The world won’t get to net zero by 2050 without low-carbon hydrogen. This super-versatile energy carrier will have a critical role in decarbonising hard-to-abate, high-emissions sectors including power, steel and fertiliser. It can also be part of the solution for countries reliant on imported oil, gas and coal to bolster energy security.

Simon

<h3>Green projects dominate investment</h3>
The world won’t get to net zero by 2050 without low-carbon hydrogen. This super-versatile energy carrier will have a critical role in decarbonising hard-to-abate, high-emissions sectors including power, steel and fertiliser. It can also be part of the solution for countries reliant on imported oil, gas and coal to bolster energy security.
The <a href="https://www.woodmac.com/events/hydrogen-conference-europe-2022/">Hydrogen Conference</a> on 27 and 28 April in London will examine the big themes in detail. Among these is the US$1.4 trillion growth opportunity: how low-carbon hydrogen production, blue and green, scales up from almost zero today to 0.5 Bt, meeting 15% of the global primary energy mix by 2050. That’s what needs to happen in <a href="https://www.woodmac.com/news/the-edge/how-the-world-gets-to-a-1.5-c-pathway/">AET-1.5</a>, our accelerated energy transition scenario to get the world on a 1.5 °C pathway. <a href="https://www.woodmac.com/profiles/people-profiles/bridget-van-dorsten/">Bridget van Dorsten</a>, Hydrogen Analyst, is speaking at the conference and took me through her latest thoughts on how the industry is developing.
First, global investment in low-carbon hydrogen supply is ramping up. There were 75 new project announcements in Q1, totalling 11.1 mmtpa of new capacity, close to a quarterly record. The US (51%) dominated the Q1 project announcements, while Spain (20%), Paraguay (11%) and Egypt (8%) give a sense of how hydrogen is going global.
<img src="https://illuminem.b-cdn.net/articlebody/e6c70ea80193b1b324436fe6a7a57385f88348eb.png" alt="undefined">
These new projects lifted the cumulative global pipeline by 20% to 64 mmtpa, of which almost two-thirds are in the six leading countries including Australia, the UK, the US and the Netherlands.
Green hydrogen, electrolysed from water using renewable electricity, has long dominated the project pipeline, accounting for 80% of all projects from 2018 to 2021. Blue hydrogen, produced by splitting natural gas into hydrogen and CO2 and fitted with <a href="https://www.woodmac.com/market-insights/topics/ccus/">carbon capture and storage</a>, has accounted for the rest.
Q1 2022 saw an intriguing shift with green hydrogen projects accounting for 95% of those added to the project pipeline, with blue hydrogen just 5%. This may prove to be a quirk of the flow of projects reaching investment decisions in Q1. But the slowdown in blue hydrogen investment will set alarm bells ringing for CCS developers, particularly in Europe where half of all current CCS projects are for blue hydrogen use cases.
Second, the <a href="https://www.woodmac.com/horizons/security-alert-five-lessons-from-the-energy-crisis/">energy crisis</a> will stimulate international trade in hydrogen. Hydrogen is central to Europe’s future energy mix, even more so as it pivots away from dependence on imported Russian gas following the <a href="https://www.woodmac.com/market-insights/topics/ukraine-conflict/">war in Ukraine</a>. But elevated gas and power prices over the next several years threaten to weaken the economics of blue and green hydrogen in Europe. The result will be less investment and a deficit in the domestic hydrogen projects required to strengthen Europe’s energy security.
Europe’s loss will be hydrogen exporters’ gain. Producers in markets with relatively stable gas and power prices and lower costs of production – including the Middle East, North Africa, Australia and the US – will be among the winners.
Third, electrolyser vendors are moving quickly to build “gigafactory”-scale facilities, but the size of the prize keeps moving up. Vendors have a project backlog of 45 GWel whereas current manufacturing capacity will only support 14 GWel annually by 2023. We think such mismatches are typical of any nascent industry.
Concrete policy will lift the bar further. The UK government recently announced a doubling of its hydrogen capacity target from 5 GW to 10 GW. That also sends a strong signal for the domestic supply chain to put down roots.
Fourth, policy globally is laying the foundations for growth. <a href="https://www.woodmac.com/market-insights/topics/cop26/">COP26</a> last November was the catalyst for countries to set net zero targets and for many, hydrogen is becoming a central part of the delivery. More than 75 governments have now announced hydrogen plans, roadmaps, strategies and goals at various stages of development. India (expansion of hydrogen policy), Croatia (roadmap), Peru (roadmap development) and Denmark (roadmap clarification) all advanced a hydrogen policy in Q1 2022. 
Lastly, offtake agreements are helping the early-stage financing of the industry and are vital to de-risking projects. In one of the biggest agreements so far, Australia-based Fortescue Future Industries and German utility E.ON signed an MoU to deliver 5 Mtpa by 2030. We expect offtake agreements to proliferate and for commercial arrangements to evolve into long-term contracts as the industry matures.​​​

This article also appeared on <a href="https://www.woodmac.com/news/the-edge/how-the-energy-crisis-is-a-boon-for-hydrogen-exporters/">The Edge</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.

How the energy crisis is a boon for hydrogen exporters

How will the Russian invasion of Ukraine play out? If the endgame is near impossible to call, the dramatic news overnight narrows the possibilities. The launch of a ‘special military operation’ against Ukraine closely matches the ‘most likely’ scenario political risk experts at Verisk Maplecroft flagged earlier this week. The events of the February 24, though, also make the main alternative scenario increasingly plausible – a full-scale Russian invasion of Ukraine. At this point, de-escalation via diplomacy looks little more than a faint hope.


How will the Russian invasion of Ukraine play out? If the endgame is near impossible to call, the dramatic news overnight narrows the possibilities.
The launch of a ‘special military operation’ against Ukraine closely matches the ‘most likely’ scenario political risk experts at Verisk Maplecroft flagged earlier this week. The events of the February 24, though, also make the main alternative scenario increasingly plausible – a full-scale Russian invasion of Ukraine. At this point, de-escalation via diplomacy looks little more than a faint hope.
Whatever Russia’s ultimate goal, the heightened geopolitical tension is rippling feverishly out into the global economy and markets. We’ll publish specific analysis on the implications for individual sectors imminently. In the meantime, here are our team’s broader thoughts on what the events mean for commodities, energy policy and the energy transition.
First, Russia has timed its move from a position of strength. With the global economy surging, the world needs all the commodities it can get its hands on, not least Russia’s exports of gas, oil, coal, metals, petrochemicals and fertiliser. Sanctions on exports of these essential commodities are unthinkable – there are no quick fixes should Russia’s supplies be cut off. OPEC has already signalled it won’t ramp up production to lower prices. But in the unlikely event Russian oil supply is cut, we’d expect the organisation to consider supplying extra oil to offset the loss to avoid a global economic crisis.
High commodity prices, inflated by the crisis, are a boon for Russia. Higher export revenues will boost an existing fiscal surplus and swell buoyant financial reserves.
Second, we may be witnessing the beginning of the end of Europe’s umbilical relationship with Russian gas. Europe didn’t get cold feet after the 2014 Crimea invasion. In fact, Russia subsequently proved itself a reliable supplier and imports have actually increased as European domestic production dwindled. Even during this winter, when exports have been lower than market requirements, Russia has still met its contractual obligations. We expect that to continue through this crisis.
The Ukraine invasion appears to be the last straw for the EU – the suspension of certification of Nord Stream 2 is a clear indicator of the future direction of travel. The debate about diversifying gas supply away from Russia will only intensify. New supplies, though, can’t be secured overnight and could lead to higher prices in the medium term. It is a super-bullish signal to LNG developers in the US, Qatar and beyond; as well as pipe options such as Azerbaijan, the East Mediterranean and Norway.
Russian hard commodity exports to Europe and other markets are mostly shipborne, providing more optionality to buyers. These exports include a lot of coal – Russian high-quality exports meet 10% of European coal-fired plant demand. Buyers of all commodities, however, are increasingly having to justify to stakeholders how they source materials. It’s not inconceivable that higher ESG risks stemming from the invasion dampen enthusiasm for Russia’s other big-money earners including aluminium, nickel and other key commodities. ESG concerns could also dent Russia’s goal to become an LNG superpower.
Third, Russia may inadvertently trigger a faster energy transition. Threats to supplies and high prices resulting from the invasion could harden policy and action underway in the EU, UK and elsewhere to move away from fossil fuels.
The EU’s debate around the role of gas in the energy transition was already complicated. Higher gas prices could make coal stickier. They would also make a stronger case for renewables and alternative gases such as bio-methane and green hydrogen, though these will take time to develop at scale. The ambitious target to reduce emissions by 55% by 2030 now looks even more challenging.
And what of Russia’s own transition ambitions? It has plenty of transition metals to supply, notably nickel, cobalt and aluminium as well as bounteous palladium group metals, used mainly in ICE vehicles.
The country also has the potential to be a global low-carbon leader in hydrogen exports (blue H2) and carbon removal. The pipeline infrastructure linked to high-volume emitters in Europe, huge depleted reservoirs for carbon storage and the nation’s vast natural carbon sinks could become giant-scale competitive advantages.
But development and commercialisation will need investment and counterparties. In the current tense geopolitical environment, it’s difficult to imagine there will be much appetite among corporates or investors to commit to such major initiatives and finance them any time soon.
<img src="https://illuminem.b-cdn.net/articlebody/c93a0ed0f773bbb0f9e414d48131dad1a6a8ca75.png" alt="(Editorial addition from the illuminem team) ">

This article is also published by <a href="https://www.woodmac.com/news/the-edge/what-russias-invasion-of-ukraine-means-for-commodities/">the Edge</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.

What Russia’s invasion of Ukraine means for commodities

Big Oil is determined to show it’s part of the solution for climate change. That much is clear from the rapid acceleration of investment in new energy. Simon Flowers asked Tom Ellacott and Greig Aitken of Woodmackenzie's Corporate Research team how they see the Majors’ strategic positioning evolving.

<h1>When will spend on low carbon catch up with oil and gas?</h1>
Big Oil is determined to show it’s part of the solution for climate change. That much is clear from the rapid acceleration of investment in new energy. Simon Flowers asked <a href="https://www.woodmac.com/about-us/our-people/tom-ellacott/">Tom Ellacott</a> and <a href="https://www.woodmac.com/about-us/our-people/greig-aitken/">Greig Aitken</a> of Woodmackenzie&#x27;s Corporate Research team how they see the Majors’ strategic positioning evolving.
<h2>How much has spend ramped up?</h2>
It’s doubled since 2019/20. Two years ago, the Euro Majors were planning to spend an average of US$2 billion a year on new energy, 10% of total investment. An intense period of business development has strengthened the opportunity set. Budgets for all of the Majors are now aimed at an average of US$4 billion a year, almost 25% of total investment – though timescales vary across the group. Repsol’s target of 35% out to 2025 is the most aggressive.
<img src="https://illuminem.b-cdn.net/articlebody/d93777addc62ab22728c0bff8c076675d48142af.png" alt="undefined">
Another big change from two years ago is that the US Majors have entered the fray, as we <a href="https://www.woodmac.com/news/the-edge/big-oils-separate-paths-to-decarbonisation/">predicted</a>. We expect Chevron and ExxonMobil to follow the upward trend. Their plan to allocate 10% of spend to low-carbon opportunities is only an opening salvo.
<h2>What are the Majors investing in?</h2>
Mostly renewables, the immediate growth opportunity as the world electrifies. Solar, onshore wind and <a href="https://www.woodmac.com/news/the-edge/big-oils-offshore-wind-journey-is-only-just-beginning/">offshore wind</a> are among the few low-carbon technologies that are commercial and scalable, and diversifying Majors can build the exposure they seek. TotalEnergies is aiming for a 10-fold increase in capacity to around 50 GW net by 2030, as is BP; both could be in the top five renewables players by then. Utilities’ renewables targets (Enel 120 GW and Iberdrola 95 GW) perhaps indicate where Big Oil will eventually go as it morphs into Big Energy.
Geographical diversification is an increasingly important theme for the Majors in renewables. We’re likely to see renewables portfolios expand to an international footprint much like E&amp;P. Equinor’s 15 GW of projects are held across 14 countries (including holdings via affiliates), ditto BP (15 countries) and TotalEnergies (17 countries). Intensifying competition is forcing companies to look further afield to capture new opportunities. TotalEnergies has set up a network of 50 ‘renewables explorers’ across 50 legacy countries.
<img src="https://illuminem.b-cdn.net/articlebody/d50d5458955782d8247b3af7d70d77948d46eb48.png" alt="With increasing renewables investment, Big Oil is morphing into Big Energy">
The other big focus for spend is developing the customer base. Shell and BP plan to spend more than 10% of their total five-year budget on marketing and retail. Customers will be a key part of their integrated, full value chain approach to low carbon: from producing electrons through to providing energy solutions for the industrial, commercial and retail segments. Energy trading will play a critical part in boosting margins through the value chain. The customer proposition will embrace multiple services, including EV charging, energy efficiency and distributed energy resource management.
<h2>Where do CCS and hydrogen fit?</h2>
All of the Majors want a piece of these emerging technologies that will undoubtedly play a big role in the world achieving net zero. Investment is still modest, but budgets for both are going to get a lot bigger as they move towards commercialisation and are scaled up.
Project pipelines are already growing exponentially. The Majors’ <a href="https://www.woodmac.com/news/opinion/can-carbon-capture-help-big-oil-reach-its-net-zero-targets/">CCS</a> pipeline has doubled in six months, with ExxonMobil having more than twice the gross project capacity of the others.
Hydrogen project pipelines, too, are in their infancy but growing rapidly. The Majors’ existing production of hydrogen at refineries gives them an early advantage in the market. All see blue (linked to CCS) and green <a href="https://www.woodmac.com/market-insights/topics/hydrogen-guide/">hydrogen</a> as a huge growth opportunity. Equinor (5 mmtpa, gross capacity), Shell (3 mmtpa) and BP (2 mmtpa) are the early leaders.
<blockquote>The Majors’ CCS and hydrogen pipelines are growing as they see huge growth opportunity.</blockquote>
<h2>Do the returns in new energy justify the pivot?</h2>
It’s not clear cut. Renewables projects on their own deliver mid-single-digit returns and vie for capital with upstream projects, many of which deliver superior IRRs at current prices. Risk adjusted, though, the gap with upstream is narrower, and integration also boosts the overall returns from renewables.
The bigger picture is that the increase in capital allocation to renewables is strategic. The Majors are on a mission to reshape and futureproof the business. The commitment to new energy and low carbon is a long-term bet on an irreversible shift in the energy mix. And they need to do it now to stay investible.
<h2>How big can investment in new energy get?</h2>
Oil and gas will continue to dominate earnings and cash flow for years to come. We estimate that even for Equinor, which has the most aggressive growth strategy, new energy will contribute only 15% of operating cash flow in 2030 based on today’s commercial assets. Of course, as companies add to their portfolios, the contribution will get bigger.
The tilt of investment in favour of low-carbon energy technologies is only going one way, and now they are on board, the US Majors are going to catch up. We think investment for the group will double again in the next five years.
As the Majors push towards their net zero goals, we reckon the peer group leaders’ spend on new energy versus oil and gas will get close to 50:50 by 2030.
This article is also published on <a href="https://www.woodmac.com/news/the-edge/the-majors-accelerating-tilt-to-new-energy/">Wood Mackenzie</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.

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How the energy crisis is a boon for hydrogen exporters

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