In September Baringa’s hydrogen experts have been presenting our views on the developing hydrogen market at three conferences across the globe, and we’re keen to share some of our insights with you. Leveraging analysis from our current engagements with the likes of the global Hydrogen Council, major developers across O&G, integrated power players and regulatory institutions, we have been addressing the opportunities and challenges in the current hydrogen landscape at Gastech in Singapore, SPE Offshore Europe in Scotland, and the World Petroleum Congress in Canada. Some of our key insights are summarised in this article and please reach out to the hydrogen team if you would like to discuss further.
The current hydrogen market
In foundational sectors for hydrogen such as Oil & Gas, initial hype is trailing off and laser focus placed on ensuring projects stack up commercially versus other decarbonisation options. While there are still enormous ambitions for mega projects worldwide and hydrogen remain a key vector for net zero targets, only a tiny percentage of current projects are considered bankable and as such only a handful of mega projects have progressed past FID. Key barriers include lack of detail around enabling policy, lack of storage and transportation infrastructure, supply chain uncertainties, and a slower than hoped shift in consumer willingness to pay (B2B and B2C) that would dramatically increase demand and lead to credible offtake agreements. Specifically on policy, we have seen European policy ambition and detail ratchet up significantly while the UK has lost its early leadership position. In the US, although the production tax credit provided by the Inflation Reduction Act (IRA) is simple and generous, many companies are waiting on the outcome of the next election and clarity on the finer mechanisms in the policy before committing to investment.
Here are our 5 key takeaways from our conversations at these 3 conferences in the last month.
1. Policy support
Policy will be critical to bridge the commercial gap between the cost to produce low carbon hydrogen and the price that offtakers are prepared to pay. But while revenue support is starting to be made available, this is often small scale and not bankable. We’ve seen equity raises and the big news splash that was the Neom project reaching FID – but at what cost to the Saudi Government?
2. Hydrogen carriers
Future hydrogen production will focus on global regions where there is high grade, abundant and low-cost renewables for green hydrogen, and low-cost gas for blue hydrogen with carbon storage potential. Regions like Australia, South America, Middle East, and Africa, and North America, are likely to be the production power houses and will supply areas of high demand where the willingness to pay is greater, like Asia (South Korea / Japan) and Europe. The US market, with its focus on production support mechanisms, could become an export powerhouse into Europe. But will European taxpayers be prepared to effectively subsidise the development of the US hydrogen manufacturing base? This remains to be seen.
Moving hydrogen at scale and over large distances will be critical to connect these markets, and the optimal hydrogen carrier will depend on the offtaker market that is being supplied into, the distance travelled, and other factors such as availability of biogenic carbon to make methanol. Ammonia has taken an early lead as one of the most credible options due to its relatively mature technology and supply chain, relatively high energy density compared to other carrier options and existing market. However, in some situations liquid hydrogen will be optimal, or another carrier like e-methanol or liquid organic hydrogen carriers (LOHCs). Check out our thought leadership piece on this here.
3. Shipping as a key hydrogen use case
Hydrogen will be a key decarbonisation vector for marine fuels and there are a range of hydrogen-based shipping technologies and fuels emerging which will be suitable for different fuel types and routes. While short hop ferries can be electrified, larger ships travelling longer distances will need alternative options.
Key considerations will be around safety and storage. For ammonia, a strong regulatory framework will be required to manage NOx emissions and there are engineering challenges to be solved in engine rooms. Bulk ammonia storage in built up urban areas is unlikely to be palatable to regulatory authorities, however bunkering in industrial areas for cargo ships is emerging. Similarly, regulatory authorities may think twice about permitting the transport of ammonia on inland European waterways or other sensitive regions as it is highly toxic in a marine environment. As a shipping fuel, methanol presents a viable option from a technical perspective, especially in the short term, however there are questions about scalability due to a limit on availability of biogenic CO2. Methanol also releases CO2 when burnt, meaning that ships using methanol will not be able to enter some locations which will require zero carbon release, such as Norwegian fjords. Cruise ship operators have indicated an early preference for liquid hydrogen.
4. Is blue the new green?
With the challenges around bankability of green hydrogen projects, among the Oil and Gas sector there is a noticeable strengthening in rhetoric around blue hydrogen, particularly companies with large positions in low-cost gas plays such as in the shale sector of North America. These organisations have clear adjacencies in developing blue hydrogen where they can leverage their existing upstream infrastructure and are familiar with technologies in the value chain. The ability to act as their own anchor demand by decarbonising scope 1 and scope 2 emissions in assets like refineries enables these companies to develop hydrogen positions with less market risk. However, the rate of return expectations of shareholders is often unrealistic – a shift in mindset is needed to enable capital to be reallocated from more profitable traditional activities.
The increased focus on blue hydrogen, as seen for example with ExxonMobil’s plans for a 1.2 mtpa facility at Baytown, Texas, also increases the focus on effective, low cost, and scalable CCUS which is likely to accelerate technology and storage maturity for the whole energy sector. The same could be said for management of upstream fugitive methane emissions as the blue hydrogen produced will need to prove production value chain emissions do not exceed regulatory thresholds to qualify for subsidies.
5. Gold hydrogen
Naturally occurring, or “gold” hydrogen, could be a massive disruptor, and a major opportunity for oil and gas majors, if it proves to be a renewable resource and is included in the relevant taxonomies. Watch this space as companies pile in to investigate the size of reserves, ease of extraction and the method by which it is produced in the natural world. A world with large reserves of gold hydrogen will still have a place for green hydrogen production (countries will benefit from domestic production to improve energy security) but we may see the market for electrolysers shrink significantly and see a redrawing of the map in terms of expected future global energy flows.
Please reach out to one of our hydrogen experts if you would like to discuss further.
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