The Dash For Hydrogen

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Canada is one of several countries looking to develop the first wave of export-focused hydrogen projects. But, with the sector eventually projected to become as big as the LNG market, there should be plenty of demand remaining for hydrogen from projects that are slower to get to FID.

The hydrogen sector has been hyped before.

In 2003, the Bush administration in the U.S. launched the $1.2-billion Hydrogen Fuel Initiative to help reduce America’s dependence on oil by developing hydrogen fuel cell cars and trucks. But the initiative failed to take off.

Investors and companies are betting that this time will be different. Since 2021 there have been over 300 MOUs in the sector as firms jostle for position in different parts of the hydrogen value chain, according to Evaluate Energy M&A data.

The biggest difference in the latest hydrogen rush is clear policy backed by financial incentives. By 2021 there was a proliferation of hydrogen strategies launched around the world —including in the EU, U.S., Canada and Australia.

And since then, the EU, U.S. and Canada have legislated detailed regulatory regimes to financially incentivize hydrogen production, as they once did for renewables. The regimes differ in their make-up; the U.S. and Canada have gone for production and investment tax credits, while the EU looks likely to favour a Contract for Difference (CfD) model. But they all want to achieve the same thing — the stimulation of a hydrogen economy.

Australia has not put in place an incentive mechanism yet, although the domestic industry has been calling for one.

First projects

As in the LNG market, Europe and East Asia will represent the bulk of the demand (50 per cent by 2050 globally, according to consultants McKinsey and Company – see chart below), but a much smaller portion of supply. The EU’s new rules defining green energy are complicated, and its electricity prices and natural gas prices — key components of the cost of producing green and blue hydrogen respectively — are expensive. This means projects are likely to be hard to get off the ground.

Europe, China, Japan and Korea will be responsible for 50 per cent of hydrogen demand by 2050, according to modelling by McKinsey.

Given this high level of expected import demand from Europe and East Asia, many developers and investors are looking around the world for the best place to locate projects, now that incentive regimes are in place. Early signs show that the U.S., Canada, Australia and the Middle East are the most likely locations for the first wave of export-focused projects.

All have favourable policy regimes, abundant renewable resources, and relatively stable governments.

Only one giga-scale hydrogen production project of either the blue or green variety has currently taken FID — the Neom project in Saudi Arabia. That project was able to do so chiefly because industrial gases firm Air Products absorbed all the off-take risk, betting that demand would materialize for green hydrogen, both in its existing portfolio and from new customers, when production begins in 2026.

Industry observers say the next large project that is most likely to take FID is the EverWind project in Nova Scotia, Canada, a brownfield project with strong off-take interest supported by the German and Canadian government that has received environmental approval for the initial phase of its one million tonnes per year of green hydrogen production.

The project developers have said that the recent Canadian budget delivers comprehensive measures that compete with the U.S. Inflation Reduction Act (IRA) in incentivizing hydrogen.

“Off-takers, investors and equipment suppliers are looking at jurisdictions and projects around the world, and Budget 2023 sends a clear signal that they should choose Canadian projects,” says Trent Vichie, chief executive officer of EverWind Fuels Company.

Meanwhile, H2U’s H2 Hub Gladstone project in Queensland, Australia, is also reported to be close to FID and will be eyeing Asian markets for its exports.

LNG expertise

The Middle East, Australia, the U.S. and Canada have another quality that project developers want — they are all already experienced fossil fuel extractors and exporters with strong track records in project development.

“An emerging LNG industry positions Canada to be an exporter of hydrogen as the global economy evolves,” Canada’s hydrogen strategy notes.

But the U.S., Middle East and Australia have more experience in exporting LNG than Canada, meaning it will be important for the country to become an early mover to gain valuable knowledge from first-of-a-kind projects.

Developing a skilled workforce will be vital. An analysis of the skills and training that will be required in the move to a hydrogen economy by The Transition Accelerator found that “many of the core technical occupations and foundational skills required by the hydrogen economy are already found within Canada’s labour market.”

But the report adds that short-term, focused training will be needed to re-skill the workforce and address skills gaps.

Shipping hurdle

One key technology hurdle for project developers will be shipping. Shipping hydrogen is a very different proposition to shipping LNG because of the low volumetric density and high reconversion costs of the gas. There are several technology options available including: liquefaction, compression, the use of derivatives such as ammonia or methanol, and the use of liquid organic hydrogen carriers (LOHCs).

Australia was the first country to ship a cargo of liquefied hydrogen in 2022, and Australian firms have signed MOUs with Japanese companies to work on the shipping value chain.

But all the projects that are closest to (or in the case of Neom, have taken) FID are planning to ship ammonia initially, including Canada’s EverWind and Australia’s H2 Hub Gladstone.

Unlike other transport options (excluding methanol), ammonia has an established shipping infrastructure and an existing traded market.

But projects that take longer to get to FID may have the advantage of being able to use yet-to-be-commercialized shipping technologies that could significantly bring down costs.

“Evolving production costs, conversion, transportation and reconversion rates mean that trade arbitrages will emerge and change over time,” said a joint report published last year by the Hydrogen Council and McKinsey called ‘Global Hydrogen Flows.’

The report sees pipeline hydrogen, synthetic kerosene, ammonia, methanol, and other forms of shipping all being used to move 400 million tonnes of hydrogen annually by the middle of the century.

“By 2050 shipping of hydrogen and derivatives will be similar in size to LNG today,” says Bernd Heid, senior partner at McKinsey.

That size of market would leave plenty of space for all prospective exporting countries to have a share of the pie, including potential newcomers such as Chile and Mauritania.

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