WoodMac: Should gas resource holders target LNG exports or blue ammonia?

Scale derived from LNG investment is much higher, but profitability and payback periods make blue ammonia attractive

LONDON / HOUSTON / SINGAPORE, 15 June 2023 – As Europe moves away from Russian gas and Asia reduces its dependency on coal, demand and investment in liquefied natural gas (LNG) continues to rise. But according to “Stick or twist: Should gas resource holders target LNG exports or blue ammonia?”, a new Horizons report from Wood Mackenzie, the acceleration of the energy transition means gas resource holders increasingly face a choice: follow the established pathway and develop new LNG export facilities or pivot into developing blue ammonia.

“Demand for LNG is expected to grow by just under 70% over the next 25 years to reach 700 metric tonnes per annum (mmtpa) by 2050. But neither growth nor revenue is locked in for LNG. As the energy transition gathers pace, gas stakeholders are questioning whether longer-term demand for LNG is so assured,” said Giles Farrer, Head of Gas and LNG Asset Research and co-author of the report.

In Wood Mackenzie’s Accelerated Energy Transition* (AET-1.5) scenario, the world needs far less new LNG supply. The market will still need 160 million mmtpa of new LNG supply to be developed by 2040, but beyond this time, developers face the risk of declining prices and underutilisation as demand reduces to 500 mmtpa by 2050 under Wood Mackenzie’s AET-1.5 scenario.

Faced with these challenges, holders of undeveloped gas resources are now starting to consider alternative ways to monetise gas exports. Blue ammonia, produced from low emission hydrogen, generated through gas reforming with carbon capture and combining it with air-sourced nitrogen, has quickly risen to the top of the pile as a credible alternative to LNG for gas monetisation.

With the implementation of Europe’s Carbon Border Adjustment Mechanism (CBAM), ammonia prices are expected to increase by 60%, and low-carbon ammonia exports to Europe will become competitive against carbon-intensive alternatives.

“Momentum is building for blue ammonia. We see more and more projects – especially in the US Gulf Coast – looking to export blue ammonia to Europe and in many cases these are backed by major LNG players,” said Murray Douglas, head of hydrogen research at Wood Mackenzie, and co-author of the report.

The economics of LNG vs blue ammonia

In terms of size of the market, approximately US$250 billion of additional investment in pre-FID LNG liquefaction projects is required to meet Wood Mackenzie’s base case forecasts by 2050. In contrast, US$24 billion of investment is required for blue ammonia for exports. In Wood Mackenzie’s AET-1.5 case, the case for blue ammonia investment is much stronger, with US$80 billion required compared with US$160 billion for LNG.

“For those seeking scale over the next 15 years, the prize is still LNG rather than blue ammonia, but for profitability and value, blue ammonia could prove more attractive, although this of course depends on prices, costs and tax incentives,” said Douglas.

Apples-with-apples comparisons are difficult due to different commercial structures and relative taxation. However, when these differences are factored in, some clear high-level conclusions emerge:

The profitability and payback periods of blue ammonia investments could be much more attractive than LNG.

• This will in part depend on location and incentives available, with the US 45Q tax credit improving competitiveness against markets with lower nominal feedgas costs. Offering an additional boost to blue hydrogen economics is the pricing of carbon at the point of consumption.
• Export-led projects will look first to markets like Europe offering incentives such as CBAM. Locking in European demand through long-term contracts could deliver internal rates of return for blue ammonia that are higher than those of LNG, halving payback periods.

Douglas stated: “Shorter payback periods for blue ammonia could be particularly attractive for those with first-mover advantage in accessing Europe. And if the world was going to edge closer to Wood Mackenzie’s AET-1.5 scenario, lower LNG prices and higher carbon prices would further strengthen the attractiveness of blue ammonia vs LNG.”

Diversification into blue ammonia is a natural evolution for LNG developers and resource holders.

• LNG developers have already delivered projects and supported gas-intensive industries, such as grey ammonia, gas-to-liquid, methanol, aluminium, fertiliser exports, local power and so on. Blue ammonia can be viewed as further industrial diversification, with potentially better returns, report findings show.

Blue ammonia is not without its challenges, though. Green ammonia, produced from electrolytic hydrogen powered by renewables, is overwhelmingly considered the future of low-carbon ammonia.

“The window of opportunity is narrow. Blue ammonia will outcompete most green ammonia projects targeting FID this decade, but this gap closes beyond 2030 as the cost of renewable power and electrolysers continue to fall,” Douglas concluded.