Oil majors move early on hydrogen after slow response to renewables

Global oil company moves in green hydrogen are a long-term bet on a budding industry and reflect an effort to avoid repeating mistakes made with renewable energy.

Oil majors, including Shell, BP, Saudi Aramco, Exxon, and Repsol, as well as dozens of smaller, independent producers and engineering groups have announced ambitious plans to build a green hydrogen business.  

The companies have decades of experience leading the world’s energy sector, run tried-and-tested infrastructure, and have invested billions of dollars in research and development, placing them in the perfect position to help build an extensive hydrogen economy from almost nothing. 

As renewable power becomes cheaper, there is also a strong incentive to be involved from the beginning. 

“A number of oil majors which had not made moves into renewable, green electrons, have found that being late to the game is much more expensive with a much lower return than building the infrastructure and a leading position would have been a decade ago,” says Jeff McDermott, Global Co-Head of Investment Banking at Nomura and Founder at Nomura Greentech.

“Our advice to clients is they should be pursuing investments and making acquisitions in green hydrogen now, and not in 10 years.”

Traditional fossil fuel companies underestimated the disruptive power of technological innovation, which brings costs down, financial capital, which enables technologies to scale, and political will, which can help put schemes in place before they can pay for themselves, McDermott says.

“Those three forces really drove down the cost of renewable electricity and are going to do the same thing in green hydrogen. Several oil and gas majors have woken up and said; ‘we said no to renewables because we believed that green electrons would never be cost efficient. But boy, we were wrong! We’re not going to make the same mistake with green hydrogen.’”

Hydrogen forms essential part of the Net Zero Emissions Scenario

Notes: NZE-Net Zero Emissions; TFC-Total final energy consumption; CCUS-Carbon capture, utilization, and storage. 

Source: International Energy Agency

Here comes the sun

Many oil companies are leveraging existing infrastructure to roll out hydrogen plans using fossil fuels and carbon capture, utilization, and storage (CCUS), but some, like Spain’s Repsol, are making the leap straight to renewable sources.

In January, Repsol helped launch SHYNE (Spanish Hydrogen Network), a multi-sectorial consortium of 33 members from both the private and public sector that will invest 3.23 billion euros to deploy clean hydrogen projects using solar and wind power across ten autonomous Spanish communities.

“Repsol aims to lead renewable hydrogen production in Spain, and to become a top player in Europe, and SHYNE aspires to be a benchmark in Europe,” says Repsol’s Hydrogen Director Tomas Malango in an emailed response to questions.

“SHYNE will stimulate and support technological innovation, pilots, and new hydrogen-based processes to contribute to the development of hydrogen competitiveness. All the parts of hydrogen supply chain are extremely important to make the renewable hydrogen economy work.”

Spain is one of the sunniest countries in Europe and boasts vast tracts of open, wind-swept land, aims to generate almost three quarters of its electricity from wind and solar power by 2030 and electrify over half of its economy by 2050.

The country’s ‘Renewable Hydrogen Roadmap’, approved in Oct. 2020, stipulates that by 2030 Spain will have 4 GW electrolyzer capacity and renewable sources will produce a quarter of all hydrogen consumed by industry.

The roadmap, which direct some 9 billion euros ($10.3 billion) in investment, foresees widespread hydrogen use throughout the transport sector, namely buses, trains, and land and sea freight vehicles.

“This Hydrogen Roadmap aims to identify the challenges and opportunities for the full development of renewable hydrogen in Spain, providing a series of measures aimed at boosting investment action, taking advantage of the European consensus on the role that this energy vector should play in the context of green recovery,” noted MRC Consultants and Transaction Advisers.

Increasing electrolyzer capacity is one of Repsol’s first goals.

Electricity from solar power and wind is charged through an electrolyzer to split water into oxygen and hydrogen, though capacity today is just around 200 MW and any sizeable transition to a hydrogen economy will need a capacity of closer to 270 GW by 2030 and as much as 1,700 GW by 2050, according to the International Renewable Energy Agency (IRENA).

The SHYNE project is aiming to scale up installed electrolyzer capacity in Spain to 500 MW by 2025 and 2 GW by 2030.

“For the first phase of renewable hydrogen production based on our Petronor refinery, Repsol is targeting to install the first electrolyzer in the second half of 2022. The facility will have a capacity of 2.5 MW and will involve an investment of 8.9 million euros, including the construction of the necessary infrastructures for the use and distribution of the renewable hydrogen produced,” says Repsol’s Malango.

That electrolyzer will serve Petronar’s refinery and other businesses at the nearby Margen Izquierda Technology Park.

The next phase is planned for 2024 with 10MW electrolyzers in the port of Bilbao alongside gas utility Enagas and 102 MW aimed at accelerating Petronor’s decarbonization process, though the details on how are still to be announced, says Repsol.

The hydrogen produced there will supply a synthetic fuel factory which, initially, aims to churn out 50 barrels of synthetic fuel a day, the company says.

Blue steppingstones

Not all oil companies are moving straight to renewable sources for hydrogen production and are instead focusing on what, they say, is a steppingstone from fossil fuels to a greener economy.

Saudi Aramco, the world’s largest oil company by market capitalization, has said it aims to become a global supplier of hydrogen via hydrocarbons and carbon capture, while Shell, ranked fourth by market cap, houses Europe’s largest PEM hydrogen electrolyzer as part of the Refhyne European consortium and was one of the first to capture CO2 at its Pernis refinery.

Green hydrogen must scale up considerably to reach any kind of price parity with blue hydrogen, with the former pricing at about $6 per kilo, assuming 50% capacity factor and electricity price of $0.057/kWh, and the latter at $2.1/kilo, assuming European gas prices, according to the Hydrogen Council.

The difference is understandable in today’s markets, with low-carbon hydrogen demand for new applications low and 98% of all hydrogen produced worldwide arising from natural gas or coal, but growth in any hydrogen use in transport and heavy industry will help pave the way for the gas from non-carbon-emitting sources as it becomes more available.

The oil companies are leveraging infrastructure and know-how to become strong hydrogen players, whether it be ‘blue’ or ‘green’, and as renewables continue to scale and electricity prices fall, the oil companies are busy positioning themselves at the head of a new hydrogen economy.

By Paul Day