By: T. Siddiqui
Opportunity
Houston is the energy capital of the world. Texas is in a unique position to lead the world in achieving net-zero by adopting several decarbonization pathways; especially hydrogen and Carbon Capture Utilization and Storage (CCUS).
Hydrogen energy is crucial to the energy transition to achieve net-zero target. It could account for 14 % of the global energy mix by 2050. However, a very sizable investment (~$600 bln) is needed along the hydrogen value chain to make this possible (ref1). USA has been a traditional supporter of hydrogen as an energy vector (ref2). Texas has the critical experience and key enablers to make the technology, a technical and commercial success.
Barriers To Adoption
Legislative support, policy framework and financial incentives are crucial to support the emerging technologies like hydrogen & CCUS and attract investors. They create a supply ‘push’ to the production and a demand ‘pull’ in the emerging end-user markets.
Hydrogen projects are typically; capital intensive, high risk, with long pay-back period and having uncertainty in recouping the future operating costs.
The high risk, limits the investments due to higher WACC expected by the investors .
Hydrogen Road Map
The IEA (ref3) has identified key areas for the governments to define a policy frameworks to facilitate the development of the hydrogen road map across the entire value chain:
Establish emission targets and/or long-term policy signals.
Support demand creation for hydrogen.
Mitigate investment risks in emerging technologies.
Promote R&D, innovation, strategic demonstration projects and knowledge-sharing.
Harmonize standards and remove barriers
Market Development in Texas
Texas has unique credentials to position itself as a leader in the new energy technologies, especially in the hydrogen market.
Current Competitive Advantage
PRODUCTION: Texas produces 2.0 million tons of grey hydrogen, mostly from fossil fuels (natural gas and coal).
MIDSTREAM: Texas has 1600 miles of H2 pipelines networks, many of which are retrofitted from natural gas.
STORAGE: The only three places that are currently operational for underground H2 storage (UHS) in salt caverns in USA, are all located in Texas.
R&D: Research and labs at University of Texas at Austin are working hard to bring the potential of hydrogen closer to reality. UT project is also looking at feasibility study for scaling up hydrogen production and use at the Port of Houston.
CLEAN POWER: Texas is a US leader in the wind power with ~93 TWh (Terawatt-hours) of electricity generated and close second in the solar PV market, with ~15 GW of installed capacity.
This unique advantage can leverage development of Hydrogen market in three phases (see title figure):
1. MARKET CREATION
Initially, a policy support is needed for incentivizing hydrogen for hydrogen production and end-usage.
Need policy framework to de-risk and induce R&D Investments
Need engineering analysis and piloting of key H2 technologies
Need early commercialization of H2 technologies
Hydrogen Supply
Greatest and earliest opportunity is in converting current Grey H2 produced from the natural gas (SMR) in oil refining and ammonia production in the industry, to the Blue hydrogen with Carbon Capture and Sequestration (CCS).
Green H2 offers further opportunities. It can be easily produced from electrolysis for the end-user market. Texas has extensive expertise in wind power and solar PV to provide renewable electricity for green H2 production.
Hydrogen Demand (End-Users)
Transportation sector, offers greatest opportunity for the end-users; Heavy Duty vehicles (HDV), rails, fleet vehicles and fork lifts are the earliest applications.
Hydrogen Refueling Station (HRS) and infrastructure investments will help achieve zero emission targets in mobility sector and create a demand pull for the green hydrogen.
Hydrogen blending with natural gas in power generation sector
Hydrogen Fuel Cell application in the stationary back-up power generation (example data centers, hospitals, defense facilities etc.)
2. MARKET GROWTH
Blue hydrogen with CCS has the biggest scope to be scaled up using existing H2 pipeline network, and integrating into natural gas pipeline system for CCS.
Scaling-up in the transportation sector, aviation and shipping.
Scaling-up Green hydrogen from solar PV and wind.
Scaling-up in power generation sector
3. MATURE MARKETS
Houston shipping channel offers the best opportunity along with Corpus Christy port, to be the regional hubs for the hydrogen.
Hydrogen can be a biggest source of H2 based fuels export from these ports.
Industry can also be big driver of the demand; including industrial heating
Transportation can also be significant driver of the demand
Power generation with initially blending of H2 with natural gas to more advanced pure H2 and ammonia turbines can follow later.
CONCLUSIONS & PORTFOLIO IMPLICATIONS
The oil & gas and energy companies that are currently battling the ‘Green’ wave need to balance their portfolios very carefully, as there is a creative tension between energy demands from their customers and the climate targets:
The energy demand can be met with exsting fossil fuel portfolio, yeilding competitive rate of returns, however, the climate targets are likely to be exceeded beyond 2.0 oC; vice versa meeting the climate target of 1.5 oC with new energies has potential to lower significantly, the rate of returns that are expected by the investors.
The earlier the companies make portfolio decisions the better. They have broad choice to focus, from low growth oil & gas assets to higher growth carbon management and renewable options. The companies can balance their portfolio between growth and returns.
Carbon management options like, Blue hydrogen and CCS, are the lowest hanging fruits, they offer growth opportunities that are closer to oil companies core competencies.
Green hydrogen production and end-users especially in transport also offer growth opportunity, but may require change in the business model
Houston shipping channel and Corpus Christi ports offer great opportunity for energy companies to invest and co-create a regional hub, that through policy support, technology de-risking, piloting, will considerably reduce the risks and share the benefits and rewards in the future hydrogen economy.
References:
“Hydrogen: The US $600 billion investment opportunity”. Wood Mackenzie -April 6, 2022.
Global Hydrogen Review 2021.
“The Future of Hydrogen; Seizing Today’s Opportunities”. Technology Report -June 2019