Analysis: Pupuk Indonesia’s Clean Strategy Towards Blue and Green Ammonia

Company Focus Analysis

Pupuk Indonesia’s Clean Strategy Towards Blue and Green Ammonia

By: William Jhanesta

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Pupuk Indonesia’s Clean Strategy Towards Blue and Green Ammonia

During the recent International Convention on Indonesia Upstream Oil and Gas (ICIUOG) 2023 held by SKK Migas in Bali, the state-owned fertilizer holding company, PT Pupuk Indonesia (Persero), announced their plans and strategies to reduce carbon emissions in chemical industry through blue and green ammonia initiatives. Currently, studies and assessments are being conducted in collaboration with various partners, including E&P-related companies and renewable players. However, it is important to note that both the blue and green ammonia projects are capital-intensive and require various forms of support to operate economically.

Snapshot of Ammonia Production by Pupuk Indonesia in Indonesia

Indonesia is currently the world's fifth-largest ammonia producer and aims to become a leading producer of premium ammonia products. The largest contributor that positions Indonesia as a significant player in the global ammonia market is Pupuk Indonesia. With its extensive experience and expertise in ammonia production, Pupuk Indonesia plays a pivotal role in driving the country's ambition of becoming a prominent producer of high-quality ammonia. This strategic position places Indonesia at the forefront of the ammonia industry, allowing it to cater to the growing demand for ammonia-based products both domestically and on the international stage.

Figure 1: Global Ammonia Production by Country in 2022.

Source: Statistica

Figure 2: Existing ammonia production by Pupuk Indonesia as of October 2023.

Source: PT Pupuk Indonesia (Persero)

Based on the company's recent report, Pupuk Indonesia currently produces approximately 7.09 million tons per annum (MTPA) of ammonia from its five production plants in Indonesia, namely in Aceh, South Sumatra, West Java, East Java, and East Kalimantan.

Pupuk Kalimantan Timur in Bontang, East Kalimantan Province, is the largest ammonia plant owned by Pupuk Indonesia, with the current capacity of 2.74 MTPA, representing 42% of Pupuk Indonesia's ammonia production. This figure has the potential to nearly double in the next two decades, in line with the development plans for blue and green ammonia.

In addition to ammonia, Pupuk Indonesia also produces fertilizer products for agriculture and plantations including urea, NPK, SP-36, ZA, and ZK and non-fertilizer products such as phosphoric acid and sulfuric acid. The total production of the fertilizer products reaches 14.02 MTPA, while non-fertilizer products amount to 8.69 MTPA, including ammonia.

Blue and Green Ammonia Initiatives: The Company Future Plan

As the largest fossil-based ammonia producer in Southeast Asia, Pupuk Indonesia has a mission to decarbonize fertilizer industry and developing clean chemical business through development of blue and green ammonia to achieve carbon neutrality.

Existing facilities have the potential to be converted into blue ammonia. The conversion from grey to blue ammonia does not require significant modifications since it essentially uses the same raw materials and processing methods. However, the system needs to be integrated with carbon capture facilities. The captured carbon is then stored in geological storage, which can be either a depleted reservoir or a saline aquifer located within the oil and gas blocks.

Figure 3: Simplified diagram of blue and green ammonia production.

Source: Petromindo Analysis

For the production of green ammonia, Pupuk Indonesia needs to establish a new production system. The commonly used technology is water electrolysis, which splits water into hydrogen and pure oxygen as a byproduct. The clean hydrogen produced is then used as a raw material, along with nitrogen, to generate clean and low-carbon ammonia. Additionally, Pupuk Indonesia must ensure that the electricity used to operate the electrolyzer comes from renewable energy sources to categorize the resulting hydrogen as a green product.

As of October 2023, Petromindo notes that there are at least 17 blue, hybrid, and green ammonia plants planned by Pupuk Indonesia for the next three decades. These 17 clean ammonia plants are distributed across six locations, with five of them located in existing plants, as shown in Figure 4, and one new location in Maluku that is set to be developed soon.

Figure 4: Future Plan of Clean Ammonia Initiatives in Indonesia by Pupuk Indonesia.

Source: PT Pupuk Indonesia (Persero)

The total planned development of clean ammonia by Pupuk Indonesia is estimated to reach 11.31 MTPA, nearly two times the capacity of existing grey ammonia production plants. Pupuk Iskandar Muda (PIM) in Aceh is the largest development site for clean ammonia, with approximately 3.33 MTPA or 31% of the total planned blue and green ammonia initiatives.

Notable Clean Ammonia Projects

Out of the 17 clean ammonia plants, three plants have made notable progress; PIM blue ammonia, Petrokimia Gresik (PKG) hybrid green ammonia, and Masela blue ammonia. Petromindo delves into more detail for these projects and provides estimates on their potential development moving forward.

Aceh Blue Ammonia

PIM, a subsidiary of Pupuk Indonesia, is collaborating with Japan's Mitsui & Co Ltd in the development of the first blue ammonia plant in the country. PIM and Mitsui have already completed the pre-technical and commercial feasibility study for blue ammonia in Lhokseumawe.

The study is now progressing to the detailed feasibility study and geological subsurface assessment in the Arun field for the implementation of CCS. The ongoing study is expected to be completed by the end of this year.

The geological storage that will be utilized by PIM for the blue ammonia project is a depleted reservoir in the Arun field. PT PEMA Aceh Carbon (PAC), a joint venture between PT Pembangunan Aceh and Carbon Aceh Pte Ltd, will serve as the operator of the carbon injection field. PIM estimates that the CO2 they will deliver to PAC for storage will amount to 26.81 million tons for 25 years of blue ammonia plant operation, which is approximately 3.3% of the Arun field's capacity.

Figure 5: Blue Ammonia Development Plan in Aceh.

Source: PT Pupuk Indonesia (Persero)

The 825,000 TPA blue ammonia plant is expected to commence operations in 2029. To achieve this target, PIM will require a natural gas supply of 71 BBTUD. Pupuk Indonesia's top official recently mentioned that they hope the gas supply can be sourced from Andaman I and Andaman II blocks, which are currently in the exploration phase.

Director General of Oil and Gas at the Ministry of Energy and Mineral Resources, Tutuka Ariadji, said last year that Harbour Energy was expected to submit the first Plan of Development (POD) in 2025 with the aim of commencing production in the Andaman II block in 2028.

If it successfully secures gas supply from the Andaman blocks, PIM plans to build a 7-km new pipeline and utilize a 30-km stranded existing pipeline to facilitate the gas transport.

Gresik Hybrid Green Ammonia

Pupuk Indonesia recently announced a collaboration with state-owned electricity firm PT PLN (Persero) and UAE-based ACWA Power to jointly develop an integrated green hydrogen and ammonia facility in Gresik, East Java Province. In the initial stages, PKG, a subsidiary of Pupuk Indonesia, will construct a 33,000 TPA hybrid green ammonia plant as part of this initiative.

PLN and ACWA Power will collaborate to provide green electricity to the ammonia plant. A total of 200 MW of renewable electricity is expected to be developed, not only for the initial phase but also for future ammonia plants. The 200 MW of renewable electricity will be sourced from a 120 MW Pamekasan solar plant and the remaining 80 MW from the Banyuwangi-1 wind power plant.

Figure 6: Green Ammonia Development Plan in East Java.

Source: PT Pupuk Indonesia (Persero)

According to Petromindo's records, the electricity tariffs for wind and solar power in Indonesia vary from USD 5 cents/kWh to USD 12 cents/kWh, which are still relatively high for producing green ammonia at competitive prices. It is not yet clear how much PLN and ACWA will charge Pupuk Indonesia for the project’s electricity generation. If the electricity tariff subjected to Pupuk Indonesia remains above USD 5 cents/kWh, they should consider selling green ammonia at a premium price to cover their margins.

Currently, Pupuk Indonesia, PLN, and ACWA are still in the technical and commercial feasibility study phase. The signing of the Joint Development Agreement (JDA) is targeted to take place during COP-28 in Dubai this coming December. The financial close of the project is expected to be completed before the end of the year.

Masela Blue Ammonia

To support the downstream oil and gas program, Pupuk Indonesia plans to build a petrochemical plant on Yamdena Island, Maluku Province. In terms of gas supply, Pupuk Indonesia will be supported by INPEX Corporation, which is currently developing the Abadi gas project in the nearby area.

In addition to natural gas supply, Pupuk Indonesia and INPEX will also collaborate on the shared use of carbon capture and storage (CCS) facilities. The current study is ongoing and is expected to be completed, followed by pre-FEED activities, in 2025.

Figure 7: Blue Ammonia Development Plant in Maluku.

Source: PT Pupuk Indonesia (Persero), Petromindo Analysis

The blue ammonia plant with a capacity of 660,000 TPA is targeted to commence operations in 2030, which is one year after the expected on-stream date of the Abadi Masela gas project in 2029.

Pupuk Indonesia's strategy of going to the gas source, in this case building a petrochemical plant close to the Abadi gas project, is quite commendable. Furthermore, with the involvement of Pertamina, a government-controlled company, in Abadi project, Pupuk Indonesia might have an easier time securing gas supply from the Masela block. This strategic approach strengthens Pupuk Indonesia's position in ensuring a stable and reliable gas supply for their operations.

Furthermore, the opportunity to develop CCS facilities in Masela has been well seized by Pupuk Indonesia, enabling them not only to develop grey but also blue ammonia. Given the still-high transportation costs for CO2 in the country, Pupuk Indonesia can work on cost optimization in this sector to cover the expensive injection cost. This condition leads to a situation where the challenges faced by Pupuk Indonesia may not be as complex as those encountered by other blue ammonia projects in Indonesia.

Potential Market of Blue and Green Ammonia as Clean Chemical and Energy

Pupuk Indonesia is highlighting the potential market for clean ammonia, both on a global and Indonesian level, and believes that there are highly attractive opportunities in the context of clean chemical and energy industries. They estimate that the demand for blue and green ammonia in the global market from 2030 to 2050 will be predominantly driven by the power generation sector (ammonia co-firing) and the shipping sector (marine fuels).

In Indonesia, particularly in the Nusantara Capital City (IKN), Pupuk Indonesia identifies significant growth in demand. The use of clean ammonia in this new capital city is expected to be crucial in meeting various needs, including transportation, city gas supply, power generation, and the green steel industry. It highlights the versatile applications and potential of clean ammonia in supporting sustainable development and clean energy initiatives.

This potential creates significant opportunities for the growing domestic clean ammonia industry, which can play a crucial role in supporting sustainable growth and addressing future climate change challenges. The development of a robust clean ammonia sector can contribute to reducing carbon emissions, promoting environmental sustainability, and advancing Indonesia's position in the global clean energy landscape.

Table 1: World Clean Ammonia Demand Forecast.

Source: PT Pupuk Indonesia (Persero)

A Financial Outlook: The Reality of Clean Ammonia at Pupuk Indonesia

In evaluating Pupuk Indonesia's financial capability for their clean ammonia program, we can examine the consolidated financial statements of the company. As of June 30, 2023, Pupuk Indonesia has total assets amounting to USD 10.29 billion, which is divided into USD 5.08 billion in current assets and USD 5.21 billion in non-current assets.

Price Assumptions

The cost data published for the clean ammonia development plan is quite limited. However, investment costs generally refer to estimates ranging from USD 600 to USD 1,000 per ton of ammonia, depending on natural gas prices, electricity tariffs, and other supporting cost components. The assumptions made below are rudimentary hence further study is needed.

Cost Simulation

With the assumption that the natural gas price refers to Specific Natural Gas Price (HGBT) at USD 6 per MMBTU, CCS costs around USD 50 per ton of CO2 emitted from natural gas-based ammonia production, and the tariff for renewable energy is USD 6 cents per kWh for green ammonia, the total investment required by Pupuk Indonesia to realize their entire clean ammonia initiative is estimated to be USD 8.24 billion.

Figure 8: Estimated of Total Investment Cost Required by Pupuk Indonesia for Clean Ammonia Initiatives.

Source: Petromindo Analysis

To finance this project, Pupuk Indonesia is likely to seek green financing or other loan facilities in a ratio of 70:30 (70% loan and 30% equity). It means that Pupuk Indonesia will need to provide at least USD 2.47 billion in equity.

When examining Pupuk Indonesia's financial condition, the clean ammonia initiative plan still appears realistic, considering that the required equity represents around 48.62% of their total current assets. Pupuk Indonesia also has the option to utilize some of their non-current assets because many of their clean ammonia initiatives are long-term programs with projections spanning 20 to 30 years ahead. With this approach, Pupuk Indonesia can secure the financial resources needed to support their efforts in developing a sustainable clean ammonia industry.

However, it is essential to note that these are straightforward assumptions. Pupuk Indonesia must ensure that their financial capability remains unaffected by this plan. Furthermore, they need to consider where the funding for the project will be sourced and whether investors are willing to accept a lower return on investment (ROI). This is quite significant, given that the production technology for blue and green ammonia in Indonesia is currently relatively expensive compared to conventional ammonia technology.

Clean Ammonia's Uphill Battle: Addressing Key Challenges

In Pupuk Indonesia's efforts to establish a clean ammonia industry in Indonesia, Petromindo summarizes several challenges that they will face, particularly related to the availability of gas supply (for blue ammonia), high investment costs, and the absence of a regulatory framework that supports the development of clean ammonia in Indonesia. These challenges highlight the complexities and obstacles in realizing clean ammonia initiatives in the country.

Gas Supply

In principle, both blue and grey ammonia are fossil-based ammonia production methods that require natural gas as feedstock. The key difference lies in the implementation of CCS facilities in blue ammonia production, making it relatively lower in emissions compared to grey ammonia.

This implies that the expansion plans and capacity additions for blue ammonia over grey ammonia indicate an expected increase in demand for natural gas in the coming years. The availability of a stable natural gas supply is a primary prerequisite to ensure that these projects can operate sustainably and securely from a business perspective.

In fact, ammonia producers in Indonesia have been facing challenges in securing a stable supply of natural gas. PIM was reportedly at risk of shutdown due to a gas supply shortage at the end of last year. The Ministry of Energy and Mineral Resources (ESDM) planned to supply gas to PIM from Tangguh Train 3, but the project only became operational in mid-September 2023. As a result, 2 LNG cargoes originally intended for PKT were redirected to PIM. This highlights the importance of addressing natural gas supply issues to ensure the smooth operation of ammonia production facilities in Indonesia.

A few years ago, specifically in 2019, several ammonia producers, notably subsidiaries of Pupuk Indonesia, experienced a shortage of natural gas supply. Out of a total requirement of 355 MMSCFD, Pupuk Indonesia received only 253 MMSCFD.

The shortage of gas supply from upstream O&G companies to ammonia producers is highly likely to be due to gas pricing factors. The government has regulated the price of natural gas for several sectors, including the ammonia industry, known as the HGBT, at USD 6/MMBTU. However, off-takers are still paying higher prices than the HGBT. For example, PIM receives natural gas at a price of $6.59/MMBTU, while PT Kaltim Parna Industri (a private ammonia producer) pays a gas price as high as $15/MMBTU. This pricing disparity can have a significant impact on the cost structure and profitability of ammonia production in Indonesia.

On the other hand, E&P companies also seem to struggle to meet the HGBT tariff due to the varying conditions of different oil and gas blocks in Indonesia. Some oil and gas blocks in Indonesia are aging fields with diverse treatment and operational costs. Therefore, equalizing gas prices across different blocks may be challenging for upstream companies to achieve project viability and economic feasibility. This variability in gas block conditions and production costs can further complicate efforts to establish a uniform and affordable gas pricing mechanism for ammonia production.

Figure 9: Shortage of Natural Gas Supply at Three Plants owned by Pupuk Indonesia in 2019.

Source: Petromindo Analysis

Although upstream oil and gas authority SKK Migas has assured that the natural gas supply for ammonia producers in 2023 is sufficient, the possibility of future supply shortages cannot be ruled out. This is because the natural gas industry is subject to various external factors such as fluctuations in global energy prices, changes in government policies, and production conditions in specific gas fields. Therefore, Pupuk Indonesia must remain actively engaged in monitoring and adapting to changes in natural gas supply while planning robust contingency strategies to ensure the smooth production of clean ammonia in the future.

Table 2: List of Natural Gas Needs and Suppliers for Pupuk Indonesia in 2023.

Source: Petromindo Analysis

High Renewable Electricity Price

The challenges faced in green ammonia production are different from those in blue ammonia. While green ammonia does not require natural gas as a raw material, it relies on a clean electricity supply as a key input. Clean electricity is used in the process of electrolyzing water to separate hydrogen from oxygen, which is then used in ammonia production. Therefore, the availability and sustainability of a clean electricity supply are crucial factors in maintaining sustainable green ammonia production.

Indonesia's current electricity system relies heavily on coal-fired power plants, accounting for approximately 80% of the national electricity grid. The dominance of coal is due to the high generating costs associated with renewable energy sources. The difficulty in penetrating renewable energy into the national electricity system is likely to be reflected in the ammonia industry as well.

Compared to blue ammonia, renewable-based ammonia is currently challenging to sell at a lower price due to the still high electricity generation tariffs. Petromindo's study indicates that green ammonia can be cheaper than blue ammonia using a natural gas price of USD 6 per MMBTU if the electricity tariff used is lower than USD 3 cents per kWh, which is still difficult to achieve. This disparity reflects the economic challenges that need to be addressed in the effort to make green ammonia more competitive.

Figure 10: Green Ammonia Investment Cost is Relatively Higher than Blue Ammonia.

Source: Petromindo Analysis

One solution to bridge this price gap is through the development of more efficient production technologies that can reduce the production costs of green ammonia. This includes improving the efficiency of the electrolysis process to produce green hydrogen, using energy-efficient equipment, and selecting the most economically viable sources of renewable energy.

Additionally, the development of more affordable renewable energy infrastructure and increased efficiency in the green ammonia supply chain can also help reduce production costs and, consequently, its selling price. This includes the use of energy storage technologies, efficient distribution, and advanced logistics systems.

The government plays a key role in shaping a conducive and sustainable business ecosystem for the clean ammonia industry. Through incentives such as tax reductions, subsidies for renewable energy, and favorable carbon pricing policies, the government can help reduce production costs and enhance the competitiveness of green ammonia in the market.

In addition to incentives, the government should also consider the flexibility of the electricity market, which is currently monopolized by PLN. One important step is to open opportunities for Independent Power Producers (IPPs) to sell its excess electricity to potential off-takers, such as green hydrogen/ammonia producers. This can create a more dynamic and competitive market that benefits both producers and consumers.

This support will not only stimulate investment in environmentally friendly technologies but also enable the clean ammonia industry to contribute significantly to global goals of reducing carbon emissions and creating a more sustainable society.

Lack of Regulation Framework on Clean Ammonia Development

The clarity and certainty of the regulatory framework for the development of clean ammonia are crucial to ensure investment certainty for developers. In the context of the clean ammonia industry, clear regulations can provide guidance on permits, environmental standards, incentives, and technical requirements that must be met. This not only provides the necessary legal certainty but also helps create a stable investment environment that supports the growth of this industry.

Currently, regulation related to the implementation of CCS is only governed by MEMR Regulation No 2/2023, and it is limited to upstream oil and gas activities. In fact, CCS plays a crucial role in the blue ammonia industry, and there is a need for regulatory clarity in this regard.

The government is currently in the process of finalizing a Presidential Regulation regarding the implementation of a CCS hub that will encompass the non-upstream oil and gas sector. This regulation was scheduled to be officially announced in September.

However, as of the writing of this report, the regulation has yet to be released. There is significant anticipation within the business community regarding this CCS Presidential Regulation because it is expected to open up broader opportunities for participation in CCS implementation. This step will have a positive impact on the development of the clean ammonia industry in Indonesia by providing a clearer legal framework and supporting the use of sustainable technologies.

In addition, the government also needs to formulate a clean ammonia roadmap that includes energy transition goals and outlines the role of ammonia in various aspects of Indonesia's energy landscape in the future. This roadmap will serve as a crucial guide for businesses to develop their plans and strategies in Indonesia to accelerate the development of the clean ammonia ecosystem.