Fertile Prospects for Natural Gas – Can Ammonia Soak Up Bakken Gas Surplus?

US nitrogen based fertilizer prices are currently at record levels as a result of high demand from farmers. Farm demand for fertilizers is driven by crop prices. The Midwest drought this year has pushed corn prices through the roof, creating strong demand for fertilizer to improve crop yields. Nitrogen fertilizers are derived from ammonia – largely produced using natural gas. The current cost to produce ammonia from natural gas is about $98/ton. With farmers in Iowa paying over $800/ton for fertilizer this month producer margins are extremely attractive. One company is pushing a new “mobile” technology to make fertilizer from surplus natural gas in the Bakken.  Today we look at fertilizer market fundamentals.

Making Ammonia for Fertilizers

Most forms of nitrogen fertilizer (ammonia, urea, ammonium nitrate and solution liquid fertilizers) are made with anhydrous ammonia. Anhydrous ammonia (82 percent nitrogen) is the most concentrated nitrogen fertilizer. The Claude-Haver ammonia synthesis process is the most common way to make anhydrous ammonia. The process combines natural gas, water and air at very high temperature (about 900 ºF) and pressure (between 200 and 1,000 atmospheres) to create anhydrous ammonia gas (see process diagram below).  Natural gas is used both as a raw material to react with air and supply hydrogen and as a fuel to create the necessary heat and pressure. Manufacturing 1 ton of anhydrous ammonia fertilizer requires approximately 33.5 MCF or 34.4 MMBtu of natural gas.

Source: www.candianfertilizers.com

Fertilizer Prices

The price of anhydrous ammonia has recently surged over $800/ton in the US. Higher prices have been driven by increased demand for corn by American farmers in large part due to tax incentives to produce ethanol from corn (see The RIN and Stimpy Show – Crushing Pain and Mandate Madness” for more on ethanol and corn prices). This year the price of corn has reached record levels because of poor harvest prospects following a Midwest drought. At the same time, the price of natural gas fell to 10 year lows in April of this year because of surging production and has remained close to or less than $3/MMBtu since then. The chart below shows Chicago Board of Trade (CBOT) corn prices (blue line, left axis) and natural gas NYMEX (red line, right axis) for the past 3 years. 

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