As the world’s energy systems transition from those largely fuelled by hydrocarbons to those largely powered by renewables, there will be a profound shift in where our energy comes from.
Hydrocarbons are found in deposits that are the result of organisms alive millions of years ago undergoing particular geological processes, in particular climatic conditions. Coal, made from ancient swamp forests, is found in nearly every country around the world. Oil and gas tends to be less widespread – and therefore more expensive – stemming from plankton breaking down on the ocean floor.
Renewable power, by contrast, can be generated from sun and wind across the Earth’s surface. It is dependent on weather patterns that exist everywhere, not specific geological processes. This is great news for consumers, who can in theory generate or buy cheap, renewable electricity wherever they may be, but it is bad news for petrostates, which are oil and gas-producing nations whose economies have become overly dependent on the export of fossil fuels, with little success thus far at diversification.
However, there may still be a way of being an energy-producing nation in the transition to net zero.
Some processes – notably in industry or certain forms of transport – require a high-density energy source. Others might need a stable source of energy that can be easily stored and moved around. Hydrogen – an energy-dense gas that produces only water vapour when burnt – is a potential saviour.
The International Energy Agency (IEA) anticipates hydrogen demand will increase sixfold by 2050 in its net-zero scenario, with demand booming across the industrial, power and transport sectors. This boom in demand will, experts say, transform hydrogen from a typical domestic product – made from natural gas through a process known as steam methane reforming – into a global commodity.
It could be a massive economic opportunity. Current hydrogen sales represent a market value of approximately $179bn – already exceeding the value of annual trade in liquefied natural gas (LNG) in a typical year – and sales are expected to be worth more than $600bn by 2050, according to the International Renewable Energy Agency (IRENA).
Petrostates – countries that rely on oil and gas revenues for a large chunk of their economic output – should have an advantage in gaining a foothold in this new sector. They can leverage existing energy infrastructure, a skilled workforce and established trade relations. Gas reserves mean they have a ready ability to produce low-carbon blue hydrogen, which is hydrogen made by splitting the methane molecule in natural gas and capturing the carbon via carbon capture and storage (CCS).
Many fossil fuel exporters – notably desert countries in the Middle East and North Africa – are also blessed with massive renewables potential, which allows them to make green renewable hydrogen produced by using renewables-powered electrolysis to split water molecules. “You could say these countries won the geological lottery twice,” says Thijs Van de Graaf, professor in energy politics at Ghent University.
Doubts over blue
What is great in theory, though, is often not in practice. For starters, there are serious doubts over the economic feasibility of blue hydrogen.
The amount of energy that carbon capture technology requires is substantial, which means a lot of the gas that could be converted into hydrogen will need to be directed towards powering the capture process instead. This will affect the amount of hydrogen that can be produced, impacting profits.
“The energy penalty for CCS is a massive challenge, and likely to be much higher than a lot of developers are willing to reveal,” says Daniel Quiggin from the UK-based think tank Chatham House. Consultancy Wood Mackenzie anticipates only a modest reduction in CCS costs between now and 2050.
Quiggin adds that current high gas prices following Russia’s invasion of Ukraine will also push up the price of blue hydrogen production. In such market conditions, the inflated cost of blue hydrogen is unlikely to be able to compete with relatively cheaper green hydrogen, whose cost is only influenced by fossil fuels insofar as their cost pushes up electricity prices.
“Even if you have direct access to oil and gas, as Saudi Arabia does, and you are not subject to global price fluctuations, you would [still] be more inclined to sell natural gas [than blue hydrogen], which could be more profitable," he notes.
Green hydrogen is expected to get significantly cheaper as technology improves and the price of electrolysers goes down. This competition leads Kobad Bhavnagri, global head of strategy at BloombergNEF, to anticipate that blue hydrogen assets “could essentially become white elephants”.
There are also doubts over the feasibility of blue hydrogen from a climate point of view. “CCS does not capture 100% of emissions,” explains Greg Muttit from think tank the International Institute for Sustainable Development (IISD). “There are fugitive emissions and infrastructure leakage in both the extraction and transportation of natural gas – and given how limited our carbon budget is, we cannot afford that.”
A study from a coal plant with carbon capture and a synthetic direct air capture plant shows capture rates of less than 11% over 20 years, and 20–31% over 100 years. This low capture rate is the result of both supply chain emissions and emissions associated with powering the CCS equipment. It is among several analyses that suggest blue hydrogen is only slightly climate-friendlier than 'grey' hydrogen.
Potential in green
There is, though, an opportunity for petrostates in green hydrogen.
“Green hydrogen is a no-brainer: it is nearly carbon-free from a life cycle perspective, its production aids in balancing renewables in the system and it takes advantage of the continually falling cost of renewables,” says Quiggin. He adds that the solar resource in Africa and the Middle East – the location of many petrostates – is so great there is an opportunity for countries to gain a competitive advantage if they are early movers.
Many petrostates have strategies in place to make the most of their geographical advantage for green hydrogen.
Saudi Arabia, the world’s greatest exporter of oil and gas by volume, announced its Helios Green Fuel Project in July 2020, a massive $5bn green hydrogen and green ammonia plant that will be powered entirely by solar and wind. Set to come online in 2025, it will form part of a $36bn national hydrogen strategy, whose key backer is the country’s $500bn sovereign wealth fund. This fund was built up over decades using oil revenues, and is chaired by Crown Prince Mohammed bin Salman, the country’s de facto leader.
Other petrostates with hydrogen strategies include Oman, which has announced several gigawatt-scale green hydrogen projects, the largest of which is due to be powered by 25GW of solar and wind.
The Canadian government, meanwhile, says Canada is well placed to become “a leading global clean fuels exporter”, with the ambition of becoming a global top three clean hydrogen producer by 2050. Norway, which provides around a quarter of Europe’s gas, also has significant green and blue hydrogen hopes, with plans to store carbon under the seabed of the Norwegian shelf of the North Sea.
No unique access
These plans are ambitious and exciting, but petrostates will not have a stranglehold over supply, as they do with oil and gas, because green hydrogen can be produced anywhere. Also, in a world where Opec oil producers have long held the rest of the world to ransom via price manipulation, and where – following Russia’s invasion of Ukraine – energy security is suddenly a key priority, countries will be reluctant to be overly reliant on specific producer states.
“In contrast to fossil fuels, which are extracted, hydrogen is actually a manufactured product. Anyone can make it,” says Van de Graaf. “We expect that this market will accord less geopolitical leverage to future exporters than we see today in oil and gas.”
The EU's new REPowerEU agenda – effectively its new energy security strategy – includes the ambition of producing ten million tonnes of hydrogen locally and an additional ten million tonnes in imports by 2030. This 50:50 ratio is in marked contrast to the fact that 97% of EU crude oil is imported.
Petrostates with high renewable potential will still be able to undercut domestic green hydrogen production in Europe, but this advantage is not unique to petrostates, and many countries with high renewable potential that are not currently oil and gas producers also have ambitious hydrogen strategies.
Chile – by some measures the country with the greatest solar potential – launched a green hydrogen strategy in 2020, which envisages 5GW of electrolyser capacity by 2025 and 25GW by 2030, with the aim of producing the world’s cheapest hydrogen by 2030.
Australia, an oil and gas producer but not a petrostate by most measures, is also aiming to become a “major global player” in green hydrogen production and trade by 2030. The country has already forged deals with prospective markets including Germany, Japan and Singapore. A survey of 78 experts by IRENA, carried out to mark the publication of the agency’s 2022 Geopolitics of Hydrogen report, found that most experts see Australia as the country most likely to become a major producer of hydrogen. Separate data from GlobalData, Energy Monitor’s parent company, also finds that Australia has more green hydrogen plants in development than any other country.
Doubts over demand
There are fundamental uncertainties over how big the demand for hydrogen will become, despite the optimistic strategies and net-zero models anticipating massive growth in hydrogen consumption.
“No one really knows what the demand will be for hydrogen," says Arjun Flora from the Institute for Energy Economics and Financial Analysis. "There are many technical and economic challenges that need to be overcome before it can become a reality. The first step should be to simply replace all the grey hydrogen production we have today. This would already require a huge amount of renewable-generated electricity – similar in magnitude to the amount currently generated each year across the EU.”
Flora notes a ‘hydrogen hype’ in the heating and transport sectors as a result of hard fossil fuel industry lobbying for blue hydrogen to play a major role in a net-zero future, as this would allow it to maintain some of its fossil fuel assets.
Diversify by any means possible
Nevertheless, most agree that hydrogen demand will increase, even if the true extent remains unclear for the time being. There will be an opportunity for petrostates to gain a foothold in the new hydrogen economy, but we should not kid ourselves into thinking the opportunity that hydrogen represents is anywhere close to the economic opportunity provided by oil and gas over the past century. Instead, a wise bet would be for countries to invest in green hydrogen as part of a broader diversification strategy.
“The key priority for petrostates right now, with high oil and gas prices, should be to prioritise investment in multiple avenues of diversification,” says Muttit from the IISD. “The bonanza is not going to last, and they need to make the most of the income to ensure long-term returns, whether that be by investing in tourism, hydrogen or any other export that allows a country to play to its strengths.”