Oil prices might be riding high on robust post-Covid demand, but don’t expect supply-side pressures to relent. Follow This, the Dutch pressure group whose climate resolutions are winning over investors, is redoubling its campaign to force international oil companies to slash Scope 3 emissions this decade. Outspoken founder Mark van Baal believes this won’t happen unless shareholders oblige IOCs to halt exploration and invest in renewables.

Oil prices might be riding high on robust post-Covid demand, but don’t expect supply-side pressures to relent.The Dutch pressure group whose climate resolutions are winning over investors, is redoubling its campaign to force international oil companies to slash Scope 3 emissions this decade. Outspoken founder Mark van Baal believes this won’t happen unless shareholders oblige IOCs to halt exploration and invest in renewables. He told us that the onus is on Western IOCs to lead the oil industry into a post-crude future – and ignore short-term market signals along the way.

<img src="https://illuminem.b-cdn.net/articlebody/053ca3d4c3e511473d5df27bbdcdaddbf81baf6f.png" alt="undefined">
Follow This founder Mark van Baal at a London symposium in 2019
Oil is the new tobacco. ESG investing is all the rage on Wall Street. Even providing IOCs with services such as underwriting or <a href="https://onezero.medium.com/google-says-it-will-not-build-custom-a-i-for-oil-and-gas-extraction-72d1f71f42c8">advanced computing</a> is becoming frowned upon – let alone financing their exploration and production activities.
Combined with insatiable demand for commodities to fuel the global economic recovery, these factors are conspiring to keep oil prices high. Yet IOC shareholders are increasingly voting to tie the hands of Big Oil bosses, who hope to secure bumper profits during a period of structural market tightness.
Amsterdam-based pressure group Follow This has been instrumental in energising this movement by tapping into shareholder appetite for change. The organisation won notable victories this year at the AGMs of <a href="https://www.follow-this.org/61-of-chevron-shareholders-support-follow-this-climate-resolution/">Chevron</a> and <a href="https://www.follow-this.org/58-of-conocophillips-shareholders-vote-for-follow-this-climate-proposal/">ConocoPhillips</a>, and support for its climate resolutions is rising among shareholders at <a href="https://www.follow-this.org/support-for-follow-this-climate-resolution-more-than-doubles-despite-bps-claims-to-be-paris-aligned/">BP</a> and <a href="https://www.follow-this.org/support-for-follow-this-climate-resolution-more-than-doubles-signalling-dissent-over-shells-climate-plan/">Shell</a>.
Mark van Baal is adamant that stoking the fires of discontent among typically conservative institutional shareholders is the only viable route to emissions reductions. In a wide-ranging interview with us, the Follow This founder rejected the view that tackling the more difficult challenge of curbing oil demand might yield better results:
<blockquote>“That’s an argument the oil industry is using a lot, ‘it’s not a supply-side problem, it’s a demand-side problem’. Everybody has to do their fair share to achieve the Paris climate agreement, which means that consumers have to buy renewables. “But let’s face the fact that they haven’t been offered this, Shell didn’t offer any renewable products before 2017, I think. It is very easy to say consumers aren’t buying it if you aren’t offering it, so it is really the supply side that has to change.”</blockquote>
<h1>Big Oil’s big deflection</h1>
Shell CEO Ben van Beurden describes as a “fallacy” the idea that constraining oil supply will force the world to transition to lower carbon sources. “Ultimately, our customers will have to make the transition,” the Shell boss <a href="https://www.energyflux.news/p/big-oil-is-winning-the-market-battle">said recently</a>.
Van Baal sees Shell’s focus on oil demand and ‘consumer choices’ as the latest in a long string of attempts to steer the conversation away from meaningful (but less profitable) action on Scope 3 emissions:
<blockquote>“Talking about consumer choices is deflection and the oil industry have been masters in deflection. By the end of the 1980s they knew what was going on and they decided to deflect public opinion to whether climate change was real or not. They kept us debating about that for a couple of decades. “When that debate was settled they said, ‘let’s discuss consumer choices’. Now they are saying ‘let’s discuss 2050’. Shareholders are losing their patience, they see the track record of the oil industry and want change and that’s why they vote for climate resolutions.”</blockquote>
<h1>Riding a wave of dissent</h1>
Support for climate action is on a firm upward trajectory at Shell, with 30% of shareholders voting in favour of a Follow This resolution this year – more than double the percentage achieved in 2020:

<img src="https://illuminem.b-cdn.net/articlebody/ac53b23ede4044fc3cf61c9795bea9e23265df64.png" alt="undefined">
 Van Baal believes the tide is turning because pension funds and other institutional investors are starting to consider the wider impact on their portfolios from the ravages of anthropogenic global heating.
<blockquote>“The oil industry is talking about 2050 but not taking enough action in the next 10 years. Even BP knows. We tried to negotiate a joint shareholder resolution but we didn’t agree on it because we said, ‘OK, our limits are the Paris climate agreement. And the Paris climate agreement dictates decreasing emissions by 2030, not increasing’. That was the key stumbling block. “The good thing is that the investors are no longer accepting it. Investors are shifting their decision-making from what’s best for the company to what’s best for their portfolio, AKA best for the climate. That’s the key thing I saw changing. “Five years ago investors would go with that narrative, ‘yes we are looking at a very profitable decade, so please give us maximum flexibility to maximise profit because that’s your fiduciary duty. You have to make sure you can pay your pensions’. “Now the investors are saying ‘sorry, there’s something much bigger at stake and that’s the climate that’s threatening all our assets, not only yours, so we are going to put constraints on you’.”</blockquote>
<h1>What about NOCs?</h1>
Van Baal acknowledges he is targeting a comparatively small part of the oil industry. Western IOCs account for only 20% of global oil production, and are the ones transitioning arguably much faster than national oil companies – which account for around 60% of global oil production. Again, he sees no reason to doubt the merit of the Follow This strategy:
<blockquote>“Let’s first look at the numbers. Shell says they are transitioning much faster. In the last five years while they have been talking a lot more about action on climate, a mere 3% of their investment went on renewables. 97% still went to fossil fuels. OK, 3% is more than 0%, but you can’t claim to be in a fast transition. “The IOCs have the brains and the ability to drive the energy transition. If they prove we can shift from fossil fuels to renewables, the NOCs will follow. It all comes down to whether you believe the battle between fossil fuels and renewables will be easily won by renewables, which I do, because technology is getting cheaper.”</blockquote>
NOCs might be dragging their feet now but they are owned by governments that signed the Paris climate accord, so they are obliged to act on emissions sooner or later, he argues. Diversifying NOC revenues will become an increasingly urgent priority for political reasons, too:
<blockquote>“These NOCs are in countries where government budgets completely depend on fossil fuels. They must realise if they don’t transition they will lose their revenues. It is a little bit cynical, but if you don’t have these huge revenue streams you will have to ask for taxes, you have to tax your citizens. And as soon as you start taxing your citizens they also want democracy.”</blockquote>

This article first appeared on Energy Flux. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

"Constraining oil supply is key to cutting demand" - an exclusive interview with the Founder of 'Follow This'

Love it or loathe it, bitcoin is here to stay. The power-hungry digital currency is going from strength to strength, soaring to a series of all-time highs since the New Year and winning a string of high-profile corporate backers along the way. All this has cemented its position as the world’s leading cryptocurrency by market capitalisation.

Love it or loathe it, bitcoin is here to stay. The power-hungry digital currency is going from strength to strength, soaring to a series of all-time highs since the New Year and <a href="https://www.nasdaq.com/articles/a-summary-of-bitcoins-massive-first-quarter-2021-04-07">winning</a> a string of high-profile corporate backers along the way. All this has cemented its position as the world’s leading cryptocurrency by market capitalisation.
There are few topics in modern finance as divisive as bitcoin, and its intense energy consumption is a major bone of contention. Every time the price rallies, the debate becomes as heated as the ASIC mining rigs endlessly crunching numbers in far flung corners of the world to keep the bitcoin network running 24/7.
Bitcoin’s electricity consumption will only increase with adoption. A requirement for ever-greater computing power is baked into the system: every four years or so the ‘reward’ for mining bitcoins <a href="https://www.investopedia.com/bitcoin-halving-4843769">halves</a>, meaning twice the hashing power is needed to ‘mint’ each new coin.
At the current trajectory, bitcoin’s spiralling energy requirement promises to disrupt upstream energy production in all manner of ways – some of them very positive – and yet the energy industry is barely starting to engage with the technology.
In short, if bitcoin achieves its full potential and replaces fiat currencies around the world – the so-called ‘<a href="https://www.bitrawr.com/hyperbitcoinization">hyperbitcoinisation</a>’ of the economy that bitcoin acolytes eulogise about – then early adopters will essentially replace central banks at the heart of this new digital financial ecosystem. Energy incumbents are in a privileged position to take a big slice of that market, but short-termism and a lack of vision seem to be standing in the way.
<img src="https://illuminem.b-cdn.net/articlebody/8f42ee45fcdc4e87cf7e496e1ef0926af4eba485.png" alt="Photo by NASA on Unsplash">
<h1>Money = energy</h1>
But let’s rewind a moment. Why does bitcoin consume so much power in the first place? (If you’re already au fait with this, skip to the next section.)
Bitcoin’s insatiable power demand – equivalent to that of Switzerland, according to <a href="https://www.statista.com/chart/18632/estimated-annual-electricity-consumption-of-bitcoin/">one estimate</a> – is at the heart of the ‘proof of work’ system of cryptographic consensus that makes the bitcoin network and the transactions it supports secure, resilient and trustless.
In simple terms, bitcoin’s proof of work algorithm requires a market participant to demonstrate that a certain amount of computational effort has been put into producing a block on the bitcoin blockchain.
Bitcoin miners around the world compete to be the first to mine the next block by ‘hashing’, or churning through reams of digits, to earn transaction fees and mint new bitcoins in reward. The greater the miner’s processing power, the greater its chance of winning the number-crunching race. This establishes a direct correlation between a miner’s energy usage and its competitiveness.
The power price is thus a fundamental determinant of the profitability of any mining operation, which is why miners are constantly scouring the world for cheap sources of electricity: electrons generated a long way from demand centres, in an over-supplied market, whose production is subsidised – or a combination of these factors.
China remains the world’s capital of bitcoin mining and hashing power thanks to abundant supplies of subsidised capacity, much of which runs on coal. This severely tarnished bitcoin’s environmental credentials, providing rhetorical ammo to sceptics and environmental campaigners who question the cryptocurrency’s ethical legitimacy.
China’s hegemony in hashing capacity is not total. Small but significant mining operations are also active in the US, Russia, Kazakhstan, Malaysia, Iran, Canada, Germany, Norway, Iceland and Venezuela – all home to sources of cheap electricity, be that from subsidised zero marginal cost hydroelectric dams, nuclear stations, solar PV arrays or wind farms. And sales of ASIC mining equipment are growing fastest outside China.
<h1>Birth of a Norwegian pioneer</h1>
There are signs that some big energy players are waking up to bitcoin. A significant announcement in early March sent ripples through the cryptocurrency world but went almost unnoticed in mainstream energy press: the launch of <a href="https://www.seetee.io/">Seetee</a> by Norwegian industrial energy titan Aker.
Seetee is Aker’s new bitcoin arm, <a href="https://www.akerasa.com/en/news/stock-exchange-releases/article/36900-aker-asa-launches-seetee-to-invest-in-bitcoin-and-blockchain-technology">dedicated</a> to investing in mining operations that convert stranded or intermittent electricity without stable local demand – wind, solar, hydropower – into “economic assets that can be used anywhere”. In the words of Aker chairman Kjell Inge Røkke:
<blockquote>“Bitcoin is, in our eyes, a load balancing economic battery, and batteries are essential to the energy transition required to reach the targets of the Paris Agreement. Our ambition is to be a valuable partner in new renewable projects.”</blockquote>
So, a company that derives the vast majority of its income from oil exploration and production is to leverage bitcoin as a means of shoring up the economics of intermittent wind and solar projects, perhaps enabling some that would not otherwise get built.
Seetee believes bitcoin’s role as an economic battery can transform wind and solar into baseload power sources by mopping up structural excesses, preventing curtailment and boosting power plant revenues. This is beneficial to grid balancing, as demand-side load shifting can only do so much.
Also, bitcoins mined this way could be reinvested into building new renewable projects, creating a virtuous economic cycle along which electrons are converted into bitcoin and back again. There will probably be technical impediments, but the idea is an interesting one.
Røkke’s <a href="https://www.seetee.io/static/shareholder_letter-6ae7e85717c28831bf1c0eca1d632722.pdf">letter to Aker shareholders</a> is worth reading in full to understand how a Norwegian entrepreneur who made his fortune in fishing and, later, oil and gas sees bitcoin as the next great business opportunity in the energy transition. The letter is a freewheeling philosophical examination of risk perception, monetary policy, data privacy, the need for businesses to constantly innovate – and the risk of missing out on bitcoin’s enormous upside potential.
<h1>Spinning gold from straw</h1>
Røkke’s visionary leadership is rare among energy industry magnates. Bitcoin mining is only just starting to gain awareness as a highly versatile and profitable means of unlocking stranded energy sources, such as associated gas.
There are a few upstream operators harnessing this waste gas at remote oil fields to power mobile bitcoin mining rigs. A few pioneering US companies specialise in leasing gas-to-power mining units to upstream operators or providing them with turnkey hashing solutions.
One of them – Crusoe Energy Systems – at one time <a href="https://web.archive.org/web/20200829091301/https:/research.arcane.no/news/equinor-partners-with-bitcoin-mining-company">partnered with Norwegian state oil company Equinor</a> in the Bakken shale oil play in North Dakota. The setup typically involves laying a short pipeline from the oil well to a small onsite gas-to-power generator; power conditioning equipment; and a rig of fan-cooled ASIC mining computers.
Using waste gas for mining allows oil producers on one side of the world to use a worthless stranded energy asset to produce an increasingly valuable digital commodity – in direct competition with others on the network.
Some proponents of gas-fired mining claim that they are displacing coal-fired bitcoin miners in China. Taken at face value, this means bitcoin mining is opening up a new digital frontier in the push to replace coal with cleaner-burning natural gas in China and across much of Asia.
<img src="https://illuminem.b-cdn.net/articlebody/51b0cb83c73aa037b6f93d683316f959eaed36d6.png" alt="Crusoe Energy’s digital flare mitigation units operating in the Williston Basin">
<h1>Eschewing the laws of physics</h1>
In reality, a gas-fired miner is competing with all the other miners, including those fuelled by genuinely low- or zero-carbon power sources. But let’s hold that thought and explore the significance of (theoretical) coal-to-gas switching via bitcoin mining.
Until now, converting a heating system from coal to gas required natural gas molecules to be physically present in the same location as the coal furnace. In the power sector, the gas molecules must generate electricity onto the same network as a coal-fired power station.
To achieve this physical proximity, the CH4 molecules must be drilled from a hydrocarbons reservoir, gathered, processed and then piped over long distances to the end-use location. For American, Russian or African gas to compete with coal in Asia, it must also be liquefied, loaded, shipped over even longer distances, unloaded, regasified and injected into the local gas network at the consumption end of the chain. At every step, energy is consumed and often some methane leaks out.
Bitcoin is upending the assumption that fuel replacement requires physical proximity. At mobile bitcoin mining rigs at US or <a href="https://forklog.com/sp/oil-gas-bitcoin/">Russian</a> oil fields, the gas molecules need travel only a few hundred feet rather than halfway around the world (and thereby avoid the inefficiencies inherent in producing and transporting liquefied natural gas).
Bitcoin won’t be denting LNG trade any time soon, but widespread adoption could help address the problem of routine venting or flaring of gas at conventional oil fields and shale plays. This practice persists because infrastructure does not exist to pipe the gas to market, or there is no spare capacity on the pipeline at a price that makes it worthwhile to do so.
If low wholesale gas prices render solutions to these obstacles uneconomic, the status quo prevails: methane is released unabated into the atmosphere, it is re-injected to the well to pump more oil, or it is burned at flare stacks that light up the prairie.
The American shale patch has earned an unwelcome accolade for wasting obscene volumes of methane during the hydraulic fracturing of oil-rich shale deposits. The shale boom has helped put US gas flaring on a par with that of Russia, Iran and Iraq, the world’s worst offenders, and beyond that of Venezuela, Algeria and Nigeria – other major gas flaring culprits, according to <a href="https://www.ggfrdata.org/">World Bank data</a>.
As the climate debate intensifies, investors are more closely scrutinising the environmental metrics of upstream operators. Associated gas is becoming a reputational liability for oil producers that have grown accustomed to freely venting and flaring endless volumes of the climate-heating fuel. It could soon become an economic liability too, if regulators finally come good on promises to crack down on routine flaring.
For this reason, oil producers with too much gas on their hands can make it available for bitcoin hashing at a negligible cost to the mobile mining outfits – giving them a competitive edge over rivals that must pay a generator directly, or draw power from the grid.
<h1>Transformative opportunity</h1>
The addition of associated gas to the bitcoin miners’ global fuel mix is neither here nor there for the mining ecosystem; it makes no difference whether a coin was minted using electricity derived from hydro, wind or gas-fired power. But it could prove transformative for those energy companies sitting on stranded gas resources: technically insolvent US shale players, chastened independents, cash-strapped energy majors and Covid-weary national oil companies.
As the bitcoin price surged – from highs of $1,000 per coin in 2013 to $20,000 in 2017, and then on to ~$60,000 today – the profitability of mining rose in tandem. The most bullish forecasters now foresee bitcoin hitting six figures as soon as this year, and $1 million before mid-decade. It might happen later than that, but the timing matters not: current monetary policy is debasing fiat currencies, pulling the inflection point towards a hyperbitcoinised economy steadily closer.
The conversion of stranded gas into bitcoins thus makes a lot of economic sense. One is a carbon-emitting fossil commodity with zero wellhead value that, even when it finds a route to market, is on a path of secular (albeit gradual) decline. The other is a digital commodity that, bitcoiners say, could give rise to an entirely new decentralised global monetary system.
Putting a stranded fossil energy resource to economic use improves the efficiency and profitability of upstream operations, while ridding oneself of a liability and – depending on your worldview – taking a punt on a speculative digital asset class, or buying a stake in the new world economic order.
While mobile gas-fired miners are niche third party enterprises, their founders openly expect oil companies to integrate bitcoin mining into their upstream operations as it gains acceptance. If they do, the carrying value of their 2P gas reserves could be expressed directly in bitcoin, enabling them to hold the currency as a reserve in their corporate treasuries and diversify their balance sheets (as <a href="https://ir.teslamotors.com/node/21421/html">Tesla now does</a>).
As central banks print more money, bitcoin is <a href="https://news.bitcoin.com/visual-interpretation-of-bitcoins-supply-shows-the-digital-assets-unique-scarcity/">becoming more scarce</a> by design. Converting stranded gas resources into a large cryptocurrency portfolio could convert today’s cash-constrained energy incumbents into the (decentralised) banks and money lenders of tomorrow.
<h1>Still lots to play for</h1>
The best moment to invest in bitcoin was five or ten years ago, but the size of the market opportunity is still considerable. An estimated 328,500 bitcoins will be <a href="https://www.blockchaincenter.net/bitcoin-supply/">minted every year</a> out to 2024. With the price hovering just below $60,000 per coin, that’s nearly $20 billion in wealth creation every 12 months.
While that’s barely 1% of the ~$2 trillion value of today’s oil market, the figure will rise as the bitcoin price appreciates. If bitcoin hits $1 million dollars before mid-decade, the value of newly minted coins in 2024 alone would be $328.5 billion – while the entire market capitalisation of all the bitcoins in circulation would be closer to $19.6 quadrillion.
Unlocking stranded energy resources to take a piece of that market presents an alluring proposition and a strategic hedge. For petrostates in particular, it holds the prospect of preserving geopolitical clout that would otherwise wane with the demise of the petrodollar from its status as the world’s reserve currency.
<img src="https://illuminem.b-cdn.net/articlebody/9b2fc634d5f3fb5062b1400a57fb8ae7089375a5.png" alt="Photo by Alexander Sinn on Unsplash">
<h1>But what about emissions?</h1>
Unfortunately, burning waste gas to power ASIC mining rigs does nothing to prevent emissions of carbon dioxide (although it does reduce venting of methane, a more potent climate-heating gas over shorter timeframes). This exposes investments in gas-fired bitcoin mining to the same climate risks as any other gas-fuelled operation. It also adds a further economic incentive to drill sooner rather than later – before regulators clamp down on externalities such as carbon emissions.
Using natural gas for mining has already divided bitcoiners, with some concerned about the <a href="https://lorenzovallecchi.medium.com/on-stranded-natural-gas-and-bitcoin-190dd3c87870">moral implications</a> of using an ‘unsound’ carbon-emitting fuel source to create what they deem to be ‘sound money’. And the claim that US gas-fired mining displaces coal-fired Chinese rivals does not stand up to scrutiny either.
Analysis <a href="https://medium.com/@nic__carter/noahbjectivity-on-bitcoin-mining-2052226310cb">indicates</a> that Chinese bitcoin miners flock to regions with abundant hydro-electric power during the rainy season when dams fill to the brim, or where excess wind power is routinely curtailed. With companies such as Seetee investing in mining ventures that bolster the economics of renewable power projects, bitcoin is another theatre in which the coal/gas/renewable/nuclear battle for market share will play out.
As such, carbon pricing and tightening of environmental regulations will progressively incentivise cleaner mining operations and push ‘dirty operators’ off the bitcoin network first – in much the same way that UK and European carbon pricing is pushing coal off the grid, with gas-fired power next in line.
<h1>Short-termism prevails – again?</h1>
Oil producers will have to move fast if they want to seize the bitcoin opportunity, but many have other priorities. Some mobile gas-fired miners <a href="https://open.spotify.com/episode/1qNPQhQzBgQwDhM2hDH7Km">report</a> that few are willing or able to partner with them, due to lack of understanding or awareness of bitcoin, fear of shareholder reprisal, technical constraints or a steadfast fixation on boosting free cashflow while the oil price remains buoyant.
A short-term obsession with drilling new wells at any cost in the misplaced belief that ever-greater production volumes would increase profitability put many shale oil operators in their current predicament. (Equinor is a case in point: it sold its Bakken acreage in February after a decade of eye-watering losses rooted in <a href="https://www.reuters.com/article/us-equinor-usa-idUSKBN2AA0FX">abysmal US shale investment decisions</a>. The partnership with Crusoe probably ended with that asset disposal.)
The irony is that the same short-termism is blinding these companies to a fascinating opportunity to play a role forging the new world monetary order – or at least make a few precious bucks on gas they can’t sell.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Brave new world: Bitcoin opens digital frontier in global clean energy transition

It’s all about hydrogen in today’s issue – the fuel of the future, or fanciful folly depending on your perspective. Sustainability consultancy E3G released a report this week that seeks to find a green-tinted middle ground in the polarised debate around the efficacy of switching parts of the UK economy to run on hydrogen. In the hydrogen debate, detractors decry hydrogen’s huge inefficiencies and practical challenges, while supporters see it as nothing short of vital for achieving ‘net zero’.

It’s all about hydrogen in today’s issue – the fuel of the future, or fanciful folly depending on your perspective. Sustainability consultancy E3G <a href="https://www.e3g.org/publications/between-hope-and-hype-a-hydrogen-vision-for-the-future/">released a report</a> this week that seeks to find a green-tinted middle ground in the polarised debate around the efficacy of switching parts of the UK economy to run on hydrogen.
In the hydrogen debate, detractors decry hydrogen’s huge inefficiencies and practical challenges, while supporters see it as nothing short of vital for achieving ‘net zero’.
The E3G report seeks to cut through those binary positions to identify realistic use cases while warning against pursuing dead-end options being pushed by vested interests. It is worth reading in full, but here is my pick of the key recommendations:
<ul><li>On the production side, the UK should focus exclusively on green hydrogen (from renewables) rather than taking a twin-track approach that includes the blue variety (derived from fossil gas)</li></ul>
<ul><li>This requires parallel rapid growth in offshore wind, electrification, efficiency and the circular economy</li></ul>
<ul><li>In end-use applications, UK should focus on high temperature heat in industry, shipping and aviation, and long-duration electricity storage — not domestic heating</li></ul>
<ul><li>Hydrogen pipelines should be built around secure demand and supply, not around the question of how existing gas assets can best be kept functioning</li></ul>
This last point is crucial. The pro-hydrogen narrative is heavily influenced by the natural gas industry. Pipeline owners and regulated gas network operators are keen to maintain utilisation rates and avoid writing down the value of their assets.
Regulators almost certainly won’t let them jack up per-unit rates to compensate for fewer volumes flowing through their assets if net zero squeezed demand — so hydrogen ‘blending’ is a great way to shield gas industry incumbents from the economic threat posed by decarbonisation.
E3G places emphasis on identifying areas where hydrogen offers the best ‘value-add’ — and blending is not one of them. Mixing H2 with pipeline gas will be “challenging” over a certain share due to infrastructure constraints and the potential that “the quantities of green hydrogen that would be required never emerge”, the report states.
Similarly, the blue-versus-green debate is becoming a flashpoint in the fossil-versus-renewables cold war. Upstream operators need to convince capital markets that their prized 2P resources will not be stranded by the net zero push, and subsidised blue hydrogen provides the perfect cover.
North Sea oil and gas lobbyists want to convince government that ‘blue is cheaper than green’ in a bid to secure subsidies for steam methane reformation (SMR) with carbon capture, to convert CH4 into ‘low carbon’ H2. That phrase has caught on, with the UK government conflating blue and green under the misleading umbrella of ‘clean’ hydrogen.
On this, E3G is unequivocal:
<img src="https://illuminem.b-cdn.net/articlebody/ffa3d43592d113ade7018219505a77625066a28d.png" alt="undefined">
None of which is to say hydrogen has no future whatsoever in the UK, or anywhere else for that matter. Using green hydrogen to replace dirty ‘grey’ H2 (made from gas, without carbon capture) in refineries is a good place to start attacking industrial emissions.
Wider industrial uptake of green hydrogen could cluster around centres of production (e.g. coastal sites near offshore wind farms). Since transporting H2 over long distances is problematic and inefficient, hydrogen clusters could make a lot of sense. But beyond that, who knows? Clusters might become the high water mark of hydrogen adoption.
<h1>Big vision, small budget</h1>
Cue yesterday’s big hydrogen ‘news’: Danish wind developer Ørsted’s <a href="https://orsted.com/en/media/newsroom/news/2021/03/451073134270788">grand unveiling of SeaH2Land</a>, an ambitious vision to roll out 2 GW of new offshore wind capacity in the Danish North Sea powering a 1 GW electrolyser by 2030. This, in turn, would feed a Dutch-Flemish North Sea industrial port cluster to enable “sustainably-produced steel, ammonia, ethylene, and fuels in the future”.
Big industrials in the area – ArcelorMittal, Yara, Dow Benelux, and Zeeland Refinery – currently use 580,000 tonnes per year of grey hydrogen. The electrolyser would initially replace around 20% of that, growing to 1 million tonnes by 2050 – equivalent to roughly 10 GW of electrolysis, according to Ørsted.
There’s a long way to go, however. Ørsted and partners need to conduct a feasibility study and then pow-wow with regional authorities over “the framework and policies needed to support” such a development – i.e. they’ll lobby for subsidies to make it a reality. Nobody will be cutting a big cheque any time soon to bankroll construction of SeaH2Land (or any other proposed hydrogen cluster).
Therein lies the rub on hydrogen: who ultimately pays to build out grand visions of clean steel and zero-carbon cement production? These are among the hardest segments of the economy to decarbonise, yet solutions such as SeaH2Land won’t make economic sense without a triple-figure carbon price — which is not likely this side of 2030. Maybe that’s where targeted support, for example in the form of <a href="https://climatestrategies.wordpress.com/2020/09/09/carbon-contracts-for-differences/">Carbon Contracts for Difference</a>, will play a vital bridging role.
<h1>Unleashing potential</h1>
If the economics can be cracked, green hydrogen uptake could unlock some exciting possibilities. Next-generation floating offshore wind turbines, the next frontier in offshore wind development, <a href="https://www.rechargenews.com/wind/floating-wind-powers-new-hydrogen-horizons-a-global-offshore-energy-game-changer-/2-1-986939">could benefit enormously</a>: freed from costly and complex long distance electrical connections to shore, floating offshore wind farms could be developed exclusively for in situ hydrogen production, with H2 shipped to coastal demand centres (perhaps in the form of ammonia).
Financing a dedicated offshore wind-powered hydrogen production facility would require cast-iron contractual certainty that a credit-worthy offtaker would absorb the required volumes, and at the right price. Only then can projects leverage debt finance to cover up-front construction costs.
In short, green hydrogen proponents will need to de-risk the entire value chain and apportion risk carefully among industry participants before big money lenders will make a play. This is exactly what the liquefied natural gas industry strived over many decades to achieve; LNG is only now on the cusp of becoming a mature commodity characterised by trade transparency and deep liquidity.
Producing and shipping LNG consumes energy, but the losses are nothing compared with those inherent in hydrogen. All things considered, the path to commercialisation of H2 will probably be very long, slow and strewn with obstacles. All the more reason to follow E3G’s advice and focus resources on those applications where hydrogen “adds the greatest value for climate, jobs, and a strong economic recovery”.
This article first appeared on <a href="https://www.energyflux.news/p/2021-04-01-polarised-hydrogen-debate">Energy Flux</a>​ 
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

You can’t miss it!

Seb Kennedy

Seb Kennedy

"Constraining oil supply is key to cutting demand" - an exclusive interview with the Founder of 'Follow This'

Recent publications

Readers also like

Want to know more about illuminem Voices?