Interest in hydrogen is mainly centred in two regions—China and the EU. China's interest stems from the country's desire to dominate global energy and technology markets. In the EU, government policy has taken centre stage thanks to the EU Hydrogen Strategy. Released last July, the plan calls for the installation of 6GW of renewable hydrogen electrolysers by the end of 2024, and at least 40GW by 2030.
The US is likely to be the next
major entrant to the hydrogen race, and the country could release its own
national hydrogen strategy sometime in 2021.
With respect to the global oil
and gas industry it is expected to be producing gas for at least another two
decades to cater for at least 22% of the world’s energy consumption even in the
International Energy Association (IEA) 2°C scenario.
Currently the industry still has
social licence to operate and the larger exploration and production companies
(E&Ps) have availability to finance. However, this is being threatened by a
gathering resistance in the form of public / shareholder perception, carbon taxation,
anticipated lower carbon substitutions for gas (such as hydrogen, fuel cells,
etc, in addition to renewables). Also, smaller, independent E&Ps may
struggle if they have less access to capital.
“Green” and “blue” hydrogen, are carbon-free or neutral fuels that could be produced by oil and gas companies
and enable them to become carbon net zero 2050 compliant. Hydrogen can be used
to decarbonise a range of sectors including industry (chemicals, iron, steel,
fertiliser, refining), transport, heat (domestic & industrial) and power
where it is proving difficult to meaningfully reduce emissions. What are the market factors for hydrogen to
become a replacement for gas and how could oil & gas companies make it work?
Global Significance and Type
Global
demand for hydrogen is currently at about 70Mtpa and is produced using 6% of
the world’s natural gas and 2% of the world’s coal, according to the IEA.
Current uses of hydrogen are
largely by industry, in oil refining and ammonia, methanol and steel
production.
Less than 2% of hydrogen globally
is generated with zero carbon emissions as green hydrogen, from water
hydrolysis powered by renewables and this is set to become cheaper and more
widely available in the future, which would make it an important zero-emission
energy and transport fuel source. Green
hydrogen is not yet commercially viable. Scaling up green hydrogen will require
development of larger-scale electrolyser equipment that converts renewable
power to hydrogen via electrolysis and a ramping up of low-carbon renewable
generating capacity. Almost all hydrogen (remaining 98%) therefore is produced
as grey hydrogen, meaning all 830Mtpa CO2 emissions
generated during its production are released to the atmosphere (approximately
2.5% of global CO2 emissions in 2017).
Notwithstanding increased demand
for hydrogen in the future, this presents a significant opportunity for
emissions reduction by cleaner alternatives, either by increasing green hydrogen
production or a clean version of grey hydrogen, namely blue hydrogen.
- Grey hydrogen is most commonly produced by the steam-methane reformation (SMR) process. There is also the autothermal reforming (ATR) process, which is similar to SMR but also adds oxygen via a catalytic process and is more costly, as well as partial oxidation of methane; and coal gasification.
- Blue hydrogen is essentially a
carbon-neutral version of hydrogen, as it is produced in the same way but
with up to 95% of the resulting CO2 emissions either being
disposed of via carbon capture and storage (CCS) or offset elsewhere via a
carbon “negative” project. Blue hydrogen via SMR using natural gas with
CCS currently has the lowest production cost of all types of hydrogen,
including green hydrogen.
Future global demand for hydrogen
between now and 2050 is expected to grow to anywhere between 79Mtpa and 546Mtpa
depending on how big a contribution it makes to the world’s future energy
needs. This wide range of forecasts is
based on the views of Shell, International Renewable Energy Agency (IRENA) and
The Hydrogen Council plus four scenarios with different pathways for technology
and market development. The Hydrogen Council estimate is by far the greatest.
This assumes hydrogen provides 18% of the world’s energy demand in the 2050
two-degree scenario.
If it is assumed there is enough demand
to support new entrants, blue hydrogen could be seen as a good fit for E&P
companies, at least in the near term, as it offers a large scale, hybrid
solution: carbon-neutral, while still using fossil fuels and existing oil &
gas industry skills, expertise and know-how.
New entrants will also need to
understand the competitiveness of the blue hydrogen business environment and
identify a strategy for potential profitability.
Blue Hydrogen – An Emerging Market?
As a nascent market, new oil and
gas company entrants to this market are examining opportunities through the
lens of five key business factors.
1. Competitive rivalry is
moderate, allowing new opportunities for oil & gas companies:
- Worldwide, there are currently 10 large
blue hydrogen plants with CCS in operation and 11 planned. Capacity of these ranges from
Tomakomai’s 100kt CO2/yr to Lake Charles Methanol’s 4.2 Mt CO2/yr.
- Oil and gas companies have ownership of
raw materials and appropriate knowledge, expertise and transferrable
skillset, including transport of gas, compression, metallurgy, complex
plant, gas liquefaction, large scale capital project management
- Oil and gas companies have the opportunity
to reuse depleted oil and gas fields for carbon capture and storage.
2. Barriers to entry
for others but less so for oil and gas companies, because:
- Large capital requirements and lead times
involved in planning and executing hydrogen and CCS projects
- Specialist competencies needed similar to
those currently used by the oil and gas industry (highly transferable
skills).
- High infrastructure costs – hydrogen
transportation by pipeline (convert existing or new) and storage tanks
either, as gas or liquid like LNG, salt caverns, etc; CO2 capture,
transport and storage (plant, equipment, pipelines, empty field
reservoirs). There are issues to be resolved around pipeline conversion
and regulations are required.
3. Strength of suppliers appears similar to the oil and gas industry:
- High number of suppliers of equipment and
services for hydrogen production. Substitution
of similar products and therefore likely less volatility in prices.
4. Large pool of customers due to the many applications for hydrogen, currently used in industry, with potential to expand to include:
- Transport – using hydrogen fuel cells for
vehicles and hydrogen-based fuels for shipping and aviation.
- Buildings – hydrogen could be blended into
existing natural gas networks and commercial buildings in hydrogen boilers
or fuel cells.
- Power generation – hydrogen is one of the
leading options for storing renewable energy when there is no demand (wind
at night or too much sun/solar during the day).
- Heavy industrial applications, noting that
heavy industry currently produces about 22% of global CO₂
emissions.
5. Low threat of substitute products to carbon-free hydrogen:
- Blue hydrogen has the lowest production
cost of all hydrogen categories.
- Mature process – SMR with CCS is well
proven and has been in operation for almost two decades. Alternatively,
ATR offers a higher CO2 capture rate (95% vs SMR’s 90%)
through increased gas processing efficiency and a more cost effective
option when factoring in CCS as the CO2 is contained at
process pressure, therefore reducing compression costs.
- Commercially scalable – existing hydrogen
production facilities with CCS produce 1,000 tonnes hydrogen per day. In
contrast, electrolysis accounts for less than 2% of the current 70Mtpa of
hydrogen globally produced today. The largest individual electrolysis
project installed to date was 10MW in 2018.
- Less electrically intensive than green
hydrogen – blue hydrogen requires less than 10% of the electricity needed
by electrolysis. Producing the current world hydrogen output from
electrolysis would require an electricity demand of 3,600TWh, more than
the total annual electricity generation of the European Union.
Concluding Comments
The need for carbon-free
alternatives in sectors that are difficult to electrify, coupled with
limitations on battery capacity, has begun the race for global dominance in
international hydrogen market. However, this market is likely to experience a
long timeline to maturity. Even with strong government support, hydrogen must
still overcome two key challenges that are linked, affordability and scale. The
lifespan of blue hydrogen will depend on electricity and gas prices but can
also be influenced by individual government policies. Whilst policymakers and
industry must work together to encourage investment and trade, if it is assumed
there is enough demand to support new entrants, blue hydrogen could be seen as
a good fit for E&P companies, at least in the near term.