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.