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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Saudi Arabia Skips LNG, Bets Big On Hydrogen

Last year, Saudi Arabia’s national oil company Saudi Aramco sent shockwaves through the natural gas markets after it announced that it was kicking off the biggest shale gas development outside of the United States. Saudi Aramco said it plans to spend $110 billion over the next couple of years to develop the Jafurah gas field, which is estimated to hold 200 trillion cubic feet of gas. The state-owned company hopes to start natural gas production from Jafurah in 2024 and reach 2.2 Bcf/d of sales gas by 2036 with an associated 425 million cubic feet per day of ethane. 

And Aramco has now announced that instead of chilling that gas and exporting it as LNG, it will instead use it to make much cleaner fuel: Blue hydrogen. 

During the company’s earnings call on Monday, Saudi Aramco CEO told investors that Aramco had abandoned immediate plans to develop its LNG sector in favor of hydrogen. Nasser said that the kingdom’s immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen. Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or Auto Thermal Reforming (ATR) with the CO2 generated captured and then stored. As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.

Last year, Aramco made the world’s first blue ammonia shipment--from Saudi Arabia to Japan. Japan—a country whose mountainous terrain and extreme seismic activity render it unsuitable for the development of sustainable renewable energy—is looking for dependable suppliers of hydrogen fuel with Saudi Arabia and Australia on its shortlist.

Germany has also said it needs “enormous” volumes of green hydrogen, and it hopes Saudi Arabia will be a supplier. Last year, Germany’s cabinet committed to investing €9B (about $10.2B) in hydrogen technology in a  bid to decarbonize the economy and cut CO2 emissions. The government has proposed to build an electrolysis capacity of 5,000MW by 2030 and another  5,000MW by 2040 over the following decade to produce fuel hydrogen. But apparently, the European giant has realized it cannot do this alone.

Luckily for Germany, Saudi Arabia is now developing the biggest green hydrogen plant in the world. Related: Oil Plunges As European Countries Extend Lockdowns

$5B Green Hydrogen 

With its sun-scorched expanses and steady Red Sea breezes, Saudi Arabia is prime real estate for renewable energy generation. The oil giant has, however, failed to put all that energy into good use--until now.

The Saudi government is building a $5 billion green hydrogen plant that will power the planned megacity of Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce hydrogen.

But here’s the main kicker: Helios could soon produce hydrogen that’s cheaper than oil.

Bloomberg New Energy Finance (BNEF) estimates that Helios’ costs could reach $1.50 per kilogram by 2030, way cheaper than the average cost of green hydrogen at $5 per kilogram and even cheaper than gray hydrogen made from cracking natural gas. Saudi Arabia enjoys serious competitive advantage in the green hydrogen business thanks to its perpetual sunshine, wind, and vast tracts of unused land.

The Hydrogen Economy

After decades of stagnation and multiple false dawns, the hydrogen economy now appears primed for takeoff. A growing number of countries and industries are proactively investing in hydrogen technologies, with hydrogen being touted as the ‘fuel of the future.’ Meanwhile, industry experts are predicting that hydrogen could become a globally-traded energy source, just like oil and gas, while Bank of America says the industry is at a tipping point and set to explode into a $11 trillion marketplace.

The world’s green hydrogen leaders have joined hands with an ambitious goal to drive a 50-fold scale-up in green hydrogen production over the next six years.

The Green Hydrogen Catapult Initiative is a brainchild of founding partners Saudi clean energy group ACWA Power, Australian project developer CWP Renewables, European energy giants Iberdrola and Ørsted, Chinese wind turbine manufacturer Envision, Italian gas group Snam, and Yara, a Norwegian fertilizer producer. Related: Saudi Arabia Sidelined By Biden's Middle East Strategy

The companies hope to drive 25GW of green hydrogen production by 2026, a scale that could significantly drive down hydrogen costs to below $2/kg thus making the fuel source competitive with fossil fuels in power generation.

Green hydrogen is produced using renewables as an energy source in the electrolysis of water.

High costs are the biggest reason why the hydrogen marketplace has been lagging at a time when the renewable energy sector is booming.

The push to take hydrogen costs below $2/kg is, therefore, a potential game-changer for the entire hydrogen ecosystem because it could mean that, for the first time ever, hydrogen becomes cheaper than gas.

In fact, a recent analysis by the Hydrogen Council suggests that $2/kg is the tipping point required to make green hydrogen and its derivative fuels competitive in power generation, steel and fertilizer production, and long-range shipping. Green ammonia, which is made from green hydrogen, and being tested in the marine industry and also as a possible replacement for fossil fuels in thermal power generation. Compared to its grey brethren, green ammonia produces zero carbon when burned; boasts an energy density 80% higher than hydrogen, and is much safer than hydrogen.

The icing on the cake: the consortium of green hydrogen producers says we can expect to see $2/kg hydrogen in just four years’ time.

“From an industry perspective, we see no technical barriers to achieving this, so it’s time to get on with the virtuous cycle of cost reduction through scale up. Having led the race to deliver photovoltaic energy at well-below US$2 cents per kilowatt-hour, in certain geographies, we believe the collective ingenuity and entrepreneurship of the private sector can deliver green hydrogen at less than US$2 per kilogram within four years,’’ ”Paddy Padmanathan, CEO of ACWA Power, has declared.

Suddenly, seemingly overvalued hydrogen stocks such as Plug Power Inc. (NASDAQ:PLUG), Bloom Energy Corporation (NASDAQ:BE) and Ballard Power Systems (NASDAQ:BLDP) actually look like bargains.

Plug Power is up over 1,053% over the past 12 months; Bloom Energy stock has gained 563%, BLDP has rallied 217%, while FuelCell Energy (NASDAQ:FCEL) has racked up gains of 1,127% over the timeframe. Is it hyper-speculative? Yes. But it’s also possible that we haven’t seen the end of this yet. 

By Alex Kimani for Oilprice.com

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