BASF BASFY 0.75% SE, one of the world’s largest chemical companies, said it will reduce production of the fertilizer ingredient ammonia as it tries to curb its natural gas use after Russia cut flows to Europe.
Moscow on Wednesday began reducing supplies to about 20% of capacity via the Nord Stream pipeline, Russia’s largest gas link to Europe. The cuts complicate the continent’s efforts to store enough gas before winter and raise the specter of costly rationing for the industry. European Union members this week agreed sweeping cuts in natural gas consumption, urging countries to voluntarily reduce their gas consumption by 15% from August.
European gas prices rose to near record highs on Wednesday, nearing March highs that followed Russia’s invasion of Ukraine.
For BASF, the supply cuts and higher prices are a heavy burden as it uses the fuel both to generate electricity and as a feedstock for products. The German multinational said on Wednesday it would reduce its production of ammonia, which relies on natural gas, to ease its demand.
According to the US Department of Agriculture, gas can account for up to 85% of the production cost of ammonia. Ammonia, in turn, is an important component of many fertilizers.
While BASF said the ammonia production cuts won’t affect farmers this year because they’ve bought enough fertilizer and harvesting is already underway, next year could face problems.
“Ammonia is in a difficult situation,” said BASF CEO Martin Brudermüller. “The availability of fertilizers next year could be worse. Fertilizer prices are skyrocketing.”
He said this could lead to lower harvests next year. “And if you then add weather problems, there could be a shortage of key crops,” said Brudermüller, adding that this would pose a challenge, especially for poorer countries at the end of the food supply chain.
The company, which accounts for up to 4% of Germany’s gas demand, said it is buying additional ammonia from outside suppliers to mitigate the risks.
The European Union reached an agreement on Tuesday to curb its natural gas consumption over the next eight months amid the possibility of a disruption in Russian supplies. Photo: Michael Probst/Associated Press
BASF said dwindling Russian gas supplies pose a threat to its production center in Ludwigshafen, Germany, which is the world’s largest integrated chemical complex. If the gas supply falls well below 50 percent of Ludwigshafen’s maximum requirement, production would have to be stopped, the company said.
In the meantime, according to Brudermüller, BASF expects to continue to operate the site at reduced capacity even in the event of gas rationing by the federal government.
BASF is also preparing to replace gas with heating oil as much as possible. Some of the electricity and steam generation in Ludwigshafen could be switched to heating oil, which would replace around 15% of the gas requirement.
Gas saving measures in the chemical industry are limited by the state of the art. The shift to renewable energy in the power supply and the use of biofuel feedstocks, including biomethane, will not replace fossil fuels on a large scale any time soon, analysts say.
According to the German Chemical Industry Association (VCI), the chemical industry, the largest consumer of industrial gas in the country, needs around 135 terawatt hours of gas a year. Industry can only save two to three terawatt hours by using alternative fuels.
BASF said if Russia continues to cut gas supplies to Europe, it will try to offset the loss of European production by expanding sites outside the continent. BASF has major sites in Louisiana, Texas and China.
In the second quarter, BASF’s gas bill increased by 800 million euros, or about 810 million US dollars, compared to the previous year. The company has increased its prices and said it will continue to do so to offset those costs.
BASF has raised its full-year guidance on strong first-half results, but warned that it expects a slowdown in the global economy due to the war in Ukraine and its impact on energy and commodity prices.
“For the second half of the year, BASF expects a gradual slowdown in economic development worldwide, but much more so in Europe,” said Brudermüller.
write to Georgi Kantchev at [email protected]
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