Nitrogen+Syngas 375 Jan-Feb 2022
31 January 2022
The current crisis in global gas markets
FEEDSTOCKS
The current crisis in global gas markets
Recent spikes in natural gas prices, particularly in Europe, have highlighted the tightness of natural gas markets around the world going into the northern hemisphere winter. Are ammonia and methanol producers on for a run of high gas prices in 2022?
Ammonia and downstream markets have been dominated by a run-up in natural gas prices over the past few months. Notwithstanding all of the announcements of experiments or pilot plants using electrolysis to generate hydrogen feeds, natural gas remains the key raw material for ammonia production outside of China, where coal-based capacity still predominates. Each tonne of ammonia requires typically at least 36 MMBtu of natural gas, and so the price of gas is a key determinant of the cost of ammonia production.
Last year’s gas price run began in Europe, escalating throughout September and October. The continent had seen record low gas prices in June 2020, as coronavirus lockdowns and mild summer weather reduced demand for natural gas. However, returning demand as lockdowns eased in mid-2021 combined with a variety of factors to push prices steadily higher, including a colder than average winter in 2020-21 which left storage depleted, followed by a hot summer that increased demand for power for air conditioning, and a prolonged period of still air which led to low output from Europe’s large wind-powered electricity generation sector. This in turn led to more gas-fired power being used, at the same time that Russian supply remained relatively slack, in part due to pandemic-delayed maintenance on pipelines, something which also constricted supply from Norway. Problems were exacerbated in the UK by a fire at an electricity station handling a cross-Channel power cable which left the country unable to balance power generation with imports from France, where nuclear energy still predominates. The UK has low gas storage capacity and was forced to re-start its last coal fired power station in the autumn. Supplies from the key Dutch Groeningen gas field are also being wound down because earth tremors – see the article on that elsewhere in this issue.
The result has been something of a perfect storm for gas prices. The Dutch TTF gas benchmark, which stood at as low as $1.50/MMBtu in summer 2020, stood at $6.55/MMBtu in March 2021, but had climbed to $35/MMBtu by October 2021, equivalent to a cash cost for ammonia producers of over $1,000/t. Ammonia prices did not keep pace with soaring gas costs, at least to begin with, and this led to a wave of shutdowns across the continent. On September 15th, CF Industries announced that it was halting operations at both its Billingham and Ince fertilizer plans in the UK, although the government said it would provide financial support to keep the Billingham plant running, as these plants supply most of the UK’s carbon dioxide for food and drink manufacture. BASF closed its Antwerp and Ludwigshafen plants in Belgium and Germany, Fertiberia ceased production at its Palos de la Frontera site in Spain, and Puertellano remained down for scheduled maintenance. Yara shut 40% of its European ammonia production in September, and OCI partially closed its Geleen plant in the Netherlands. Achema in Lithuania decided against restarting its ammonia plant following maintenance in August, and OPZ in Ukraine shut one ammonia line at Odessa, with Ostchem and DniproAzot likely to follow.
European gas prices actually dropped back from their highs during November due to milder weather and a number of LNG cargoes arriving. Prices dropped back to around $25/MMBtu, at the same time that ammonia prices were reacting to the shutdowns and rising – to over $1,100/t c.fr northwest Europe in December – allowing a number of plants to restart production. Yara said that by December 15th, most of its 4.9 million t/a of European ammonia capacity was back on-stream. However, with the Russian Yamal pipeline out of action, gas prices spiked again in December – Dutch TTF forward rates actuallytouched $60/MMBtu before dropping back to $45/MMBtu going into the New Year.
European gas
Europe’s gas woes are mainly down to structural issues with its market. Although the continent has gradually liberalised its gas market and reduced dependence on oil-indexed pricing, which had previously left prices dependant on the vagaries of the international oil market, Europe’s dependence on imported natural gas continues to increase. In particular, in spite of attempts to diversify its supply, it remains highly dependent on imports of gas from Russia. Gas has become more important in Europe’s overall energy mix due to stricter climate and energy policies. The EU Emissions Trading Scheme (ETS) sets a price for carbon emissions from power generation and large-scale industry which has eliminated most of the continent’s coal-abased generation capacity. Most EU member nations are also winding down their nuclear power programmes. While there has been a considerable increase in power generation from renewable sources, these are often intermittent by nature, and base load generation therefore relies upon natural gas.
Europe’s own gas production is also in long-term decline, both due to falling output from fields in the North Sea, Romania and elsewhere, but also due to that move away form fossil fuel generation, as well as the seismic issues with the Groeningen gas field as mentioned previously. To mitigate against this, Europe has increased its gas storage capacity, to hold gas in case of price shocks or supply disruptions. However, by June 2021 the previous cold winter and lack of supply from Russia meant that storage was less than half full; the lowest summer levels in a decade. Europe has also dramatically increased its capacity to import gas by sea as LNG, and takes large cargoes from the US, Qatar, Nigeria and Algeria. But in spite of this, Europe remains dependant on gas imports for about 2/3 of its gas requirements, much of that still comes from Russia. Europe imported 330 bcm of natural gas in 2020, according to BP figures, of which only about one third (115 bcm) was as LNG. Of the remainder, 167 bcm came via pipeline from Russia, or 50% of total imports.
Geopolitics
Geopolitics plays its role in the crisis as well. Because of tensions between Russia and Europe over issues such as Ukraine and NATO expansion, there is a suspicion that president Putin is using ‘the gas weapon’ again – restricting supplies of natural gas to put political pressure upon European governments. Russia has cut supplies of gas to Europe before, during gas payments disputes with Ukraine in 2005-6 and 2008-9, as well as during the Crimea crisis of 2014, with knock-on effects for European prices. Russian exports to Europe were running around 15% below capacity during 2021.
One bone of contention is the recently completed NordStream 2 pipeline. Ironically, this has been built to give Russia more of an option to maintain supplies to Europe at times when the gas supply to Ukraine may be interrupted. Previously around 40% of Russian gas reached Europe using pipelines through Ukraine. However, Germany has dragged its feet on signing off on NordStream 2, perhaps worried that it would presage further Russian pressure on Ukraine.
There are also pricing disputes with Europe. European consumers have gradually forced Russia’s state gas supplier (and monopoly exporter) Gazprom to give up oil indexation of gas pricing and long term fixed price contracts for sales to Europe and accept a spot price model instead. Europe also wants other private Russian gas companies, such as Novatek, to be able to use NordStream 2, something Gazprom is resisting.
But most of all, it is the ongoing stand-off between Russia and the US and its allies over Ukraine which is playing into the current gas price crisis. With 100,000 Russian troops on or near the Ukrainian border, and inconclusive talks with the US in early January, European gas prices have risen by 30% on concerns that supplies could be interrupted were the conflict to turn hot.
Elsewhere
While this winter’s gas price crisis has been a largely European affair, it has not been exclusively so. Northeast Asian demand for LNG has also been running at high levels, helping LNG prices to peak in December at $48/MMBtu, before falling back to $33/MMBtu at the end of the year. With Australia exporting a record amount of LNG in 2021, this has also had a knock-on effect on gas prices in some parts of Australia. However, in North America, gas production continues to be unaffected, and Henry Hub prices remain below $4.00/ MMBtu.
As far as ammonia prices go, soaring European prices have dragged up prices all around the world, beginning with Black Sea prices, where supplies are mainly destined for Europe, reaching record prices of above $1,000/t f.o.b. This in turn has led to US Gulf Coast c.fr ammonia prices reaching $1,000/t in December, and likewise Middle Eastern f.o.b. prices. With European prices so high, Middle Eastern producers have supplied only contract volumes to Asian consumers and sent cargoes west through Suez instead.
For producers with fixed or relatively low gas costs, this has been a bonanza. In the US and Middle East, producers are able to take advantage of high product prices at the same time that gas prices remain low. Not everyone has been able to take advantage of this, however; Trinidadian producers have been committed to long-term supply contracts and have only been able to sell small ammonia volumes on the spot market. But for markets which rely upon imported ammonia, such as India, or industrial consumers in e.g. Taiwan and South Korea, it is unwelcome price pressure on operations.
Where do we go from here?
This will be a difficult season for European ammonia producers. If gas prices remain high, it may be possible for ammonia prices to fall to a point where nitrate plants can be run on imported ammonia. Platts has suggested that there may be a tipping point around $680/t ammonia (equivalent to around $18/MMBtu gas). But there is likely to be demand destruction among natural gas consumers, and indeed on nitrogen consumers. The main impact of high nitrogen prices is likely to be felt in lower applications of fertilizer for the coming year, and/or higher costs to farmers which will be passed on to consumers as higher food prices. Nitrogen application has a particular impact upon wheat, rice and corn production – most nitrogen fertilizer goes to produce these staples. European applications of nitrate for winter wheat are already down, and a prolonged run of high prices for urea will start to impact Asia in a couple of months.
Governments worldwide are starting to intervene to mitigate this as much as possible; India is looking to subsidise urea costs to farmers, for example. Higher food prices are already being felt worldwide as a result of covid-related supply chain disruptions and increased demand for biofuels. Lower yields due to lower nitrogen applications and high input fertilizer prices are likely to exacerbate this and may cause domestic issues for governments. The last time that food and fertilizer prices spiked this high, in 2008-9, it led within a year to the ‘Arab Spring’. Kazakhstan has already faced riots in the past few weeks due to high energy prices.
Impact on renewables
One of the so far mostly overlooked consequences of the current price environment could be a fresh look at renewable energy and how it might impact upon both the power and chemicals sectors. Europe has already tightened its climate goals for 2030 and 2050, leading to the EU’s carbon price under the Emissions Trading Scheme rising from about e30/t at the start of 2021 to over e60/t. While this is a substantial increase, the European Commission estimates that, since early 2021, the impact of wholesale gas price increases on electricity prices is nine times greater. It seems by no means certain that natural gas will continue to be the cheapest feedstock for ammonia production, certainly in Europe. Longer term, there are measures that Europe can take to try and mitigate high gas prices; joint gas storage facilities, coordinated buying, greater hedging against price fluctuations, more storage capacity etc. But that dependence on Russia is unlikely to be broken in the medium term. Continued economic growth in Asia is likely to keep LNG prices high and continue to leave Europe at the mercy of Russian gas imports.
Meanwhile, even with less wind than usual in northern Europe, renewables reached 42% of the EU energy mix from April-June 2021, compared to 32% for fossil fuels. Increasing this further would require substantial investments in electricity storage or ways of converting that power during periods of excess, perhaps stored as hydrogen or ammonia, perhaps feeding into a wider European distribution system for ammonia. It has certainly been suggested that increasing renewable generation could help break Europe’s cycle of dependence on imported natural gas. Overall, this winter’s price crisis seems likely to accelerate European moves towards greater use of renewables.
Nor is it solely Europe where such considerations are being made. Incitec Pivot had made a determination to close its Gibson Island ammonia plant at Brisbane in Queensland because of high natural gas prices. Now however it is conducting a study with Fortescue Future Industries on a potential conversion to wind and solar based hydrogen from electrolysis.
