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FEEDSTOCK AND ENERGY SOURCES FOR AMMONIA PRODUCTION by Pierre L.

LOUIS International Fertilizer Industry Association with some assistance from CEDIGAZ, France

Today, virtually all nitrogenous fertilizers are derived from synthetic ammonia. The main fertilizers : urea, ammonium nitrate, ammonium phosphates are produced directly from ammonia. Other fertilizers such as ammonium sulphate and ammonium chloride are mainly obtained as co-product or by-product of the production of caprolactam or soda ash, also using ammonia as a raw material. Outside China, most ammonia plants use the same form of energy, natural gas or naphta or fuel oil, as feedstock and as fuel for heating and for driving compressors. The compressors are then driven by gas turbines or steam turbines. In certain countries, India particularly, the boilers generating the steam for the turbines and for heating, often use a different form of energy : naptha, fuel oil or coal while natural gas is used as feedstock for the ammonia synthesis. Here in China, the compressors of small and medium scale plants are driven by electric motors. This technology is no longer used in the rest of the world, with very few exceptions.

WORLD AMMONIA CAPACITY DISTRIBUTION BY FEEDSTOCK

Figure 1
2000 AMMONIA CAPACITY - WORLD

NATURAL GAS 73% NAPHTA 4% OTHER PETROLEUM PROD. 6% COAL 16% OTHERS 1%

Figure 1 shows the distribution of ammonia capacity by feedstock. No account is taken of the form of energy used for heating or driving the compressors.

The other petroleum products category includes fuel oil (including heavy residues), refinery off-gases, condensates (butane, propane) derived from oil or natural gas refining, and also coke (petroleum coke or other coke). The others category includes essentially feedstock hydrogen obtained by water electrolysis or as a by-product of other chemical productions such as methanol, acetic acid and others. Figure 1 shows the predominance of natural gas as the preferred feedstock for ammonia production. The geographical distribution (Figure 2) of the ammonia capacity based on natural gas shows that natural gas is used in all parts of the world. China accounts for a small part of this gas-based ammonia capacity (5 %). Figure 2
GEOGRAPHICAL DISTRIBUTION - 2000 NATURAL GAS
NORTH AMERICA 20% LATIN AMERICA 7%

MIDDLE EAST 10% ASIA

CENTRAL EUROPE & EECA 29%

17%

CHINA 5% WEST EUROPE 10% OTHERS 2%

The naptha-based capacity (Figure 3) is essentially located in Asia, in India particularly. This Indian naphta-based capacity is somewhat understated. Indeed, many recent ammoniaurea plants have dual feedstock capability (natural gas, naphta) and use naphta to a large extent due to a shortage of natural gas. These dual feedstock plants are included in the natural gas category, not in the naphta category. They will probably shift to LNG (Liquefied Natural Gas) in a couple of years. Figure 3
GEOGRAPHICAL DISTRIBUTION - 2000 NAPHTA

INDIA 58%

OTHER ASIA 39% OTHERS 3%

- International Fertilizer Industry Association -2-

As regards coal (Figure 4), China is virtually the only user of this feedstock for ammonia production. The other users are a plant in Japan, a plant in the USA, a small plant in Vietnam and a few plants in North Korea. South Africa appears in the graph but this is not really a production of ammonia based on coal as a feedstock. This ammonia is recovered at a plant converting coal into synthetic fuels : gasoline, diesel fuel and other products. Figure 4
GEOGRAPHICAL DISTRIBUTION - 2000 COAL

CHINA 95% SOUTH AFRICA OTHERS 3% 1%

DEVELOPMENT OF AMMONIA CAPACITY

Industrialized countries Figure 5


18 16 14 MILLION TONNES N 12 10 8 6 4 2 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

A M M O N IA CAPACITIES - WEST EUROPE

The ammonia capacity of West Europe has declined markedly over the past 20 years. High costs of natural gas which reached about USD 3.5/MMBTU recently and competition of imported ammonia, ammonium nitrate and other fertilizers were the reasons for the closure of 58 ammonia plants over the past 20 years. The building of any new ammonia plant in West Europe is not expected in the foreseeable future. On the contrary, more capacity closures are anticipated.

- International Fertilizer Industry Association -3-

Figure 6
AMMONIA CAPACITIES - USA
20

15 MILLION TONNES N

10

0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

As regards the USA, ammonia capacity and production have been relatively constant over the past 20 years. However, the prices of natural gas have exceeded USD 5/MMBTU recently while several export-oriented ammonia and fertilizer projects are under construction in nearby low-cost-gas countries. It is therefore expected that imports of ammonia and fertilizers will further increase. About 1 million t N of ammonia capacity closed in 1998 and 1999 in the USA. More plants will probably be shutdown or permanently closed there in the coming years. No new plant will probably be built in the foreseeable future.

Gas-rich countries The main developments of export-oriented ammonia and fertilizer capacities concern the Caribbean and the Middle East. Figure 7
7

A M M O N IA CAPACITIES - CARIBBEAN

6 MILLION TONNES N 5

2 1

0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

In the Caribbean, the countries concerned are Trinidad and Tobago, where the focus is on export ammonia, and Venezuela where a large export-oriented ammonia-urea complex with a significant ammonia surplus is close to completion, while another one is already planned. In both countries, the base price for natural gas is well below USD 1/MMBTU with escalation clauses linked to the international price of ammonia.

- International Fertilizer Industry Association -4-

In the Middle East, recent developments concern both export ammonia and urea. In these countries, the price of natural gas is generally less than USD 1/MMBTU. Figure 8
9 8 7 MILLION TONNES N 6 5 4 3 2 1 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

AMMONIA CAPACITIES MIDDLE EAST (e x c l. I R A Q )

Options for gas-rich countries Countries such as Trinidad, Venezuela, Egypt and Arabian Gulf countries are located too far from large consuming countries to export by pipeline, although several pipeline projects are considered for Middle East gas, Egyptian and Qatar gas particularly. For these countries, the main options for valorizing the natural gas or associated gas (byproduct of oil extraction) are : LNG This requires very large investments and large gas resources. These projects are usually developed by major oil and gas companies or a consortium including oil and gas companies. Ammonia and methanol Both productions require lower investments and lower gas availability. There certainly was some competition between ammonia/fertilizer projects and methanol projects in the past 10 years as both productions require similar investments and gas resources. However, recent environmental problems faced in the USA by MTBE, as gasoline additive derived from methanol, have seriously affected the demand for methanol. Other productions such as steel, aluminium, etc. which are generally more labour and capital intensive than ammonia or methanol. Future GTL projects GTL (Gas-to-Liquids) involving the conversion of natural gas into clean transportation fuels appears as a potentially attractive option for mid-to-large quantities of gas, especially if pipe or LNG transport is not feasible due to distance. Various technologies are available for GTL. Few GTL plants are in operation today.

- International Fertilizer Industry Association -5-

Processes derived from the Fischer-Tropsch process appear most promising, as they produce high-quality fuels for which the market is very wide, almost unlimited, whereas the market for methanol tends to be saturated and the market for dimethylether (DME) has to be established with no existing present infrastructures. Associated gas which cannot be monetized directly and has only a negative value if reinjected can be used for GTL or ammonia production. Transportation cost over long distances does not anymore represent a major handicap in monetizing the resource.

Gas producing countries tend to prefer pipeline or LNG projects which are usually the most profitable in terms of return on each cubic meter of gas. However, competition from many LNG projects may lead LNG prices down. Higher return from LNG sales may influence the pricing of natural gas for ammonia production. For instance, in Indonesia, the price of natural gas for fertilizer production had been maintained for many years at levels below USD 1/MMBTU. But the producers of natural gas made more profits selling the gas to LNG plants. They therefore requested that fertilizer plants pay more for their gas. As a consequence, the gas price for ammonia and fertilizer plants has been increased progressively. It reaches about USD 1.8/MMBTU and more, a rather high level for export-oriented projects. Several countries have large gas resources but little or no ammonia capacity. This is the case with Burma, Brunei, Bolivia, Colombia, North West Australia, various African countries, etc. The reasons are the preference given to LNG or pipeline projects, or various political and economic constraints. Nevertheless, export-oriented ammonia-urea complexes will probably be built in some of these countries in the medium to long term future.

Russia Russia has huge resources of natural gas. Some of the gas fields are located in Central and Eastern Siberia, rather far from any consuming area. On the other hand, the gas reserves of Western Siberia and European Russia are connected to the Russian pipeline grid and through that to Western Europe, Central Europe and Turkey. The price of Russian gas exported to West Europe was around USD 2.8/MMBTU in 1999 compared to about USD 0.5/MMBTU for domestic gas sales. On the other hand, investments in the development of new gas fields have been inadequate over the past few years. As a consequence, gas production is stagnating or declining. Russia has to import now natural gas from Turkmenistan and other Central Asian countries to meet domestic needs and the growing export demand.

- International Fertilizer Industry Association -6-

About 10 % of the domestic gas consumption is used for the production of ammonia and fertilizers mostly for export. For Russia, exporting ammonia and nitrogenous fertilizers is a way of exporting natural gas. These exports will therefore continue but no additional ammonia and fertilizer capacity will probably be built in the foreseeable future. However, a growing share of the fertilizers production is consumed in Russia. Figure 9
RUSSIA EXPORTS
(MILLION TONNES N)

1994 AMMONIA UREA A.N. TOTAL 2.6 1.5 0.6 4.7

1995 2.7 1.9 0.9 5.5

1996 2.6 1.7 1.1 5.4

1997 2.5 1.3 0.8 4.6

1998 2.1 1.3 0.9 4.3

1999 2.1 1.5 0.9 4.5

Most of the Russian ammonia and fertilizer plants are located close to fertilizer consumption areas and rather far from export ports. This makes them less competitive on the export market than export-oriented plants located on the coast in other gas-rich countries.

India China and India are the only countries where a rapid expansion of the ammonia and fertilizer capacity took place in spite of a limited availability of natural gas. Figure 10
AMMONIA FEEDSTOCKS 2000 - INDIA

NG,NT DUAL FEEDSTOCK 33%

NATURAL GAS 29%

OTHERS NAPHTA 23%

2%

FUEL OIL 13%

Figure10 shows the distribution of the ammonia capacity by feedstocks in India. A feature of the Indian industry is the presence of many modern ammonia plants with dual feedstock capability : natural gas and naptha. This reflects a growing shortage of natural gas in India where gas demand is increasing for various uses and where priority is given to power generation.
- International Fertilizer Industry Association -7-

As a consequence, the dual feedstock plants have to use naphta to complement the declining deliveries of natural gas. The delivered price of naphta has reached USD 8/MMBTU recently, compared to less than USD 3/MMBTU for feedstock natural gas. Today, the price of natural gas is 75 % of fuel oil parity. It will reach 100 % parity in 2002. At the same time, the Indian government is looking at ways to reduce the support given to the local nitrogen industry.

Prospects for existing Indian ammonia-urea plant As regards the modern dual feedstock plants, imported LNG will probably substitute for naptha to complement the declining availability of natural gas. Deliveries of imported LNG to ammonia plants may begin in 2002 though this may be optimistic. The regasified LNG will be transported from LNG maritime terminals to the plants via the existing HBJ natural gas pipeline or by special pipelines if the distance is short. Figure 11
HBJ GAS PIPELINE

NEW DELHI AONLA GADEPAN BARODA

BABRALA SHAJAHANPUR JAGDISHPUR VIJAYPUR

The capacity of the HBJ pipeline is not fully utilized right now. But if all plants, using naphta to complement natural gas, shifted to LNG, the capacity of the HBJ pipeline might not be adequate to transport the additional regasified LNG. The building of new pipelines may therefore be needed. A project for the importation of natural gas from Bangladesh through a pipeline connecting with the HBJ pipeline in Northern India is also considered. This project is still at an early stage. The delivered price of regasified LNG will probably exceed USD 3.5/MMBTU. This LNG will be less expensive than naphta but it will be very expensive compared to the price of natural gas in the Arabian Gulf.

- International Fertilizer Industry Association -8-

As regards the plants entirely based on naptha or fuel oil, they are also expected to switch over to LNG, if possible. The total capacity of these naptha-based and fuel oil-based plants is about 8 million t/yr of urea. The policy to be decided by the Indian government is not known yet but it is expected that these plants will be assisted by a special subsidy scheme during a 5 year period i.e., Feedstock Differential Cost Reimbursement compensating the higher cost of naphta and fuel oil. During this 5 year period, the plants will have to find ways of accessing LNG through the building of new pipelines from LNG terminals or spurs from the existing HBJ pipeline. For some of these plants, this will not be easy. Some plants might therefore be closed at the end of the 5 year period. However, the government will certainly do its best to avoid the closure of a large number of plants.

Prospects for new Indian plants For the first time in many years, no new Indian ammonia-urea plant is currently under construction. Nitrogen demand is expected to further grow. In order to avoid excessive dependence on imports, new investments are therefore anticipated for the coming years. The question is where should these new plants be built ? They could be built in India, using imported LNG, or in gas-rich countries in the form of joint-venture companies such as the Omifco project in Oman : a joint-venture of the Oman oil company with 2 Indian fertilizer producers. Rough calculations shown in Table 1 show that LNG-based projects face the additional costs of liquefaction of the gas, of its transportation in expensive LNG carriers, and of the regasification of the LNG. These additional costs amount to about 2.6 $/MMBTU or about 52 $/t urea. It therefore appears that the building of new plants in gas-rich countries may be preferable. However, other factors such as the frequent port and railway congestions, must also be taken into consideration. Plants located close to consumption areas do not face these problems. Moreover, the comparison is only based on estimated costs. Actual prices may not necessarily reflect these costs. Indeed, LNG prices will be negotiated. Increased LNG availability from many projects may drive prices down. Fertilizer prices will also depend on various factors, particularly the future supply/demand balance for urea.

- International Fertilizer Industry Association -9-

Table 1

UREA SUPPLY TO INDIA ESTIMATED CASH COSTS COMPARISON(1) CASE 1 Urea Production in the Middle East (New Plant) CASE 2 Urea Production in India (New Plant)

USD Gas Price Gas consumption/t urea (2) Gas cost Other costs (3) Production cash cost Shiploading & transport to India Unloading & port handling Delivered cash cost/t urea 0.80/MMBTU Gas Price/Middle East 20 MMBTU Liquefaction (4) 16 48 64 16 6 86

USD 0.80/MMBTU 1.4

LNG transport to India 0.6 0.6 LNG regasification 3.4/MMBTU Delivered gas cost/India Gas consumption/t urea 20 MMBTU Gas cost Other costs Total cash cost/t urea 68 48 116

(1)

excludes capital related charges, depreciation and commercial margins for the ammonia and fertilizer plants. assumes normal operations and granular urea. includes labour, utilities, overhead, insurance, taxes, etc. For simplification, these other costs are assumed equal in Middle East and in India. Labour costs are obviously lower in India but other cost items are probably higher, electricity particularly. assumes no grass-root LNG plants.

(2)

(3)

(4)

China As regards China, we understand that the future ammonia-urea complexes will be essentially based on natural gas. The resources of natural gas are quite large but located rather far from fertilizer consuming areas. According to published information, delivered gas prices of up to USD 2.8-3.4/MMBTU are considered acceptable for the fertilizer industry.
- International Fertilizer Industry Association - 10 -

The main problem will be to transport either the gas or the fertilizer to the consuming areas. Competition of other gas uses, such as power generation, will be another problem. As regards naptha-based plants, we understand that 5 large scale naphta-based plants are currently stopped in China due to the high price of naphta. As far as we know, there are no projects to shift these naptha-based plants to imported LNG. On the other hand, projects for building coal gasification unites at some of these plants are considered. Table 2

I D L E N A P H T A -B A S E D P L A N T S - C H I N A
(Million t. / yr. N )

LOCATION GUANGZHOU PETCHEM IND. HUBEI CHEMICAL FACTORY DONGTING FERT. PLANT (HUNAN) NANJING XIXISHAN FERT. PLANT SHANGHAI WUJING CHEMICAL IND.

CAPACITY -0.3 -0.3 -0.3 -0.3 -0.2

STATUS

I D L since early 2 0 0 0

I D L since 1 9 9 8

We are not in a position to calculate the production costs for plants converted to coal. Switching over to coal may be a valid option for existing naphta-based plants in China. However, we are not sure that the building of new large scale ammonia-urea plants based on coal would be economically viable.

CONCLUSIONS

The economic, environmental and technical advantages of natural gas as a feedstock for ammonia production are such that the world ammonia production will be increasingly based on natural gas. The world resources of natural gas are huge. Ammonia and fertilizer productions account for a rather small percentage of the total use of natural gas. The availability of natural gas for the production of fertilizers will therefore not be a constraint on a world basis. On the other hand, the locations of the main resources of low cost natural gas are becoming increasingly distant from the main ammonia and fertilizer consuming areas. This will lead to further increases in ammonia and fertilizer trade. However, in certain cases, long distance gas transportation by pipeline or as LNG will be the preferred alternative to ammonia and/or fertilizer transportation. Indeed, large fertilizer consuming countries cannot be supplied entirely through imports.

- International Fertilizer Industry Association - 11 -