Brazil’s nitrogen industry

BRAZIL

Brazil’s nitrogen industry

Brazil is the main centre for new nitrogen demand in Latin America, but in spite of major oil and gas discoveries in the 2000s, has failed to develop a downstream nitrogen fertilizer industry.

Brazil represents about half of South America’s 420 million people, and 80% of the region’s GDP. Although it is resource rich, the past decade has been a difficult time for Brazil. During the 1990s the Plan Real turned around what had been an economy plagued by inflation and debt, and it was tipped in 2001 as one of the nations to watch – the ‘B’ on in the ‘BRIC’ countries. By 2010 it was one of the fastest growing economies in the world, buoyed by a commodities boom and a consumer binge that lasted into 2012.

By 2013, however, the economy was shrinking, with exports hit by a contraction in the commodity sector, and in 2014 the country entered the worst recession in its history, which lasted until 2017. The past two years have seen only relatively sluggish growth, and political turmoil as the Operation Car Wash corruption scandal led to the jailing of one former president, the impeachment and removal of a second, and the arrest of a third, and the election of controversial populist president Jair Bolsonaro in late 2018.

Oil and gas

Although its oil and gas reserves were relatively small compared to the size of the country, between 1995 and 2005, huge offshore discoveries tripled Brazil’s proved oil reserves to 12 billion barrels, and another 3 billion barrels have been discovered since; the so-called pre-salt layer off the Brazilian coast has been the largest conventional oil discovery this century. Unfortunately, exploiting these reserves has proved problematic, not least because the sheer scale of them was a tempting target for corrupt government officials, and Brazil’s state oil company Petrobras consequently found itself at the centre of the Operation Car Wash investigations.

Since the scale of the problems became clear, successive governments took steps to try and rein in the huge company. Upstream, Brazil has been inviting more foreign participation, ending the Petrobras monopoly on the offshore pre-salt deposits via a law in 2016. In 2018, there were also changes to Brazil’s rules regarding minimum percentages of locally-sourced goods and services required in exploration and production contracts, known collectively as the ‘Local Content’ rules – reducing mandatory Brazilian participation by half, which also allowed greater use of floating production, storage and offloading (FPSO) units – some 36 are planned to help develop an estimated 21 billion barrels of oil equivalent in stranded oil and gas resources out to 2027.

Brazil’s oil production was 2.7 million bbl/d by late 2018 (up from 2.0 million bbl/d in 2013), but the country hopes to lift this to 5.5 million bbl/d by 2028, most of this offshore, to counter falling onshore domestic oil production. On the gas side, Brazil produces 70% of its 35 bcm per year of natural gas requirements, with the rest coming either from pipeline via Bolivia (22%) and the remaining 8% from LNG imports from the US, Trinidad, Nigeria and elsewhere.

Brazil hopes to increase gas’ share of electricity production, and aims to collect and use more offshore gas. Gas production has risen at 9% year on year over the past decade, but about two thirds of gas is associated gas from oil production, and a large proportion of this is reinjected into oil reservoirs because of lack of export infrastructure, especially from the major sub-salt fields. This lack of export infrastructure acts as an effective cap on oil output, with subsalt fields often containing gas-to-oil ratios of 40% or more. Around 1.3 bcm of gas is also still flared every year.

Petrobras controls 85% of gas production and infrastructure, and last year, Brazil announced plans to break up Petrobras’ stranglehold on gas distribution infrastructure. It is hoped that a wave of privatisations among the 19 Petrobras owned state-controlled distribution companies (out of 27 total) will lure in international and domestic bidders. Petrobras has struck a deal with the government to sell off its gas transportation and distribution assets by 2021. There are also moves to diversify sources of gas by removing restrictions on unconventional gas production in Brazil and boosting pipeline imports from Argentina.

Nitrogen demand

Brazil is one of the world’s largest agricultural producers, the largest exporter of coffee and sugar, and the second largest exporter of soybeans. Brazilian sugar cane ethanol also supplies a large proportion of Brazil’s fuel needs. The country is also the world’s fourth largest consumer of fertilizers. Brazil’s relatively poor soils need extra application of fertilizers to achieve sufficient agricultural productivity. Overall Brazilian nitrogen demand represents about 60% of that for the whole of Latin America, and this is serviced particularly in the form of urea – Brazil’s demand for urea reached 6.3 million t/a in 2018 (2.9 million tonnes N), according to IFA figures.

Agroconsult estimates that total fertilizer deliveries in Brazil reached 36.6 million t/a in 2019, 3.2% up on 2018. Poor weather in the US and the ongoing trade dispute with China affected US soybean and corn plantings, supporting a corresponding increase in Brazilian plantings, and lower dollar exchange rates encouraged overseas purchases. This year, however, the Convenio 100/97 agreement is due to expire; a series of tax breaks on sales of agricultural inputs such as pesticides, seeds and fertilizers, and as a new extension requires the unanimous approval of every state, it is currently unlikely that the existing agreement will be extended, leading to increases in fertilizer costs.

Nevertheless, as more area is brought into cultivation, plantings of soybeans and corn are expected to increase over the next few years, boosting Brazil’s demand for fertilizers. Demand for nitrogen in Latin America is forecast to rise from 4.1 million tonnes N in 2018 to 4.5 million tonnes N in 2023, according to IFA, with Brazil responsible for most of that increase in demand.

Nitrogen production

Lack of gas availability has crimped Brazil’s development of a domestic nitrogen industry in spite of its huge need for fertilizer and dependence on agricultural export commodities. By 2017, Brazil had four operating nitrogen complexes – two producing urea, owned by Petrobras, at Camacari and Laranjeiras, and two built by Fosfertil at Cubatao and Araucaria – the latter produced urea, but Cubatao was an ammonium nitrate plant, mainly producing industrial grade AN for the mining industry. The Fosfertil plants were bought first by mining company Vale, although Vale sold the Araucaria plant to Petrobras in 2012, and the Cubatao plant to Yara in 2017, before the remainder of Vale Fertilizantes was bought by North American producer Mosaic for its phosphate assets. Yara now operates the Cubatao plant to produce nitric acid, industrial grade ammonium nitrate and some technical grade urea.

Brazilian agriculture continues to expand.

During the 2010s, Petrobras had ambitious plans to develop three new fertilizer complexes, at Linhares, Uberaba and Tres Lagoas, at a total cost of $6.5 billion, with the strategic goal of reducing or ending Brazil’s dependence on nitrogen fertilizer imports. However, the lack of additional natural gas availability, and the downturn in the economy first led to the Linhares project being cancelled, the Uberaba project postponed and work at Tres Lagoas, where a 720,000 t/a ammonia plant and 1.2 million t/a urea were reportedly 80% complete, being halted in 2014. In the wake of the Operation Car Wash scandal and its need to shed billions of dollars in debt and non-performing assets, Petrobras also announced the closure of the Camacari and Laranjeiras plants in 2019.

The closure of Camacari and Laranjeiras has removed another 1.02 million t/a of urea capacity from Brazil. Petrobras has been in negotiations with Russian fertilizer producer Acron to divest its nitrogen plants – Acron was reportedly considering buying and refurbishing the plants, using natural gas imported across the border from Bolivia, and inked a provisional gas supply agreement with Bolivian state gas producer YPFB in July 2019. However, Bolivia itself has been in political disarray following weeks of protests that led to the resignation of president Evo Morales in November, and work on exploration and development of new gas wells to replace ageing and declining production has been suspended. Cross-border talks with Brazil on gas trade have also been put on hold. As a result, Acron pulled out of talks on buying the idled plants in November 2019, and while Petrobras says that it “remains committed” to finding a buyer for the assets, there is no-one in the frame at the moment.

The closure of Camacari and Laranjeiras leaves Araucaria, with a capacity of 660,000 t/a of urea, as the only nitrogen fertilizer plant currently operating in Brazil, and there are no new project developments on the horizon. On January 15th, as this article was going to press, Petrobas announced that it would also be closing the Araucaria plant by September 2020.

Nitrogen imports

The upshot of the closures of the urea plants and the continuing increase in demand for nitrogen projects in Brazil has been a surge in import demand – Brazil had already been one of the fastest growing markets for urea imports – imports rose during the 2010s from just under 3 million t/a in 2012 to 5.5 million t/a in 2017. In 2018 this figure rose to 5.9 million t/a, and the closures at Camacari and Laranjeiras during 2019 led to this rising 7% to 6.3 million t/a in 2019. The figure for 2020 is likely to be higher still, and with no new domestic capacity being built over the next few years, it is forecast to rise another 400600,000 t/a to 2023. The closure of Araucaria will add another 600,000 t/a to this. In 2018 most of Brazil’s imports came from Algeria (19%), Russia (19%), Egypt (10%) and the various Arab Gulf countries (35%), with the rest of the world making up the remaining 17%.

In the meantime, blending and distribution in Brazil has become big business, with around 80% of the fertilizer distribution market held by just four large, vertically integrated companies; Yara, Mosaic, Fertipar and Heringer. EuroChem opened a third blending plant in Brazil in 2019.