX, 786 , 5%

GA, 758 , 5%

KS, 695 , 4%

OH, 598 , 4%

MS, 589 , 4%

VA, 584 , 4%

Other, 1,903 , 12%

AMMONIA IN THE UNITED STATES

In 2004, nearly 12 million short tons of ammonia were produced by 16 companies

at 31 plants in 17 States in the United States. Fifty-seven percent of total U.S. ammonia

production capacity was centered in Louisiana, Oklahoma, and Texas because of their

large reserves of natural gas, the dominant domestic feedstock. The graphs below show

the distribution of capacity (2004) and natural gas production (2003).60

Source: Fertilizer Institute and

Source: EIA

The two tables below list companies that currently operate ammonia producing

plants. All numbers represent capacity in ‘000 short tons.61

60 Source: IFDC (2004) and EIA (2003) 61 Source: IFDC

U.S. Natural Gas Production in 2004


26

540 2541,416 80

2,250 560

386 140

400 758532

192 598111 409

193 306

35 106267

584 4111,167

309 2551,025 489386292 267

1,222

Triad Nitrogen L.L.C.

Agrium U.S. Inc.

CF Industries Inc.

Borger TX Kenai AK

Donaldsonville LA (4-Plants)

Coffeyville KSCoffeyville Resources LLC

Dakota Gasification Co.

Green Valley Chemical Corporation

Honeywell Nylon Inc.

Cheyenne WY St. Helens OR

Cherokee AL

Creston IA

Faustina LA

Dumas TX

Dyno Nobel Inc.

El Dorado Chemical Company

Fort Dodge IA Homestead (Beatrice) NE

Koch Nitrogen Company

MissChem Nitrogen L.L.C.

The Mosaic Company

Nitromite Fertilizer

Donaldsonville II LA (Ampro)

Beulah ND

Hopewell VA

Yazoo City IV MS

Sterlington LA

Yazoo City III MS

PCS Nitrogen Fertilizer L.P.

Royster-Clark Inc.

Terra Industries Inc.

Augusta GA Geismar LA Lima OH Memphis TN

Beaumont TX

Woodward OK

Donaldsonville II LA (Ampro)

Port Neal IA Verdigris OK Yazoo City MS

East Dubuque IL

Dodge City KS Enid OK

Source: Fertilizer Institute

Fertilizer use includes anhydrous ammonia for direct application, urea,

ammonium nitrates, ammonium sulfate, ammonium phosphates, and other nitrogen

compounds. The table below shows actual production in the United States in 2004 with

quarterly distribution.

1st 2nd 3rd 4th 20042,843,077 2,639,735 2,757,179 2,725,484 10,965,4751,709,551 1,599,870 1,568,665 1,956,328 6,834,414775,955 738,377 706,022 694,177 2,914,531791,488 802,050 751,391 812,841 3,157,770

1,964,253 1,799,533 1,702,249 1,921,187 7,387,2221,575,511 1,577,584 1,543,980 1,646,082 6,343,1574,877,747 4,703,864 4,358,073 4,599,057 18,538,7411,559,077 1,383,250 1,456,737 1,273,653 5,672,7172,756,086 2,867,955 2,467,520 2,906,417 10,997,978

Nitric AcidUrea

Superphosphate

AmmoniaAmmonium NitrateAmmonium SulfateNitrogen Solutions

Diammonium PhosphatesMonoammonium

Source: Census Bureau “Fertilizer Materials and Related Products”


27

The Census Bureau provides more specific data such as stock, import and export

levels for the year of 2004 approximating the consumption of anhydrous ammonia to be

around 19 million short tons in 2004.62

Ammonia: anhydrous, synthetic 221,386 11,866,805 7,921,067 366,848 510,725 19,117,698Ammonium Nitrate 153,185 6,834,414 1,163,667 153,887 121,190 7,874,374Ammonium Sulfate 130,262 2,914,531 359,043 95,950 790,837 2,516,274Nitrogen Solutions 96,918 3,157,770 2,216,958 80,291 36,662 5,353,854

Urea 133,409 6,343,157 5,437,984 117,129 776,037 11,019,700Diammonium Phosphates 245,615 10,997,978 33,741 413,982 5,555,038 5,305,394

ImportsEnding Stock

ExportsApparent

Consumption

2004

FertilizerBeginning

StockQuantity Produced

Source: Census Bureau “Fertilizer Materials and Related Products”

It is quite difficult to trace total consumption of ammonia in the United States.

The first step is to standardize ammonia in the supply chain, which leads to adoption of a

nitrogen equivalent metric, which means that all quantities of ammonia and all its end-use

products are quoted in short tons of nitrogen. This standard has been long used by

USGS.63

Ammonia has fertilizer and non-fertilizer uses. Fertilizer use is easier to identify

as Census Bureau publishes on a quarterly basis a Manufacturing Report64 focusing on

the following nitrogen-based fertilizers and fertilizer materials: Ammonium Nitrate,

Ammonium Sulfate, Nitrogen Solutions, Nitric Acid, Urea, Superphosphate,

Monoammonium Phosphates, and Diammonium Phosphates. Consumption of ammonia

as anhydrous and aqua directly applied to the fields is available from USDA.65

62 Source: USGS, IFDC and Census 63 Many of their reports use it 64 Census: “http://www.census.gov/cir/www/325/mq325b.html” 65 USDA: “http://www.ers.usda.gov/Data/FertilizerUse“


28

3,904,221 25%1,127,678 7%612,052 4%

2,917,852 19%1,625,189 10%1,386,893 9%653,292 4%

1,997,842 13%14,225,019 90%

Ammonium SulfateUrea

Ammonium Nitrate

TotalDiammonium

Nitric AcidSuperphosphate

Monoammonium

Nitrogen

Ammonia

Total Ammonia Consumption

2004

15,727,747

The table below shows total apparent66 ammonia (nitrogen) consumption in the

United States, consumption of ammonia:

anhydrous and aqua by direct application to soil,

and production of individual fertilizer compounds

as derived from Census Bureau data. The table

accounts for 90 percent of total apparent

ammonia consumption in the US.

We consider 90% a good result considering the lack of availability of special

technical information, particularly with respect to production processes of certain

compounds and their further uses. Our estimate of the sources and uses of ammonia in

the United States is shown in the following table, titled “2004 Ammonia Grid.” All

numbers represent nitrogen equivalent in ‘000 short tons.

Various non-fertilizer uses of ammonia have not been estimated, and the fertilizer

compound information from Census Bureau has been treated as if it represented only the

fertilizer use. It has been done for purpose of simplification and thus potentially

overstates fertilizer use.

66 Consumption = beginning stocks + production + imports – exports – ending. stocks

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Source: Census B

ureau and USD

A

United States9,755

Trinidad and Tobago3,518

Canada1,161

Russia783

Latvia26

Colombia25

Ukraine475

Indonesia61

Lithuania21

Turkey16

Brazil67

Spain13

Hungary9

Venezuela293

Imports6,511

Industry Stocks 1/1/2004

181

U.S. SUPPLY16,447

Exports419

Industry stocks, 12/31/2004

301

Apparent Consumption

15,727

Fertilizers9,014

Non-fertilizer741

2004 AMMONIA GRID

Mexico22

Chile13

China1.6

Other2.7

South Korea348

Taiwan9

Singapore1

Philippines21

Mexico15

Canada9

AmmoniaDir. Application

3,904 – 25%

Plastics &Synthetics Explosives

Other

AmmoniumNitrate

955 – 7%

AmmoniumSulfate

612 – 4%

Urea2,918 – 19%

Superphosphate1,387 – 9%

Monoammonium653 – 4%

Diammonium1,998 – 13%

Other FertilizerMaterials

Nitric Acid1,626 – 10%


30

In tracing uses of ammonia, there are two principal difficulties that the Bureau of

Census data poses. First, there is the potential of double counting because some nitrogen

fertilizers are combined to form another material. For example, ammonium nitrate and

urea are frequently combined with water to make nitrogen solutions. Second, there is the

concern that several compounds might include some non-fertilizer uses. For example

ammonium nitrate, nitric acid, and urea have non-fertilizer uses, and our estimates may

not fully capture these uses. Total67 apparent consumption of ammonium nitrate in 2003

in the United States was equivalent to 2.6 million short tons. According to statistics

published by USDA in 2003, only around 30% of total ammonium nitrate consumption is

used for fertilizer production in the U.S.68 Nitric acid has a similar story. We

approximate the non-fertilizer use in 2004 of nitric acid to be 20% of nitric acid reported

by the Census Bureau. We are satisfied that our ammonia grid consumption estimates are

reasonably close to USDA fertilizer consumption data, which are discussed next.

USDA’s estimate of fertilizer use categorizes nitrogen fertilizers by fertilizer

material applied and by crop to which material is applied. The graphs below illustrate

the following points regarding nitrogen fertilizer consumption.

Nitrogen solutions are the most popular material, constituting nearly 40% of all

commercial nitrogen fertilizers. Consumption of nitrogen solutions more than doubled

since 1975. On the other hand, anhydrous ammonia has 17% market share, and its

consumption changed little since 1975 when it had the same market as nitrogen solutions.

Urea is the second leading commercial nitrogen material with 22% market share, and its

use has increased steadily.

67 Fertilizer and non-fertilizer 68 USDA: “http://www.ers.usda.gov/Data/FertilizerUse“


31

Ammonium nitrate consumption declined dramatically in the past three decades.

In the early 1970s, its market share was about the same as that of anhydrous ammonia

and urea, but now its market share is only 6%. Ammonium sulfate is a niche/special

product constituting about 5% of the total nitrogen market. 90% of ammonium sulfate

production is a by-product of another production process. Only 10% is synthetically

created as a primary product.

The largest user of commercial nitrogen fertilizer is corn, which makes up 43% of

consumption. Thus, its consumption is concentrated in the Corn Belt or Midwestern

region of the country.

U.S. Consumption of Nitrogen-Based Fertilizers

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Shor

t-ton

s (2

000

LB

)

AnhydrousAmmonia

Aqua Ammonia

AmmoniumNitrate

AmmoniumSulfate

Nitrogen solutions

Urea

Other

Source: USDA


32

Nitrogen Fertilizer Crop Use

15%

37%

1%

43%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Corn Cotton Soybeans Wheat Other

U.S. Consumption of Nitrogen Fertilizers in 2003

Other9%

AnhydrousAmmonia

16%

Nitrogen solutions

40%

Urea 22%

Ammonium Sulfate

5%

Ammonium Nitrate

6%

Aqua2%

Source: USDA

Source: USDA


33

U.S. Fertilizer Nitrogen Consumption (By State, Crop Year 2001-02)

Source: USDA (outsourced from USGS)

AMMONIA PRICING

Prices of ammonia and other nitrogen-based fertilizers have been steadily

climbing. All compounds follow relatively the same price change route – a result of

close correlation. This relationship is illustrated by the table below, which shows

correlation coefficients between ammonia (X) and each of the other compounds (Y). The

higher the nitrogen content in a fertilizer, the higher the correlation should be,69 which

turns out to be the case with urea (46%), ammonium nitrate (33%) and nitrogen solutions

(28-31%) having the largest correlation coefficient, and ammonium sulfate (21%) and

69 Ammonia consists of 82.2% nitrogen (almost all of ammonia is nitrogen), therefore the higher the percentage of N in another compound, the more similar the consistency is, thus the prices should be closer.

Source: USGS


34

DAP (18%) the smallest. Individual composition also matters, because pricing may

involve several components other than nitrogen such as sulfur in ammonium sulfate or

phosphate in DAP. Changes in these values may skew the price of the fertilizer away

from ammonia’s value.

Nitrogen Fertilizer Prices

0

50

100

150

200

250

300

350

400

450

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Dol

lars

per

Sho

rt T

on

Ammonia

NitrogenSolution

AmmoniumNitrate

Urea

AmmoniumSulfate

DAP

Source: USDA and Fertilizer Institute

2003 2004 2005Ammonia 373$ 379$ 416$

Urea 261$ 276$ 332$ Ammonium Sulfate 195$ 244$ 244$ Ammonium Nitrate 243$ 263$ 292$ Nitrogen Solutions 161$ 178$ 215$

DAP 250$ 276$ 303$

Ammonia R^2 Adj. R^2Urea 92.2% 92.0%

Ammonium Sulfate 85.8% 85.4%Ammonium Nitrate 94.4% 94.3%Nitrogen Solutions 91.5% 91.3%

DAP 72.6% 71.9% Source: USDA and Fertilizer Institute

Fertilizer prices among farmers are often quoted in dollars per pound of “actural

nitrogen.” The table below shows prices per actual pound of nitrogen for six fertilizers

during 1967-2005. Each price in the graph above has been converted to dollars per actual

pound of nitrogen.70

70 Price per pound of actual nitrogen = Price per ton of fertilizer / (2000 X % nitrogen in fertilizer).


35

1967 0.07 0.11 0.13 0.12 0.10 0.31 1968 0.06 0.10 0.13 0.11 0.10 0.28 1969 0.05 0.09 0.13 0.10 0.08 0.26 1970 0.05 0.09 0.12 0.10 0.08 0.26 1971 0.05 0.09 0.12 0.10 0.09 0.27 1972 0.05 0.09 0.12 0.10 0.09 0.27 1973 0.05 0.10 0.13 0.12 0.09 0.30 1974 0.11 0.20 0.26 0.22 0.17 0.50 1975 0.16 0.27 0.35 0.30 0.24 0.73 1976 0.12 0.18 0.23 0.22 0.18 0.53 1977 0.11 0.19 0.24 0.23 0.19 0.51 1978 0.10 0.18 0.26 0.22 0.18 0.52 1979 0.11 0.19 0.27 0.23 0.17 0.58 1980 0.14 0.25 0.33 0.27 0.21 0.83 1981 0.15 0.27 0.37 0.31 0.23 0.79 1982 0.16 0.26 0.39 0.31 0.23 0.73 1983 0.14 0.23 0.35 0.30 0.22 0.69 1984 0.17 0.25 0.36 0.32 0.22 0.75 1985 0.15 0.24 0.36 0.30 0.22 0.67 1986 0.14 0.19 0.35 0.28 0.19 0.62 1987 0.11 0.18 0.34 0.25 0.17 0.61 1988 0.13 0.20 0.33 0.27 0.21 0.70 1989 0.14 0.23 0.37 0.30 0.22 0.71 1990 0.12 0.20 0.37 0.29 0.21 0.61 1991 0.13 0.23 0.36 0.30 0.22 0.65 1992 0.13 0.22 0.36 0.29 0.22 0.62 1993 0.13 0.22 0.37 0.30 0.21 0.55 1994 0.15 0.23 0.40 0.32 0.21 0.62 1995 0.20 0.29 0.43 0.36 0.26 0.73 1996 0.18 0.30 0.44 0.38 0.28 0.82 1997 0.18 0.28 0.44 0.37 0.25 0.76 1998 0.15 0.21 0.45 0.31 0.21 0.73 1999 0.13 0.19 0.41 0.29 0.20 0.73 2000 0.14 0.22 0.40 0.31 0.20 0.67 2001 0.24 0.30 0.46 0.42 0.30 0.68 2002 0.15 0.21 0.45 0.31 0.20 0.63 2003 0.23 0.28 0.46 0.39 0.25 0.69 2004 0.23 0.30 0.49 0.42 0.28 0.77 2005 0.25 0.36 0.58 0.47 0.34 0.84

Nitrogen Solutions

DAPAmmonia UreaAmmonium

SulfateAmmonium

Nitrate

Source: USDA

The graph below illustrates that ammonia prices do vary by region. Northwest and

Southwest exhibit the highest prices while South Central and Northern Plains the


36

lowest.71 Others position themselves somewhere in between. Price differences are a

result of supply-and-demand characteristics, natural gas prices in the producing regions,

and transportation costs. South Central for instance has access to the cheapest source of

natural gas. North Central and Northern Plains use large amounts of ammonia or

ammonia-based products in the U.S., and due to large economies of scale and lower

transportation costs prices are lower than in the Northwest or Southwest

Ammonia Prices: U.S. Regions

150

200

250

300

350

400

450

500

550

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Dol

lars

per

sho

rt to

n

EAST SOUTHCENTRAL

MOUNTAIN

NORTH CENTRAL

NORTHERNPLAINS

NORTHWEST

SOUTH CENTRAL

SOUTHWEST

SOUTHEAST

Source: USDA and Fertilizer Institute

The graph below shows how dependent the cost of ammonia is on natural gas.

Conversion cost does stay constant according to USGS, while nearly 90 percent or more,

in instance of high natural gas prices, of ammonia production cost constitute the cost of

the fossil fuel. A change in the price of natural gas of $1 per million BTU results in

about a $33 per ton change in ammonia production cost.

71 USDA


37

Ammonia Production Cost

-

50

100

150

200

250

300

350

400

$2 $3 $4 $5 $6 $7 $8 $9 $10

Natural Gas Price per million British Thermal Units

Prod

uctio

n C

ost p

er S

hort

Ton

Natural gas cost Conversion cost

Source: USGS: Mineral Commodity Profiles – “Nitrogen”; Note: Cost = production cost rather than consumer prices.

NATURAL GAS PRODUCTION AND USE

We constructed a Natural Gas Grid, similar to the one illustrating the flow of

ammonia, and it is shown below. All numbers are in billion cubic feet. U.S. total supply

has been generated by summing U.S. production, imports and beginning stock. Apparent

consumption has been calculated by subtracting ending stocks and exports from total U.S.

supply. Actual consumption number provided by Department of Energy (EIA) and our

own calculation (apparent consumption) come relatively close. Total consumption in the

U.S. goes towards: 1) Lease and Plant Fuel, 2) Pipeline and Distribution, and 3) Volume

Delivered to Consumers. Consumers include residential, industrial, commercial, vehicle

fuel, and electric power use. Industrial consumption represents natural gas used for heat,

power (FUEL) or chemical feedstock (NONFUEL) by manufacturing establishments;

those engaged in mining or other mineral extractions; and consumers in agriculture,

forestry, fisheries and construction. Therefore, the industrial sector includes the chemical


38

industry – the manufacturer of ammonia. 1998 census72 provided by EIA enabled us to

perform percentage approximation of the distribution of natural gas between fuel and

non-fuel industrial usage, and even further estimation of how much goes towards the

chemical industry. The final number, 317 billion cubic feet used to manufacture

ammonia has been calculated on the basis of U.S. ammonia production.73 Returning to

our Ammonia Grid, we see that 9,755 short tones of ammonia have been produced in

2004 in the U.S. One short ton of ammonia requires 33.5 million BTUs (MMBtu),74

therefore 326,792,500 million BTUs must have been used. EIA provides conversion

tables75 thus we know that 1,031 BTUs constitute one cubic foot. Therefore, 317 billion

of cubic feet were consumed in the production of ammonia. This number constitutes

11% of the chemical industry usage,76 4.3% of total industrial use, and about 1.5% of

total annual consumption of natural gas. The bottom line is that ammonia fertilizer

production constitutes a miniscule portion of total natural gas use in the U.S.77

72 EIA: “http://www.eia.doe.gov/emeu/mecs/contents.html“ 73 Previous Grid 74 Deborah Kramer: “Mineral Commodity Profiles – Nitrogen” 75 EIA: „http://www.eia.doe.gov/glossary/glossary_main_page.htm“ 76 Mainly feedstock 77 EIA: “http://www.eia.doe.gov/emeu/mecs/contents.html“

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United States19,696

Canada3,607

Algeria120

Trinidad462

Malaysia20

Qatar12

Nigeria12

Australia15

Imports4,259


6,052

U.S. SUPPLY30,007

Exports854


6,897


22,296

Actual Consumption22,424

2004 Natural Gas GRID

Canada395

Mexico397

Japan62

Lease & Plant Fuel1,111

Pipeline & Distribution 666

Volume Delivered to Consumers20,647

Pipeline

LNG

Other1.5

Oman9 Pipeline LNG

Mexico0.4

Residential 4,878

Commercial2,989

Industrial7,407

Vehicle Fuel20

Electric Power5,352

Fuel6,666

NonFuel740

Ammonia Production317

Chemical Industry688 NF + 2200 F

United States19,696

Canada3,607

Algeria120

Trinidad462

Malaysia20

Qatar12

Nigeria12

Australia15

Imports4,259


6,052

U.S. SUPPLY30,007

Exports854


6,897


22,296

Actual Consumption22,424

2004 Natural Gas GRID

Canada395

Mexico397

Japan62

Lease & Plant Fuel1,111

Pipeline & Distribution 666

Volume Delivered to Consumers20,647

Pipeline

LNG

Other1.5

Oman9 Pipeline LNG

Mexico0.4

Residential 4,878

Commercial2,989

Industrial7,407

Vehicle Fuel20

Electric Power5,352

Fuel6,666

NonFuel740

Ammonia Production317

Chemical Industry688 NF + 2200 F


40

MORE ABOUT NATURAL GAS

Natural gas has such an impact on production and pricing of all nitrogen

fertilizers that we continue our analysis by investigating projections of long-term

production and use of natural gas. It should be pointed out that Energy Information

Administration (EIA) turned out to be an extraordinary source for natural gas

information.

International Energy Outlook78 generated by EIA in 2005 provides a very useful

illustration of the world energy use, including natural gas. In the reference79 case, the use

of all energy sources

increases over the

forecast80 period. Fossil

fuels - oil, natural gas,

and coal - continue to

supply much of the

energy worldwide, and

oil remains the dominant

energy source, given its

importance in the

transportation and

industrial end-use

sectors. Non-fossil fuel use also grows over the forecast, but not as rapidly as fossil fuel

78 Energy Information Administration (EIA): www.eia.doe.gov 79 Neutral case. EIA like other research governmental agencies generate all forecasts under three types of technological circumstances: rapid, reference (neutral) and slow. 80 World forecast is based on 2002 predications. No new data available.


41

use. The outlook for non-fossil fuels could be altered by government policies or

programs, such as environmental laws aimed at limiting or reducing pollutants from the

combustion of fossil fuel consumption and encouraging the use of non-fossil fuels.

In the EIA reference case,81 total natural gas consumption in the U.S. increases

from 22.0 trillion cubic feet in 2003 to 30.7 trillion cubic feet in 2025. In the electric

power sector, natural gas consumption increases from 5.0 trillion cubic feet in 2003 to 9.4

trillion cubic feet in 2025, accounting for 31 percent of total demand for natural gas in

2025 as compared with 23 percent in 2003.82 The increase in consumption of natural gas

for electricity generation results from both the construction of new gas-fired generating

plants, and higher capacity utilization at existing plants. Most new electricity generation

capacity is expected to be fueled by natural gas, because natural-gas-fired generators are

projected to have advantages over coal-fired generators that include lower capital costs,

higher fuel efficiency, shorter construction lead times, and lower emissions. Nevertheless,

toward the end of the forecast, when natural gas prices rise substantially, coal-fired power

plants are expected to be competitive for new capacity additions.83

Industrial consumption of natural gas, including lease and plant fuel, is projected

to increase from 8.1 trillion cubic feet in 2003 to 10.3 trillion cubic feet in 2025.84

Although increases are projected for most industrial sectors, decreases are expected in the

iron, steel, and aluminum industries. The industrial sectors with the largest projected

increases in natural gas consumption growth from 2003 through 2025 include metal-

81 The following predictions are based on year 2003. No newer forecast is available. 82 Energy Information Administration (EIA): www.eia.doe.gov 83 Energy Information Administration (EIA): www.eia.doe.gov 84 Energy Information Administration (EIA): www.eia.doe.gov


42

based durables, petroleum refining, bulk chemicals85, and food. Natural gas use is also

projected to increase in the residential sector by 0.7 percent per year and in the

commercial sector 1.2 percent per year on average from 2003 to 2025.86

Natural Gas Consumption by sector

0

2

4

6

8

10

12

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Trill

ion

Cub

ic F

eet

0

5

10

15

20

25

30

35

Trill

ion

Cub

ic F

eet

Total Residential CommercialIndustrial Electric Generators Transportation

Source: Energy Information Administration (EIA)

Due to technological improvements and increasing prices, natural gas production

from relatively abundant unconventional sources87 is projected to increase more rapidly

than conventional production. Lower 48 states’ unconventional gas production grows

from 6.6 trillion cubic feet in 2003 to 8.6 trillion cubic feet in 2025 and from 35 percent

of total lower 48 production in 2003 to 44 percent in 2025.88

Production of lower 48 states’ nonassociated89 (NA) conventional natural gas

declines from 9.5 trillion cubic feet in 2003 to 8.6 trillion cubic feet in 2025, as resource

depletion causes exploration and development costs to rise. Offshore NA natural gas 85 That would include nitrogen fertilizer compounds 86 Energy Information Administration (EIA): www.eia.doe.gov 87 Tight sands, shale, and coal-bed methane 88 Energy Information Administration (EIA): www.eia.doe.gov 89 Natural gas that is not in contact with significant quantities of crude oil in the reservoir


43

production is projected to rise slowly to a peak of 3.9 trillion cubic feet in 2008, then

decline to 3.6 trillion cubic feet in 2025.90 Production of associated-dissolved91 (AD)

natural gas from lower 48 crude oil reserves is projected to increase from 2.5 trillion

cubic feet in 2003 to 3.1 trillion cubic feet in 2010 due to a projected increase in offshore

production. After 2010, both onshore and offshore AD gas production are projected to

decline, and total lower 48 AD gas production falls to 2.4 trillion cubic feet in 2025.92

The North Slope Alaska pipeline is projected to begin transporting Alaskan gas to the

lower 48 States in 2016. In 2025, total Alaskan gas production is projected to be 2.2

trillion cubic feet in the reference case, compared with 0.4 trillion cubic feet in 2003.93

Natural Gas Production by Source

0

1

2

3

4

5

6

7

8

9

10

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Trill

ion

Cub

ic F

eet

0

5

10

15

20

25

Trill

ion

Cub

ic F

eet

Total L48 onshore NA conventionalL48 onshore NA unconventional Lower 48 ADLower 48 NA offshore Alaska


90 Energy Information Administration (EIA): www.eia.doe.gov 91 Natural gas that occurs in crude oil reservoirs either as free gas (associated) or as gas in solution with crude oil (dissolved) 92 Energy Information Administration (EIA): www.eia.doe.gov 93 Energy Information Administration (EIA): www.eia.doe.gov


44

Supplies of natural gas from overseas sources account for most of the projected

increase in net imports in the reference case. New LNG terminals are projected to start

coming into operation in 2006, and net LNG imports increase to 6.4 trillion cubic feet in

2025.94

Net imports of natural gas from Canada are projected to decline from 3.0 trillion

cubic feet in 2005 to 2.5 trillion cubic feet in 2009, rise again to 3.0 trillion cubic feet in

2015, and then decline to 2.5 trillion cubic feet in 2025.95 A steady decline of

conventional production in the Western Sedimentary Basin is more than offset by

increases in unconventional production in western Canada, conventional production in

the MacKenzie Delta and Eastern Canada, and LNG imports. Although a MacKenzie

Delta natural gas pipeline is expected to open in 2010, pipeline imports from Canada

decline at the end of the forecast, because Canada’s gas consumption increases more

rapidly than its production.

Mexico has considerable natural gas resources, but the United States historically

has been a net exporter of gas to Mexico, where industrial consumers along the border are

closer to U.S. supplies than they are to domestic supplies.96 In the reference case, net U.S.

exports to Mexico are projected to increase through 2006, when an LNG import terminal

in Baja California, Mexico, begins exporting natural gas from western Mexico to the

United States.

94 Energy Information Administration (EIA): www.eia.doe.gov 95 Energy Information Administration (EIA): www.eia.doe.gov 96 Energy Information Administration (EIA): www.eia.doe.gov


45

Net Imports of Natural Gas

-1

0

1

2

3

4

5

6

719

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

1320

1520

1720

1920

2120

2320

25

Trill

ion

Cub

ic F

eet

Liquefied Natural Gas Canada Mexico


Trends in delivered natural gas prices largely reflect changes in wellhead prices.

Wellhead natural gas prices are projected to decline in the early years of the reference

case forecast, as drilling levels increase, new production capacity comes online, and LNG

imports increase in response to current high prices. As a result, end-use delivered prices

are projected to fall. After 2011, however, both wellhead and delivered natural gas prices

are projected to increase in response to the higher exploration and development costs

associated with smaller and deeper gas deposits in the remaining domestic gas resource

base.97 (NOTE: EIA price forecasts are based on year 2003. Newer predications are not

available. Therefore, these prices may be potentially different from real spot prices in

2004 or 2005.98 )

97 Energy Information Administration (EIA): www.eia.doe.gov 98 The prices have not been adjusted in order to leave the forecast model intact.


46

Transmission and distribution margins in the end-use sectors reflect both the

volumes of gas delivered and the infrastructure arrangements of the sectors. The

industrial and electricity generation sectors have the lowest end-use prices, because they

receive most of their natural gas directly from interstate pipelines, avoiding local

distribution charges. In addition, summer-peaking electric generators reduce

transmission costs by using interruptible transportation rates during the summer, when

there is spare pipeline capacity. As power generators take a larger share of the natural

gas market, however, they are expected to rely more on higher cost firm transportation

service.99

Natural Gas Prices

0

2

4

6

8

10

12

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Dol

lars

per

'000

Cub

ic F

eet

Wellhead Residential Commercial Industrial Electric Generators


Note: These are spot prices not futures prices (Inflation-adjusted, 2003 dollars)

Natural gas wellhead productive capacity directly reflects reserve levels. The

projections for lower 48 natural gas reserves are based on expected levels of natural gas 99 Energy Information Administration (EIA): www.eia.doe.gov


47

exploration and development drilling resulting from projected cash flows and

profitability.

In the reference case, lower 48 reserves grow to 207 trillion cubic feet in 2008,

and then decline slowly to 178 trillion cubic feet in 2025.100 In the rapid technology case,

the finding and success rates for gas well drilling are higher than in the reference case,

and exploration and development costs are reduced, resulting in more drilling activity and

reserve additions. In this case, lower 48 reserves are projected to peak at 215 trillion

cubic feet in 2009, then decline to 205 trillion cubic feet in 2025.101 In the slow

technology case, finding and success rates are lower, exploration and development costs

are higher and drilling activity and reserve additions are lower than projected in the

reference case. Lower 48 reserves are projected to peak at 200 trillion cubic feet in 2008,

then decline to 159 trillion cubic feet in 2025.102

In all three cases, the natural gas resource base is sufficient in the early years of

the forecast to support the increases in drilling activity and reserve additions that are

stimulated by higher projected prices. As a result, reserve additions early in the forecast

generally exceed production. In later years, resource depletion reduces reserve additions

per well, and rising costs of gas well development reduce drilling activity. As a result,

production generally exceeds reserve additions, causing total reserves to decline toward

the end of the forecast.

100 Energy Information Administration (EIA): www.eia.doe.gov 101 Energy Information Administration (EIA): www.eia.doe.gov 102 Energy Information Administration (EIA): www.eia.doe.gov


48

Lower 48 Natural Gas Reserves

100

125

150

175

200

225

250

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Trill

ion

Cub

ic F

eet

Reference Rapid tech Slow tech


CONCLUSIONS

With persistently growing use of nitrogen in agriculture and also other sectors of

the economy, ammonia and its by-products - urea, nitrogen solutions, ammonium nitrate

and ammonium sulfate - are in high demand in Northern America and in more general

terms worldwide. In the United States for instance, corn production would be a fraction

of what it is today without consumption of 40% of all nitrogen-based fertilizers. A

population boom in China and India sustains itself only due to access to one-third of the

total world ammonia that is manufactured in the region.

The fundamental ingredient necessary for production of ammonia is natural gas,

which accounts for ninety percent or more, depending on its price, of the production cost

of ammonia. Conversion costs stay relatively fixed. Therefore, profitability of

production of ammonia hinges on the access to cheap fossil fuel. Even though the U.S


49

owns vast natural gas reserves, its large and growing demand from various sources causes

natural gas to be priced much higher than in other parts of the world. Moreover, U.S.

production, supported by relatively little new investment in infrastructure, is not able to

satisfy its growing demand. Thus the U.S. must rely partially on imports, which creates a

risk premium in the market. Imports will increase in the up-coming years, particularly

through the LNG shipments. Price of natural gas overseas often tends to be much lower

as many countries do not have the infrastructure able to support larger demand. In such

situations, frequently they focus on exports of LNG and/or production of ammonia to

capture foreign exchange revenue. Such producers relying on cheap natural gas offer the

most competition for the ammonia production industry in Northern America.

Ammonia producers in the United States have already started to feel the pain of

higher resource prices. Capacity plummeted, some of it decreased permanently, in more

recent years. The only breather for North America may be Trinidad & Tobago’s and

Venezuelan natural gas, which is close and cheap. PotashCorp, one of the leading

producers of fertilizers, now produces approximately 60% of its ammonia in Trinidad &

Tobago. Others strive to move in the same direction as in the long-term this action may

constitute one of the few survival strategies.

In terms of ammonia pricing, the future looks very uncertain. On one side, we do

witness reallocation of ammonia production capacity to parts of the world with lower

natural gas prices. Asian plants sparked by high prices in 2002 and 2003 should be

coming online as soon as 2006-07 leading to increased cheaper supply. New LNG docks

are also ready to open in next 2-3 years allowing large quantities of cheaper gas to enter

the United States. Nevertheless, demand is expected to grow worldwide. Natural gas is


50

also highly correlated with oil, thus if petroleum stays expensive, even higher supply may

not influence substantially the price of natural gas. And the risk premium surrounding

oil trading these days is expected to stay for some time. It is clear thus that high prices

for all nitrogen fertilizer materials will remain high for a while. This naturally may have

consequences on agriculture, and eventually food prices, as about 6% of all farm costs are

fertilizer costs and another 6% are fuel, oil, and electricity costs.

36085955 Primer on Ammonia Nitrogen Fertilizers and Natural Gas Markets

Documents

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