Why Washington and Big Oil are investing billions in ammonia

The latest bet is a $1.56 billion Energy Department loan commitment for an ammonia project in Indiana. The agreement comes on top of a recent $2.35 billion deal for a Gulf Coast project by an Australia-based energy company, a big investment from Abu Dhabi’s national oil company in an Exxon Mobil project in Texas and a large effort in Mississippi from ammonia giant CF Industries.

Ammonia, which is a mixture of hydrogen and nitrogen, has long been a critical ingredient in fertilizer, but it is also a big emitter of greenhouse gases because it is typically made using fossil fuels. Projects like the one in Indiana are considered low-carbon because they trap the CO2 emissions from the process and bury them underground.

Ammonia doesn’t produce carbon emissions when burned as fuel, driving a new wave of activity from companies angling to ship it all over the world. Increasing domestic supply is a priority after Russia’s invasion of Ukraine in 2022 roiled the market and pushed up prices. Russia is one of the world’s biggest producers.

“It’s important for us to have a diverse supply chain and make sure we’re not dependent on other countries for this really important chemical," Jigar Shah, head of the Energy Department’s Loan Programs Office, said in an interview. The program is rushing to get deals done before the election.

The office has agreed to a deal with Wabash Valley Resources, a producer backed by oil companies and hydrogen-vehicle startup Nikola. The company aims to repurpose a facility that was part of a decades-old coal plant in Indiana for low-carbon ammonia production.

Founded in 2016, Wabash uses a byproduct of oil refining to make ammonia and says it has an advantage over competitors because its facility is close to the farms where fertilizer will be used to grow corn. It expects to produce 500,000 metric tons of ammonia a year.

The deal also adds to recent investments in carbon capture, which has a poor track record but got billions of dollars in tax credits from the 2022 climate law. Projects such as Wabash’s are seen as more practical because they use a proven process to trap a nearly pure stream of CO2.

Once it starts operating in 2027, Wabash expects to get about $140 million in carbon sequestration tax credits annually on top of the loan. The company’s project previously got government grants for studying carbon storage options near its plant in West Terre Haute, Ind., which set the table for Environmental Protection Agency approval of storage wells.

Wabash still needs to raise about $800 million in equity and meet other project milestones before it starts receiving the loan. Daniel Williams, chief operating officer, said the company has about 75% of that equity funding in place and is talking to corporate partners.

Another low-carbon ammonia producer, Nebraska startup Monolith, received a $1 billion commitment from the loan office in 2021 but still hasn’t received the funds.

On the Gulf Coast, Australia-based Woodside Energy recently paid $2.35 billion for a plant in Beaumont, Texas, where it plans to make low-carbon ammonia. A nearby Exxon low-carbon ammonia project has a deal with Abu Dhabi’s national oil company and is in talks for additional cash from Japanese conglomerate Mitsubishi.

Exxon is also working with CF Industries on its carbon-capture effort in Mississippi and a similar project in Louisiana as part of its push into carbon management.

Subsidies are critical for the projects because rising costs are derailing many climate efforts, fueling a series of bankruptcies in recent months. Williams said Wabash’s equipment and project costs have risen about 25% to 50% in the past three years. Cost setbacks have hurt many projects involving only hydrogen, which is difficult to store and transport.

Wabash still needs to build the transportation infrastructure to carry the carbon several miles to storage sites, a process that has angered opponents of the development. Williams said the ammonia will have as much as 80% lower emissions than traditional ammonia and that the government support shows the project is worthy of development. The EPA received more than 1,000 public comments during its storage permit review.

The deal is the loan program’s first involving carbon capture and adds to a push by the office to get money out the door before the election. A victory by former President Donald Trump could halt transactions and make the program essentially dormant like it was during the first Trump administration.

Some analysts say certain deals could still get done if Trump wins because oil companies favor ammonia and carbon capture. An initiative involving a dozen fossil-fuel companies including Exxon and Chevron is one of Wabash’s investors.

“This is a bipartisan project," Williams said.

Write to Scott Patterson at scott.patterson@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com