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Mideast Gulf: In Search of Hydrogen Demand

Copyright © 2021 Energy Intelligence Group

As decarbonization of the global energy system accelerates, interest in developing hydrogen as a clean alternative to carbon-containing fuels has soared (EC Mar.26'21). This is particularly true for Mideast Gulf states seeking to adapt to a changing energy landscape in which flattening oil demand and an erosion in geostrategic significance will be defining challenges for decades to come. For Gulf producers, becoming key global suppliers of hydrogen would reduce dependency on oil revenues in line with broader economic diversification targets, while boosting their clean-energy credentials. This week alone, Dubai's state-run utility Dewa inaugurated a 300 kilowatt “green” hydrogen pilot project, while Omani state energy group OQ announced that it would proceed with plans for a massive 25 gigawatt solar and wind power project to produce “millions of tons per annum of truly zero-carbon green fuels” such as green hydrogen. But as new projects are being announced and hydrogen strategies advanced, the question is whether Gulf states' ambitions of becoming major exporters of the fuel to growth markets in Asia and Europe might be overly ambitious and optimistic. Hydrogen demand growth estimates vary widely. By 2050, future green hydrogen demand could be anywhere between the 100 million tons per year now seen for gray hydrogen -- produced from methane using steam methane reforming or coal gasification -- and 500 million tons/yr. The International Energy Agency (IEA) in its much-scrutinized Net Zero by 2050 report this week suggested that overall hydrogen production will rise as high as 530 million tons until midcentury, 62% of which would be supplied in the form of green hydrogen produced via electrolysis (related). Consulting firm Strategy& -- in an optimistic assessment -- projects that green hydrogen exporting countries could potentially capture a market share of as much as 200 million tons by 2050, worth up to $300 billion annually. Opportunity and Necessity Whatever demand will eventually be, for Gulf states, hydrogen may be as much a political necessity as an opportunity. “As far as Gulf states are concerned, I think they really see this as an imperative, they see this as a growing market, and an important one that will partly fill a gap that could be left by a retreat in fossil fuels,” says Robin Mills, CEO of Dubai-based consultancy Qamar Energy. Saudi Arabia, Oman and the United Arab Emirates have led the way in taking advantage of their low-cost solar -- and, in some instances, wind -- energy, combined with their capability to fund and implement green hydrogen projects. Some of the region's national oil companies have begun to look at advancing “blue” hydrogen options that could utilize their large, low-cost gas resources and expand the application of carbon capture, utilization and storage (CCUS) technologies (EC Mar.19'21). The rationale for moving swiftly is clear. Early movers are likely to be better placed to develop technical skills and find ways of reducing project cost. Moving quickly also stands to strengthen the region's strategic position as fossil fuels' relevance declines. Already, Saudi Arabia has locked in demand from an offtake agreement struck between its futuristic city of Neom and US partner Air Products for a $5 billion green hydrogen scheme that will produce green ammonia as transportation fuel. The US industrial gases firm will be the sole offtaker, selling the green ammonia around the world to power trucks and buses. Asia, Europe to Drive Demand Still, big questions surround the size of the hydrogen export market in Asia and Europe. Japan is at the forefront of developing a hydrogen economy and has significant potential to absorb large volumes of the fuel in the future. Unlike the EU, Japan is expected to rely on both blue and green hydrogen to meet its demand. In its strategic vision for a climate-neutral EU published in November 2018, the share of hydrogen in Europe’s energy mix is projected to grow from less than 2% now to 13%-14% by 2050. But that requires production to be scaled up and fully decarbonized, a European Commission strategy paper said. Green rather than blue hydrogen will be prioritized. Growth in demand will also be tied to the development of carbon markets, with the planned strengthening of the EU Emissions Trading System playing a key role. “What we expect is demand for low-carbon hydrogen to be spurred by the expected rise in carbon prices,” Ivan Pavlovic at investment bank Natixis recently told Energy Intelligence. Some argue because renewable energy can be produced locally, Europe will be able to produce most of the required green hydrogen at home. Others say that producers in the Gulf states and North Africa have an advantage due to their cheaper renewable power generation cost, with the latter -- especially politically stable Morocco -- further advantaged due to its closer proximity to Europe. "If hydrogen development in the EU is anything like to the scale that it's talking about, it won't be able to produce all of that domestically because demand is very large," says Mills. "So if the EU wants to achieve its ambitions it will need imports, and Japan even more so because its renewable energy potential is quite limited." But would-be Gulf exporters will have to factor in transportation costs. Long-distance, non-pipeline transport of hydrogen is difficult and costly because of its low energy density, potentially adding $1‐$3 per kilogram to its price. “This means that, depending on each country’s own circumstances, producing hydrogen domestically may be cheaper than importing it, even if domestic production costs from low-carbon electricity or natural gas with CCUS are relatively high,” says Laura Cozzi, the IEA’s chief energy modeler. Oliver Klaus, Dubai, and Philippe Roos, Strasbourg Compass Points • SIGNIFICANCE: Gulf countries' push into hydrogen is driven as much by opportunity as it is by necessity as they position themselves in a decarbonizing world (EC Jul.17'20). • CONNECTION: The pace of hydrogen developments will be determined by cost reductions in electrolysis technology and transportation that will support scaling up production, and regulations in future demand centers. • NEXT: Watch how quickly, and to what scale, the Gulf hydrogen project pipeline grows.

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