Daily Chemical Reactions

You Sexy Thing – Issaquena Green Power Works To Untap The Potential Of Issaquena County, MS
October 7, 2022
Commodities Mentioned:
Plastics (PVC, PP, PE, PU, PC, PET, etc.), Clean Energy Minerals, Carbon Dioxide, Hydrogen, Natural Gas/NGLs, Crude/Naphtha
Companies Mentioned:
Issaquena Green Power, Nutrien, CF Industries, LSB Industries, Koch Fertilizer, BASF, Shell, AdvanSix, Scoular, SABIC, Solvay, TotalEnergies, Aukero, Chevron, CalBio, Fortescue, Incitec Pivot, Helm, Dow, Johnson Matthey, LG Chem, Posco, Neste, Freeport LNG, Barentz, Vopak, Orlen, Munich Re, Moog, Komatsu, Liberty Energy, Fusion Fuel, Technip Energies, Spolchemie, Enefit Green, The Andersons, NRG

Daily Chemical Reaction

You Sexy Thing – Issaquena Green Power Works To Untap The Potential Of Issaquena County, MS

Key Points:

  • Issaquena Green Power Co-CEO and C-MACC Partner Graham Copley will attend the Hydrogen Summit in DC, promoting our MS hydropower & green fertilizer project.
  • NW Europe natural gas prices have fallen from recent highs but remain significantly above US levels, helping to support global chemical prices and favor US production.
  • We highlight US ammonia margins relative to Europe and the benefits of ammonia-integrated urea and fertilizer production relative to riskier non-integrated production.
  • We discuss the global hydrogen market and views of the hydrogen cost curve by region in 2050. We also flag rising investments in hydrogen and derivative production assets.
  • We discuss recent Baltic Exchange Dry Index movements and WoW shifts in North American rail traffic. US Dollar strength also continues, moving in favor of imports.

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Exhibit #1: We highlight a basic clean energy flow chart supporting the build-out of our Issaquena Green Power project, which will ultimately include a hydropower development. The project targets the production of green hydrogen, ammonia, and fertilizer in the South Mississippi Delta.

Source: MDPI, October 2022

General thoughts. Issaquena Green Power was formed after noticing the substantial opportunities within Issaquena County, MS that would benefit the local population, state of Mississippi, and region if properly utilized. Does this face significant challenges? Absolutely, but it also holds significant rewards if successful. This project is targeting the production of low-cost green hydrogen, ammonia, and possibly fertilizer, benefiting consumers by increasing supply within these tight markets and also based mostly on an emission-free production chain/footprint. It will also put many people to work in Issaquena county, MS, which is one of the poorest counties within the poorest state in the U.S. The Issaquena green power project also strikes a number of relevant chords with recently issued gov’t policy as well. The project will be mostly based on hydropower, a much-needed but mostly untapped resource per recent IRA legislation, it fits in well with recently introduced green hydrogen legislation under the inflation reduction act (IRA), and it may extend downstream to apply for support from recently introduced USDA efforts to expand fertilizer production. Our feedback is that Issaquena Green Power will be the largest run-of-river industrial site globally. We highlight our recent FERC permit application acceptance in LINK. Early next week, C-MACC Partner and Issaquena Green Power Co-CEO Graham Copley will be in Washington D.C., to meet with government contacts and attend the Hydrogen America Summit. We urge interested parties to contact us to learn about the benefits of our multi-pronged, integrated, high-return project in Issaquena County. This report highlights the significantly higher natural gas prices in NW Europe and Asia relative to the US. This setting is providing a significant cost advantage for US producers of ammonia and fertilizer amid high prices, but it is also hurting our farming community in the form of elevated input costs. Of note, we estimate roughly 20% of global ammonia production sits in Russia/Europe and is currently impaired, with quick fixes to this situation unlikely. Our conversations with European producers suggest significant concerns in this area and that closures could last until feedstock costs become more competitive. The demand for hydrogen and ammonia is not only increasing in existing channels but also broadening. We foresee substantial growth in fuel and other industrial downstream application demand during the next two decades that will likely outpace available supply. We think our Issaquena Green Power project will help fill this gap. At the same time, we also take a positive long-term view of this market for existing producers, such as Nutrien, CF Industries, LSB Industries, Koch Fertilizer, AdvanSix, and peers.

Energy/Upstream:

As Europe nears capacity to store natural gas for the winter, it is not surprising to see less desperation reflected in spot LNG prices and as Freeport LNG ramps back up we could see either weaker prices in Europe or more demand from Asia. The rubber will hit the road as the weather cools and as the inventory drawdown begins in Europe with incremental LNG demand and pricing driven by how inventories are moving relative to expectations. There are plenty of variables here, but most are weather-related, not just temperature but also sunshine and wind speed as these will dictate renewable power availability. Shortfalls from wind and solar will drive higher coal and hydrocarbon utilization for power generation.

The “drilled but not completed” chart below highlights some of our concerns about US natural gas production going forward as the US is still not drilling at a high enough rate to keep pace with potential growth and offset decline rates. Oil and gas production has been boosted by completing already drilled wells since 2020, which makes sense, but as the inventory on uncompleted wells falls, the industry will become more dependent on new drilling to offset declines and then grow production to meet demand growth, much of which will come from the LNG initiatives listed below. Many US energy company still lack enough confidence in energy policy in the US to lift E&P spending.

Exhibit #2: NW European natural gas prices have fallen relative to Asia levels, despite a bit of a rebound mid-week, though both remain at significant premiums to US natural gas prices. We also highlight the upward movement in Brent Crude WoW

Source: Bloomberg, C-MACC Analysis, October 2022

Exhibit #3: Germany’s EnBW to Buy More Venture Global LNG in Ongoing Shift from Russia – NGI

Source: NGI, EIA, October 2022

Exhibit #4: Number of drilled but uncompleted U.S. wells continues to decline from record in 2020

Source: EIA – Today In Energy, October 2022

Supply Chain, Commodity Chemicals, & Chemical Sector News:

We have a heightened interest in fertilizer given our affiliate company, Issaquena Green Power’s plans to possibly make green fertilizer as part of a broader plan to make renewable power based green ammonia in Mississippi. While the focus in the market today is on increasing domestic supplies of fertilizer, in Europe and in the US, we see the green element as also important where it can be achieved economically – which today is difficult. All the potential new uses for ammonia will need low or zero carbon ammonia; shipping fuels, power generation, and as a hydrogen carrier, but some segments of farming are also interested. The measurable value comes in the carbon intensity score that green fertilizer provides for any corn, soy, canola, and other crops finding their way into renewable fuels. The ”net-zero” concept for sustainable aviation fuel relies on the idea that the process to make the fuel consumes as much carbon as the fuel produces when burnt – if you use traditionally manufactured Urea as a fertilizer, for example, that adds meaningfully to the carbon footprint of the corn you grow. The calls for “urgent” action are likely to fall short, as the timing to build a new ammonia and urea complex is long – especially where you might need to develop a new site or where you have long lead time items such as compressors.   In Europe, the industry would need significant subsidies to offset the high cost of natural gas, and while an ideal might be to run the existing ammonia units in Europe of hydrogen derived from electric power, the region is short of power, green or otherwise. The other issue with basing Urea production, for example, on electrolyzer derived hydrogen is that you do not have the CO2 to react with the ammonia (this would normally come from the SMR along with the natural gas derived hydrogen).  

Meanwhile, ammonia prices are strengthening again on the back of further shutdowns and cutbacks in Europe, and the calls for action, whether it is to produce more ammonia or to protect the farmers from the high prices, reflect the idea that the consensus is gravitating to the view of longer-term shortages. Note that in one of the charts below, the non-integrated Urea margin is close to zero.   In work that we did previously on ammonia – “Super Green” For Hydrogen – Not Quite Yet For The First Element  we suggested that other potential users of ammonia might be able to bid ammonia away from the fertilizer market. If this is the case, non-integrated Urea margins could remain at break-even.

Exhibit #5: Ammonia prices remain significantly higher than the 10yr average amid elevated production costs and supply issues.

Source: Bloomberg, C-MACC Analysis, October 2022

Exhibit #6: US ammonia margins are also elevated, mainly the result of the sizable US cost advantage relative to Europe.

Source: Bloomberg, C-MACC Analysis, October 2022

Exhibit #7: We highlight the higher margins and less volatility garnered by integrated urea production for fertilizer producers than non-integrated urea fertilizer producers that face a much more volatile ammonia market. A major benefit of the Issaquena Green Power project is that it will be ultimately a fully integrated site from green power to fertilizer, lessening long-term return risks.

Source: Bloomberg, C-MACC Analysis, October 2022

Sustainability, Clean Energy, Recycling & ESG:

It is good to see the Hydrogen Council, McKinsey chart below as it suggests that Issaquena Green Power is on the right track – making green ammonia in the US makes sense in the analysis. We are a little surprised by the positioning of hydrogen versus ammonia for most countries as transporting hydrogen is very expensive and if you have cheap enough power for hydrogen to make sense then you have cheap enough power to convert it to ammonia, which is easier to move around. The other confirmation from the analysis in the charts below is that a lot of current hydrogen noise is simply that – noise! Our analysis has always suggested that sources of cheap enough and abundant enough renewable power will be a challenge before 2030 and this will limit investment in green hydrogen, with so many of the recent announcements either focusing on plans for an undetermined point in the future or small pilot projects. The ramp in green hydrogen will only come after a ramp in cheap renewable power and we question whether the “hydrogen hub” ideas for the US and Europe should really be “renewable power hubs” first, as without the power infrastructure the hydrogen cannot happen cost effectively. We are optimistic that our Mississippi plans could impact supply before 2030, but as the saying goes, we have a lot of wood to chop. 

Exhibit #8: The Hydrogen Council and McKinsey estimate local hydrogen production is typically favored but adding conversion costs favors production of derivatives and trade from the cheapest locations. We show their cost curve estimates for 2050.

Source: Hydrogen Council, McKinsey, October 2022

Exhibit #9: The Hydrogen Council and McKinsey estimate after 2030, hydrogen investments will likely accelerate—and out of the $10 trillion in investments required by 2050, investments in trade-related infrastructure will account for $1.5 trillion.

Source: Hydrogen Council, McKinsey, October 2022

Exhibit #10: The Hydrogen Council and McKinsey estimate More than 1,000 ships and 200 million tons per annum (MTPA) of pipe-hydrogen capacity will be required by 2050 local hydrogen production is typically favored but adding conversion costs favors production of derivatives and trade from the cheapest locations. We show their cost curve estimates for 2050 above.

Source: Hydrogen Council, McKinsey, October 2022

Other Chemical Industry, Demand & Downstream News:

The strong US objection to the OPEC production cuts is a reminder of how fragile the global geopolitical balance is today. Higher oil prices are good for the US as a net energy exporter, and they are good for the environmentalists as they create a margin umbrella which incentivizes renewable fuel and power initiatives. But high oil prices are a major contributor to inflation and inflation is the most pressing issue on the agendas in the US and Europe today. As we have noted in prior work, maintaining power as a political party during a time of high inflation is extremely challenging, and regardless of how you feel about energy transition or local trade balances, or the strength of the dollar, failing to address inflation, where you can, is politically very risky. Several of the headlines below reflect the growing political instability as each country looks out for its own best interest in a very uncertain market. We still believe that much of the Saudi reasoning for the oil cut is based on a very negative view of the global economy and oil demand as a consequence. None of those calling out Saudi Arabia and OPEC is likely to endorse the negative economic view that might be behind the oil move as it would be equally unpopular politically.

Exhibit #11: Rising rates send Baltic dry bulk index to 10-week peak

Source: Bloomberg, C-MACC Analysis, October 2022

Exhibit #12: Total combined weekly rail traffic in North America was 687,974 carloads and intermodal units, down 1.1 percent. North American rail volume for the first 39 weeks of 2022 was 26,388,292 carloads and intermodal units, down 2.3 percent compared with 2021. North American Chemicals is one of four sectors seeing YTD growth in rail traffic YoY.

Source: Association of American Railroads (AAR), October 2022

Exhibit #13: The US Dollar continues to strengthen, which we view as a plus for imported product demand but a negative for exports beyond Energy that are not seeing significantly higher prices abroad. We also flag the continued march upwards in US interest rates by showing the rise in mortgage rates, which we think supports our case for falling shelter, food, and consumer good affordability.

Source: Bloomberg, C-MACC Analysis, October 2022

Other Relevant Headlines

Energy/Upstream:

Supply Chain, Commodity Chemicals, & Chemical Sector News:

Sustainability, Clean Energy, Recycling & ESG:

Other Chemical Industry, Demand & Downstream News:

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