Vision 2020

Energy Strategy Vision Faster Forward To 2020 1

By 2050 we will have

3 billion new mouths to feed.

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Energy Strategy Vision: Faster Forward to 2020

Part of THE SOLUTION Fertilizers made from natural gas are an essential component of sustainable food production.

48% of the global population are fed thanks to the use of

mineral fertilizers.

Without mineral fertilizers human life is unsustainable.

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N°

The fertilizer industry is the largest single sectoral consumer of natural gas in the EU’s manufacturing sector.

Energy Strategy Vision: Faster Forward to 2020 As the largest single sectoral user of natural gas amongst the EU’s manufacturing sectors, the European nitrogen fertilizer industry applauds the EU institutions’ continued drive to establish a truly world competitive EU single energy and gas market.

EU manufacturing requires greater urgency and speed from EU authorities to achieve a competitive and efficient energy market across Europe. Europe again is amongst the world’s highest energy cost regions. Actions at regional, national, EU and global levels are urgently required to correct this situation – especially when it arises from unfair energy pricing by suppliers inside or outside the EU. The vision and practice required must be aimed at a fully integrated – fully interconnected - pan-European and inter-continental, transparent, free and fair marketplace.

For natural gas in particular – and for other energy commodities, it is necessary to develop financial and physical commodity hubs that promote and encourage transparent inter-connected prices. For gas, a European super-hub could supply enormous benefits to consumers.

The EU authorities should engage all interested parties in a process allowing for a variety of gas contracts on competitive and flexible terms.

Climate change abatement is a challenge where nitrogen fertilizers can contribute to reductions and solutions. There must be a level playing field regarding equal commitments to reduction and technological improvements.

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Energy Strategy Vision: Faster Forward to 2020

Contents Key Issues

6-7

Commentary on the EU Security of Gas Supply Proposals 2009

8-9

Energy Security of supply

10 - 13

Internal market: regulatory & practical improvements

14 - 15

EU and bi-lateral law development

16 - 18

Energy Mix and Use (natural Gas and other energy sources)

19 - 20

Climate change (carbon management)

21 - 25

26

Food Security Bio-Energy

27

Conclusions

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5

Key Issues Energy security of supply - Our position: More big and small pipeline and LNG infrastructure would provide for diversification of routes and sources.

Inter-connection, storage and transparency across the whole Pan-European gas market is essential. Everyone should receive legitimate EU or governmental financial support.

Fertilizers Europe supports the EU’s expansion of the Trans European Network – Energy infrastructure budget.

Fertilizers Europe also supports the Commission proposals on Security of Gas Supply especially the need for national and even European Preventative and Emergency planning; but believes that sub-regional cross border integration and inter-connectivity is the best practical solution.

Internal EU market regulatory development - Our position: It is Imperative that the 3rd Gas Directive is implemented by Member States on time, ie within the 18 months foreseen. Any “unfinished business”, should be dealt with by a 4th EU Gas Directive which promotes further a transparent and efficiently integrated Pan-European gas market.

Fertilizers Europe supports a review on implementation, 2 years after the 18 months implementation date of entry of the directive. Competition laws and investigations must continue to be fully employed as a priority; DG Competition’s stronger role is welcomed.

EU and bi-lateral law development - Our position: Trade, transit and investment relations with regard to energy including gas require better legal regulation. The EU’s internal market acquis should be more speedily developed into bi-lateral relations with key transit (Ukraine) and key supplier countries (Russia, Algeria, Egypt). This should be a core condition of the EU’s “good neighbourhood policy” with North Africa and the former Soviet Union.

Global WTO rules to correct unfair pricing of energy and natural resources Our position: Fertilizers Europe again calls for the WTO’s development of “Trade Related Rules for Energy Supply” (TRES). Unfair grossly discriminatory gas pricing practices are conducted by many gas supplier countries. These countries’ artificially low state fixing of gas prices or dual gas pricing policies should be made correctable under WTO laws.

The EU fertilizer market continues to be targeted by competitors benefitting from such unfair gas pricing policies. Currently the EU corrects the injurious impact by use of trade defense actions. However, the WTO should simply “outlaw” and prohibit such damaging actions.

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Energy Strategy Vision: Faster Forward to 2020

Energy and feedstock efficiency Our position: The drive for energy efficiency makes good business and environmental sense. The EU industry has an outstanding record of improved energy efficiency.

Energy Efficiency should be a global private enterprise as well as public initiative.

Climate change (carbon management) Our position: Consistent with its energy efficiency the EU nitrogen fertilizer industry predominantly using natural gas as feedstock and energy is the most carbon efficient in the world.

Fertilizers Europe accepts the EU Council’s goal of a 20% reduction in CO2 by 2020. However, without an international binding agreement leveling the playing field for carbon reduction, only free allocation of emission rights for the EU fertilizer industry, based on achievable benchmarks, can safeguard EU competitiveness and prevent major carbon leakage.

Energy Mix and Use (natural Gas and other energy sources) Our position: The fertilizer industry supplies “plant nutrients” which feed the world.

By 2050 there will be 3 billion more mouths to feed. Up to 48% of the world’s population are fed by the use of mineral fertilizers.

As natural gas is especially efficient in energy and carbon terms in the production of fertilizers, EU energy policy must recognize that natural gas supply ultimately equates to food supply and security of food supply. Accordingly, EU policy makers must differentiate between energy resources best used for heating and power generation, eg. nuclear, and other energy resources best used as feedstocks or manufacturing inputs. Renewables including bio-fuels present an interesting diversification but are best employed when they are fully competitive against hydrocarbons and are long-term sustainable.

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5

Commentary on the EU Security of Gas Supply Proposals 2009

Fertilizers Europe supports the Commission’s regulatory proposal: – preventative and emergency plans promise better orderly conduct in crisis.

Protected customers: ammonia production’s vital contribution to European farming and agriculture must be recognised. This function can often be more strategically important than the role of SMEs. Under food security pressures, even “protected customer status” should be considered for ammonia/fertilizer operations.

There must be a political/legal solution to the Russian problem, ie below cost gas pricing inside Russia; dual-pricing with premium export prices; export monopoly of Gazprom; restrictions on Caspian supplies to EU; and other transit issues.

Emergency shut-down and re-start costs must be accounted for by Member States and “compensation” is an issue.

The technical and economic factors involved in crisis shut-downs and start-ups must be considered by authorities insisting on ammonia/fertilizer plant shut-downs.

Better supply/demand forecasting and better “security” knowledge: EU needs a US type Energy Intelligence Agency.

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Energy Strategy Vision: Faster Forward to 2020

ANNEX 1: CALCULATION OF THE N-1 INDICATOR 1. Calculation of the N-1 indicator The N-1 indicator decribes the ability of the gas infrastructure’s capacity to supply the gas for maximal demand in the calculated area in case of disruption of the largest infrastructure.

“Calculated area” means a geographical area for which the application of N-1 indicator is calculated.

Technical capacity14 of all remaining available gas supply infrastructure in the event of disruption of the largest infrastructure should be at least equal to the gas demand of the calculated area during a period of sixty days of exceptionally high gas demand during the coldest period statistically occuring every twenty years. The N-1 indicator, calculated as apposite should be at least equal to 100%.

IPm+Pm+Sm+LNGm-Im-Tout N-1{%}---------------------*100, N-1*100% Dmax Definition required for the calculation of the N-1

Investors, even backed by state, will only build new infrastructure if the investment can make a good return. It is more realistic to have sub-regional evaluations and actions aligned with the 3rd Gas Directive’s 10 year investment plans.

Also important is pushing on with a Single Gas Network grid and much improved cross border flows of gas.

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Energy Security of Supply Main transmission projects in Eurasia to 2015

“

Competitive supply and security of supply needs more infrastructure linked to more sources and more routes.

”

Regasification Facilities —Existing and Potential (2006 – 2030)

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“

LNG represents more sources and more routes = security

”

The EU authorities should assist proposed expansion of more LNG sources of supply. LNG is the best flexibility option available.

New LNG terminals in the Baltic and Mediterranean have an immediate strategic security of supply advantage over established pipeline supplies.

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DSM AFA VoF

Energy Strategy Vision: Faster Forward to 2020

Energy Security of Supply • Seasonal, cyclical and crisis factors must be accommodated for, otherwise serious losses to the EU economy will prevail, eg.

Ukraine-Russia gas disputes in 2006 and 2009.

• Ideally market/physical hubs like Zeebrugge should be developed as these provide for physical, financial and all services. While they tend to serve short-term market needs they also ensure “market” based practices leading to long-term integration.

• Fertllizers Europe supports the formation of a European super hub as a commodity price reference for gas for all industrial consumers in Europe.

• Strategically, the EU should consider a gas storage facility based in each key sub-region of the EU. The sub-region should assess and set up the necessary storage and interconnection facilities as needed and as economically viable.

Hub services typically serve shortterm market needs • • • • • •

Interchanges Exchanges Balancing Parking Banking Title Transfers

“Development of Infrastructure to serve combined long-term and short-term market and competitive needs”

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7

Energy Security of Supply

Europe is surrounded by a “sea of gas”.

The boundaries and names shown and the designations used on maps included in this publication do not imply official endorsement or acceptance by the IEA

Although indigenous resources are limited & output is declining, Europe is geographically well placed to secure gas supplies from a variety of external sources.

©OECD/IEA - 2009

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Energy Strategy Vision: Faster Forward to 2020

Baltic States an “Energy Island” example.

• • • • •

100% dependant on “OAO Gazprom” gas; no interconnectors; no LNG; No transit pipelines (negotiation power); Local TSO’s “Lietuvos dujos” “Eesti Gaas” and “Latvijas gaze” are majority owned by Gazprom

• The Baltic States remain over-dependent on monopolistic supplies of gas.

• This restrictive monopolistic situation may threaten the viability of energy intensive industry in the Baltic States.

• As well as promoting infrastructural connections, the EU should engage all interested parties with a view to allowing a variety of gas contracts on competitive and flexible terms.

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Internal market: regulatory & practical improvements

• Fertilizers Europe and other energy intensive industries call for rapid agreement and implementation of the 3rd Gas Directive.

Gains include promotion of unbundling, better co-operation between national regulators, a European Agency to secure integration and inter-connection and more transparency.

• Open up key and new entry points typically dominated by the incumbents, while also supplying information sources for verifying entry/exit capacities.

• Progress promoting pro-competitive conditions must be achieved over the short–term. Europe’s gas prices are again amongst the highest in the world.

• Storage capacity and access should be made more transparent and priced at fair levels.

• EU competition powers must be employed against negative competition practices.

• Uniform balancing rules throughout Europe and transparent cross-border transfer mechanisms.

• A review of the 3rd Gas Directive should be accompanied by another DG COMPETITION “sectoral study” on gas and electricity. Thus, regulators and competition officials can work on the same agenda and audit the conduct of the incumbent supplier industry.

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• Reduce control and reservation of pipeline capacity at borders by incumbents.

• Simplify and accelerate the regulatory discussion on gas quality issues. There needs to be investment in quality conversion infrastructure thus avoiding bottlenecks.

Energy Strategy Vision: Faster Forward to 2020

Internal EU market regulatory development • Capacity at border crossings remain in control of incumbents; newcomers must be allowed access.

• Capacity at borders must facilitate two-way flow connections.

Anti-congestion measures must be applied with rigour by authorities.

• New market demands require new connections and interconnections. Planning approval, third party access and competitive supply conditions must all be accounted for in an efficient manner.

• Spare and unused capacity must be made available to consumers.

• EASEE gas - the authorities - the “Madrid process” must now immediately resolve all remaining barriers on gas quality criteria.

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EU and bi-lateral law development

“

European Union’s one voice on energy must promote Pan-European and International Legal Framework.

THE PAN-EUROPEAN AND INTERNATIONAL REGULATORY FRAMEWORK ON THE SUPPLY OF GAS IS UNDERDEVELOPED This is especially true from a consumer’s perspective.

The EU must use its bilateral Partnership & Cooperation Agreement Treaties (PCAs) to develop market economy pricing, costing and structures for gas and energy.

Or

The EU also must use its diplomatic and consumer powers to establish dispute settlement mechanisms founded on law. Disputes such as Russia-Ukraine disputes must be resolved by use of a legal framework.

It is underdeveloped as in the case of the absence of trade rules for energy in the World Trade Organization.

A basic set of legal rules should be agreed by the EU, OECD as consumers and major suppliers.

It is either not adequately adhered to or enforced, eg. the Transit Protocol of the Energy Charter.

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Energy Strategy Vision: Faster Forward to 2020

Trade & Energy Policy Development Trade and competition distorting measures such as state fixing of gas prices. Dual pricing or pricing below full costs must be outlawed under international law.

Transit and transportation must be made totally free of political or peculiar interferences. For Europe the Energy Transit Protocol must be adopted and enforced by all – or urgently a new Treaty arrangement must be agreed between all interested parties.

Russia’s rejection of the Energy Charter’s Transit Protocol is unacceptable. Adoption of this or a truly genuine equivalent must be agreed.

Ukraine must meet its protocol and Energy community commitments on transit.

The WTO should agree a Trade Related Energy agreement (TRES) to regulate standards for trade in gas and energy products. Unfair state fixed pricing and dual-pricing should be “outlawed” by the WTO. International energy products trade and competition should be subject to regular dialogue or summits between producer and consumer countries with the aim of avoiding energy supply crisis.

International agreements are preferable to bi-lateral agreements but for many situations bi-lateral discussions may be easier diplomatically and promise greater depth, eg the EU-Russia Energy dialogue and Partnership.

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“Several suppliers practice unfair dual-pricing and artificially low state fixed pricing to advantage local industries.�

RUSSIA by PIPELINE to EU Current EU correction is by trade defence actions but in future the WTO should outlaw unfair pricing practices which distort a level playing field.

18 Russian domestic gas Russian gas at Waidhaus Zeebrugge

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14

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Sources: independent trade press

US$/mmBtu

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8

6

4

2

18

0 Jan-2005

Jan-2006

Jan-2007

Jan-2008

Jan-2009

Jan-2010

Energy Strategy Vision: Faster Forward to 2020

Energy mix and use (natural Gas and other energy sources)

“Energy Efficiency should be a global private enterprise as well as a public initiative”.

Gas efficiency in ammonia production, regional average 40

36 34 30 28 26 24 22 20 20 22

EU

USA

Saudi Arabia

Ukraine

Egypt

Russia

Source: independent consultants

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MMBtu / t ammonia

ENCOURAGEMENT OF VOLUNTARY ENERGY EFFICIENCY SCHEMES PROMOTING BEST AVAILABLE TECHNOLOGIES AND PRACTICES

24 26 28 30 34 36

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Energy mix and use (natural Gas and other energy sources)

GJ/t ammonia

GJ/t ammonia

Energy Efficiency in EU Ammonia Plants 450 400 350 300 250 200 150 100 50 0

Today‘s technology is close to the theoretical minimum.

Birkeland-Eyde

Cyanamid process

Haber-Bosch Steam reforming natural gas

1910 1915 1930 1950 1960 1975 2000

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Energy Strategy Vision: Faster Forward to 2020

Fertilizers Europe Perspectives on Climate Change • The EU industry predominantly operates plants which are natural gas based, i.e. the most efficient in energy used and carbon emissions.

• The EU industry can make further contributions to energy and carbon abatement.

• The EU industry as the most efficient in energy and carbon management terms cannot accept a loss of competitiveness or profitability due to an uneven carbon reduction playing-field, especially with regard to near neighbours in Europe and in North Africa. These competitors already operate off subsidised gas costs.

• Real carbon leakage, i.e. closure of efficient EU plants while less efficient plants continue with no improvements is a “living reality” in the EU and world nitrogen fertilizer scene.

• Even after having free emission rights up to the benchmark level the fertilizer industry is exposed to carbon leakage.

• 10% best average rule must be implemented in such a way that carbon leakage can be avoided.

10% best average rule must be implemented in such a way that carbon leakage can be avoided.

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Climate change (carbon management)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 0 0.5 1.0 1.5

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Source: Integer independent consultant

The EU has many of the world’s most efficient ammonia plants.

Ammonia CO2 intensity per tonne product: 2008

5.0

CO2 intensity per tonne

The EU is the world’s most carbon efficient industry.

2.0 2.5

EU

North America

Ukraine

Saudi Arabia

Egypt

Russia

China

Energy Strategy Vision: Faster Forward to 2020

Climate change (carbon management)

300

250

250

CO2 emission / t ammonia (relative to natural gas = 100)

300

200 150 100 50

200 150 100 50

Coal

Oil

Coal

Oil

Gas

Gas

0

0

European fertilizer production has lowest emissions 9 8

t CO2-eqv per t N

Closure of efficient EU plants while less efficient plants continue with no improvements is a “living reality� in the EU and world nitrogen fertilizer scene.

Energy consumption / t ammonia (relative to natural gas = 100)

Relative Energy Consumption and CO2-Release: Ammonia Plants with different Feedstocks

7 6

Ship transport to WE From urea when used Fertilizer production Nitric acid production Ammonia production

5 4 3 2 1

NOTE:

0 AN/BAT Europe

AN from Russia

Urea/BAT Urea from Europe China

Urea gives more emission from the soil, which is not shown in this graph

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Climate change (carbon management)

“

Mineral fertilizers increases agricultural yields avoiding emissions from land-use change.

In a recent study by McKinsey (Innovation for Carbon abatement report) the fertilizer industry was highlighted as one of the biggest levers evaluated for emissions savings in the chemical industry.

Fertilizers contribute substantially to greenhouse gas reductions.

In 2005 fertilizers contributed to the saving of 1,600 million tons of greenhouse gas, second only to insulation (2,400 million tons).

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Energy Strategy Vision: Faster Forward to 2020

“ If fertilizers were not available, the yield from agriculture would drop by between 30 and 85 percent across the different regions of the world.

The absence of mineral fertilizers would require an additional 1,100 million hectares of land being farmed. At 1.5 ton CO2 per hectare, this translates to 1,600 million tons of CO2 (or equivalent greenhouse gas) saved by the use of fertilizers.

“

Compare the yields of agriculture and the climate protection.

Fertilizers can save 1,600 million tons of greenhouse gases.

This clearly provides the best balance between food production, to feed an expanding population, and the preservation of natural land whilst tackling climate change.

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Food security

The fertilizer industry supplies “plant nutrients� which feed the world. Up to 48% of the world’s population are fed by the use of mineral fertilizers. By 2050 there will be 3 billion new mouths to feed.

Natural gas is especially efficient in energy and carbon terms in the production of fertilizers, EU energy policy must recognize that natural gas supply ultimately equates to food supply and security of food supply.

EU policy makers must differentiate between: energy resources best used for heating purposes, eg nuclear, and other energy resources and those best used as feedstocks or manufacturing inputs.

Renewable including biofuels present an interesting diversification but are best employed when they are fully competitive and offer sustainable returns against hydrocarbons and are long-term sustainable.

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Energy Strategy Vision: Faster Forward to 2020

Natural gas is distinctive because: It is a feedstock used to make mineral fertilizers

Ultimately gas = food Ultimately gas = food security The EU, therefore, must work to reduce the foreseen

“supply gap� – and this inevitably means

substituting other sources for the energy only uses.

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BIO-ENERGY

The development of bio-energy and biofuels are key elements in fighting against climate change, and have a unique role to play in saving the limited resource of fossil energy. The EU’s target of 20% renewable energy by 2020, with a 10% share for biofuels is driving this change.

The cultivation of bio-energy crops specifically for generating heat and energy or biofuels for transport presents a viable means of achieving a positive energy balance that is less dependent on fossil fuels.

Biomass is already making substantial contributions to the generation of energy in both conventional and highly efficient combined heat and power plants in many countries within the EU. An increasing number of vehicles are being powered by fuel containing bio-components and research continues to improve its efficiency.

In exactly the same way as for food production, the use of mineral fertilizers increases the productivity of bio-energy crops and their intrinsic value as a raw material. Both the energy and CO2 balance of the production and use of biomass crops are positive when fertilizers are efficiently used.

Biomass crops are reducing Europe’s dependence on fossil fuels.

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Energy Strategy Vision: Faster Forward to 2020

,

Conclusions on a 2020 European competitive and integrated energy scene.

• Pan–European, inter-continental, inter-connected Single Energy Market.

• Free, Fair and Competitive Energy and Gas Trade relations backed by “good neighbour” relations, inter-connected infrastructure and law.

• Consumer choice allowing for different types of gas contracts on competeitive and flexible terms.

• Sustainable gas and other energy supply based on market economy standards respecting social, health and environmental care.

• Food security and safety backed by the rational and added value use of natural gas.

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‘fertilizers europe’ is the new identity for the European Fertilizer Manufacturers Association (previously known as EFMA)

will provide immediate recognition of our organization as the official and dedicated source of information on fertilizers. This is particularly important due to the vital role the industry plays in feeding the world.

Our new website www.fertilizerseurope.com

is designed to provide the latest information on a range of subjects of immediate relevance to everybody interested in fertilizers and their contribution to the world’s food supply.

It presents the crucial role of fertilizers - currently providing almost 50% of the world population with food and offering the only feasible means of meeting future demands for nourishment as the world population is forecast to double by 2050.

www.fertilizerseurope.com

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Energy Strategy Vision: Faster Forward to 2020

...the last drop of oil should be consumed by a tractor spreading nitrogen fertilizers made from the last drop of natural gas!�

Renso Zwiers, President Fertilizers Europe

Š 2010 - Fertilizers Europe (European Fertilizer Manufacturers Association) The information and guidance provided in this document is given in good faith. Fertilizers Europe, its members, consultants and staff accept no liability for any loss or damage arising from the use of this guidance.

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KRE8

European Fertilizer Manufacturers Association, Avenue E. Van Nieuwenhuyse 6, B-1160 Brussels Switchboard: +32 2 675 35 50 Fax: +32 2 675 39 61; Email: main@efma.be follow us on

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http://twitter.com/FertilizersEuro

www.fertilizerseurope.com