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Big Oil’s Long Bet on Hydrogen Offers a Climate Lifeline

Big Oil’s Long Bet on Hydrogen Offers a Climate Lifeline

Bloomberg News: Will Mathis and Akshat Rathi: June 25, 2020 6:06 AM EDT: Last Updated June 25, 2020 8:48 AM EDT

(Bloomberg) — On particularly cold winter days, the vast majority of the U.K.’s energy comes from burning natural gas. That arrangement will have to change radically–and soon–if the country is to hit its legally mandated target of net-zero emissions by 2050. As other countries adopt similar targets to align with the Paris climate agreement, they too will have to find an alternative to natural gas. That leaves fossil fuel companies with a ticking clock.

Hydrogen burns cleanly, leaving only water behind. That’s made it an attractive alternative fuel source–not just for governments looking to satisfy climate mandates, but also for oil companies trying to ensure their continued relevance. Oil-and-gas majors such as Shell, Equinor, and BP have spent tens of millions of dollars on pilot projects. Now in the face of record-low oil prices, frozen international travel, and growing shareholder unease over greenhouse gas emissions, investing in hydrogen has taken on a new urgency.

Hydrogen also burns very hot, making it useful for high-polluting heavy industries such as cement- and steel-making. These sectors have long relied on coal, and established renewables such as wind and solar can’t deliver the necessary heat. Supplying hydrogen could potentially become a huge new market that oil companies could dominate quickly thanks to their existing expertise in transporting and selling gas.

“Some oil and gas majors see it as a lifeline,” says Rachel Kyte, dean of the Fletcher School at Tufts University and former special representative on sustainable energy at the United Nations. “Now you need regional governments to take the helm and drive it forward.”

With European governments unveiling tens of billions of euros in new spending to re-start economies and satisfy pre-existing climate commitments, hydrogen development could get a major funding kickstart–Germany, for example, has allocated €9 billion ($10 billion) to the nascent industry. That spending will be crucial for the technology around hydrogen production to reach a scale that can compete in the international market.

Despite all the interest, major obstacles remain before hydrogen can fully replace fossil fuels in any sector. The world currently produces more than 110 million metric tons of hydrogen annually, according to BloombergNEF. Most of that is used to make ammonia, NH₃, needed in fertilizers and to convert crude oil into more valuable products such as gasoline and diesel. About three quarters of that hydrogen is derived from the chemical conversion of natural gas–the primary component of which is methane, CH₄–through a process that also produces carbon dioxide, CO₂.

If that CO₂ is released into the atmosphere, the resulting fuel is known as “grey hydrogen.” When the CO₂ is captured and buried underground, it’s known as “blue hydrogen,” a cleaner alternative. The cleanest form, called “green hydrogen,” is derived from water, H₂O, through a process that runs on renewable electricity. While all three types of hydrogen are equally clean-burning, green hydrogen has by far the least negative effects on the environment. It’s also the most expensive: the price today can run as high as $7.50 per kilogram, compared to $2.40 per kg for blue hydrogen, according to the Global CCS Institute, a think tank aimed at accelerating carbon capture and storage development.

Less than 1% of the world’s current hydrogen fuel supply is green. Scaling up renewable electricity production enough to reach 100% will be difficult, especially since consumers and other businesses are seeking renewable power for their homes and workplaces. “Probably you need both routes”–green and blue–“if you’re really serious about decarbonizing all the use cases,” says Oliver Bishop, general manager for hydrogen at Royal Dutch Shell Plc.

Shell was among the first oil companies to show interest in hydrogen, as far back as 20 years ago. One of its early bets was on hydrogen-powered cars, an intriguing idea at a time when lithium-ion batteries were prohibitively expensive. But hydrogen cars proved expensive, too, and needed a completely new fueling infrastructure; electric cars could be charged up in the garage at night. 

“One of the reasons battery-powered electric vehicles jumped ahead so decisively is that there was a parallel industry–consumer electronics–scaling up the use of lithium-ion batteries, increasing performance, and hammering down the costs,” says Colin McKerracher, head of transport analysis at BNEF. Hydrogen didn’t have that kind of push. As the cost of lithium ion batteries has dropped, the electric car market has grown from barely visible two decades ago to one of the fastest-growing segments of the auto industry. Last year, more than 2 million passenger EVs were sold globally, according to BNEF data, while there are still fewer than 20,000 hydrogen-powered cars on road.

Hydrogen could still be useful for transport, but it’s more likely to find its way into buses and trucks than cars and motorcycles. The bigger chance for hydrogen is likely to be in heating and industry. Blue hydrogen could be a particularly effective tool for oil and gas companies looking to re-purpose their existing investments–namely pipes. The same infrastructure that today carries natural gas up to the surface could instead be used to move carbon dioxide in the opposite direction.

“We’ve built this competence over decades,” says Steinar Eikaas, vice president of low carbon solutions at Equinor ASA. His team has proposed converting a natural gas power plant in the Netherlands to run on blue hydrogen. “If you want to store CO₂ safely, there is no other industry but the oil and gas industry that can do it.”

This isn’t purely theoretical. A hydrogen production facility in North Dakota has been capturing and burying as much as 3 million metric tons of carbon dioxide each year since 2000. Ultimately, blue hydrogen is an easier way for an oil company to pivot to clean energy than going full-on renewable. “It’s a way to avoid having stranded assets from the current fossil fuel-based system,” says Pierre-Etienne Franc, who leads hydrogen projects at Air Liquide and represents the company on the Hydrogen Council. “Hydrogen is a way to continue to use [fossil assets] with no CO₂ emissions.”

Others are more bullish about the future of green hydrogen. The price of renewable electricity is falling considerably faster than the prices of natural gas and carbon capture; same goes for the price of the industrial scale electrolyzers used to separate the hydrogen atoms in water from the oxygen atoms. With the help of government policies such as funding for research, subsidies for deployment, and a system to put a modest price on carbon emissions, BNEF projects that by 2050, green hydrogen could cost less than a third of what it does today. Annual sales could reach $700 billion by then, compared to about $1.5 trillion currently for the oil and gas sector.

“Electrolyzers may very well be at the same stage as solar power was more than a decade ago,” says Varun Sivaram, senior fellow at the Columbia University’s Center on Global Energy Policy. The sums governments invested in the technology as part of the stimulus measures after the 2008 financial crisis helped solar power become cheaper and, now, ubiquitous, Sivaram found in a study published this month. The post-pandemic stimulus measures could do the same for hydrogen.

Currently, governments are investing in both green and blue hydrogen. The U.K., for instance, plans to spend £800 million ($993 million) to create carbon capture and storage clusters. These would enable capturing carbon dioxide not just from blue hydrogen production, but also from other industries such as cement production and oil refineries. The Netherlands is planning to spend €2.8 billion ($3.1 billion) on offshore wind turbines to power green hydrogen production for heating and energy. Equinor is investing millions of euros to build a green hydrogen facility in Norway that will power ships for people and cargo.

To meet BNEF’s optimistic projections, the world will need to spend $11 trillion over the next 30 years. Much of that will come from private players, but governments will have to provide early support to unlock that capital. Europe’s proposals so far promises to “make Europe the leader in low-carbon hydrogen production over the coming decade,” according to BNEF.

From a long-term perspective, the spending is more than worth it, says Marc Elliott, an analyst at Investec Securities Ltd. in London. “If we’re going to decarbonize,” he says, “I view hydrogen as the best silver bullet we’ve got.”

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