NEW YORK (ICIS)--Here’s Big Oil’s dilemma. Its main products are oil and gas, and the energy transition is rapidly under way. Utilities are building solar and wind capacity, EV battery plants are under construction, and start-ups are building networks of charging stations. Where might oil companies compete?
They could choose to play in these areas, and indeed a number of European oil companies – including Total, BP and Shell – are going full speed ahead on these fronts.
Big Oil is also going big in petrochemicals, as it views this as a key growth business in contrast to the long-term prospects for transportation fuels. Shell will boost its petrochemicals footprint while it dramatically scales back refining capacity.
But do oil and gas companies have a competitive edge in renewables? They have the size and are used to making large-scale capital investments. But their core competency has been in oil and gas exploration and running hydrocarbon operations – including downstream petrochemicals.
So what renewable energy plays into the strengths of Big Oil?
Hydrogen is likely the solution – blue hydrogen, which is produced in hydrocarbon operations along with CCS (carbon capture and sequestration), and even green hydrogen, which is produced by solar and wind energy.
Source: International Fertilizer Association
Oil companies already have the expertise in producing and using hydrogen in their operations, and are well placed to transform this hydrogen into ammonia for long-distance shipments. They have the operational capability to handle ammonia at large scale and the logistics networks to distribute it to customers worldwide.
“The big oil companies have economies of scale, experience in handling, existing infrastructure, storage and logistics, as well as the contacts to participate in this new, large, exciting and potentially very lucrative sector,” said Richard Ewing, international ammonia market editor at ICIS.
“Many oil companies will look at blue ammonia in the short term as there is already much of the infrastructure there, and there is less capex [capital expenditures] needed than investing in a completely new project like a green hydrogen/ammonia plant, where a lot of the technology is still under development,” he added.
How to export solar and
Hydrogen solves the dilemma of how to export solar and wind energy. Many oil companies will build solar and wind capacity to power their own plants in the push to lower carbon emissions. But Big Oil largely depends on exports, especially producers in the Middle East. And you can’t export wind and solar. Or can you?
That’s where green hydrogen and ammonia comes in. It’s the only reasonable way to export solar and wind power across long distances.
These renewable energy sources are first converted into hydrogen through electrolysers, which separate water molecules into hydrogen and oxygen using wind or solar energy. There are zero carbon emissions. The hydrogen then can be converted to ammonia (3 parts hydrogen, one part nitrogen) for easy transport.
In the blue hydrogen scenario, where hydrogen is produced from natural gas, the carbon dioxide (CO2) generated from operations is captured. This CO2 with hydrogen can be used to produce methanol or be used in enhanced oil recovery. This is in addition to the main use of hydrogen to produce blue ammonia for shipment.
Once the ammonia arrives at its destination, it can be converted back to hydrogen for use in power generation.
The export scenario for hydrogen is what makes it so appealing for Middle Eastern oil and gas companies in particular, as they primarily depend on energy exports.
Aramco, ADNOC to go big in
Hydrogen will be a major part of the renewable energy strategies of Saudi Aramco and the Abu Dhabi National Oil Co (ADNOC). Both are working with Japan to fuel the country's developing hydrogen economy.
Aramco made its first shipment of blue ammonia to Japan in September 2020 for use in zero-carbon power generation.
“We’re the largest oil and gas company on the planet but at the same time we’re thinking of ourselves as an energy and petrochemical company. So one of the things we’re doing is considering renewables investments within Aramco,” said Yasir Al-Rumayyan, chairman of the board of Saudi Aramco, at the CERAWeek by IHS Markit conference.
Al-Rumayyan is also governor of Saudi Arabia’s sovereign wealth fund, Public Investment Fund (PIF).
Saudi Arabia itself is home to a massive green hydrogen initiative between NEOM, Air Products and ACWA Power announced in July 2020.
The venture will build a massive green hydrogen-based ammonia project at a cost of around $5bn to supply 650 tonnes/day of hydrogen for transportation globally by 2025. The project will be sited at NEOM, a city being built in northwest Saudi Arabia as a model of sustainability and innovation.
Saudi Arabia’s sovereign wealth fund is a cornerstone investor in NEOM and has a 50% stake in ACWA Power.
ADNOC sees hydrogen as key element in
ADNOC has been active in solar power and has renewable power projects in more than 30 countries as it grows its green footprint. The UAE has three of the largest and lowest cost solar projects in the world, said CEO Ahmed Al-Jaber.
ADNOC plans to further reduce its carbon intensity by 25% over the next 10 years, largely through the use of renewable energy.
“Through this period, oil and gas will remain at the heart of our business model here at ADNOC. That said, we are exploring the potential of new fuels such as blue hydrogen, which in fact shows great promise as a close-to-zero carbon fuel that could be produced at scale as part of our existing hydrocarbon value chain,” said Al-Jaber at CERAWeek.
In January, ADNOC and Japan’s Ministry of Economy, Trade and Industry signed a memorandum of understanding (MoU) to cooperate on fuel ammonia as well as carbon recycling technologies. Japan is the largest importer of ADNOC’s oil and gas, with 25% of its crude oil imported from the UAE.
Also in January, ADNOC announced a partnership with UAE wealth funds Mubadala and ADQ to establish the UAE as a leading producer of green and blue hydrogen.
Arguably all countries could generate their own solar and wind power, but there are natural geographic advantages for certain countries and regions – such as the Middle East in solar and the US in wind – and disadvantages for others.
The advantaged regions can produce renewable energy at greater scale and export low-to-zero carbon energy via hydrogen and ammonia.
The hydrogen economy
But thus far, the amount of hydrogen that can be used for power and transportation fuel versus oil and gas is somewhat limited. What is needed in the long run is a full-blown hydrogen economy.
Japan in 2017 unveiled a Basic Hydrogen Strategy to eventually reduce hydrogen costs to the same level as conventional energy for use in power and transportation fuel.
A key part of its approach will be to “combine cheap, unused energy from overseas with CCS, or procure massive amounts of hydrogen from cheap, renewable energy electricity” in parallel to establishing international supply chains and developing storage and transportation infrastructure.
Along with being a hydrogen power source, ammonia also has huge potential as a low or zero-carbon shipping fuel. On 5 March, OCI announced two potential partnerships to commercialise ammonia and methanol as the “shipping fuels of the future”.
Converting all long-distance shipping fuel to ammonia would require 750m-900m tonnes/year of new capacity by 2050, 4-5 times current total global ammonia production, according to OCI.
For vehicle transportation, Big Oil has the opportunity to provide the hydrogen fuel needed to one day leapfrog the electric vehicle (EV) revolution. The technology and networks will take longer to fully develop, but hydrogen fuel cell vehicles can be more efficient and produce less waste than EVs as there are no heavy batteries to recycle.
In January, Spain-based Repsol joined a consortium to develop a green hydrogen facility connected to one of its sites. It aims to become a leader in the production of hydrogen on the Iberian peninsula, reaching a production equivalent to 400 megawatts (MW) of power by 2025.
In January, France-based Total announced a 40MW green hydrogen project with utility Engie at Total’s Le Mede biorefinery site to start up by 2024. The hydrogen would supply the biorefinery.
BP in December announced a letter of intent with utility Orsted to develop an industrial-scale electrolyser project for green hydrogen production at BP’s refinery site in Lingen, Germany. The initial project would start up in 2024.
The first project will be a 50MW electrolyser, but the ultimate ambition is to build a 500MW unit, which would be used to replace all of the Lingen refinery’s fossil-based hydrogen use. This massive project could deliver over 10% of Germany’s hydrogen strategy capacity target of 5GW by 2030.
US-based ExxonMobil at its 3 March investor day highlighted hydrogen as a $1tr addressable market by 2040, growing at around 30%/year. It is advancing technology to produce low-carbon hydrogen at scale and noted that hydrogen from natural gas with CCS has cost and scale advantages versus alternatives. Essentially, it will focus on blue hydrogen rather than green.
Industrial gases and infrastructure
Industrial gases and industrial infrastructure companies are also undertaking major hydrogen projects around the world. There should be partnership opportunities with these players for Big Oil.
Seifi Ghasemi, CEO of US-based Air Products, sees the future 20-40 years from now where almost 100% of the energy produced will be from wind, solar and hydrogen.
Around 40% or more of the electricity produced from these sources will be used for light electric vehicles, heating, cooking, air conditioning and light.
“But then the rest of that electricity will be used…to break down water and produce hydrogen. And then hydrogen will be the source of energy to drive heavy buses, trucks, ships, trains, planes and industries. That is the vision we see in the future,” said Ghasemi at CERAWeek.
Air Products aims to transition from producing gray hydrogen (hydrogen from natural gas without carbon capture) to blue hydrogen and then green hydrogen. It is involved in all three aspects but will shift towards green hydrogen over time, he said.
Mitsubishi Power Americas is building an 840MW power plant in Delta, Utah, US to replace an existing coal-fired plant at the site, enough to meet the peak electricity demands of the city of Los Angeles, California at peak hours, said CEO Paul Browning at CERAWeek.
It will include two gas turbines specifically designed to use hydrogen fuel. By 2025, the turbines would be able to use a mix of 30% hydrogen and 70% natural gas fuel. Between 2025 to 2040, the capacity will be increased to 100% green hydrogen.
Mitsubishi will produce green hydrogen nearby using electrolysis and store it in a huge salt dome underground. “It’s going to be the largest energy storage project in the world by quite a lot,” said Browning.
Siemens Energy’s Haru Oni project in Chile aims to harness the country’s wind power to produce hydrogen and what it calls e-methanol and e-gasoline. E-fuels produced from water, wind energy and CO2 captured from the air emit about 90% less CO2 than their fossil-fuel counterparts, it claims.
Ultimately, low-carbon hydrogen and ammonia is a massive opportunity in the global energy transition. Big Oil has inherent advantages in this field and, through partnerships, can advance technology and build scale to make this a core part of its role as an energy provider to the world.
Insight article by Joseph Chang
Additional reporting by Al Greenwood, Richard Ewing and Jake Stones
Thumbnail image shows pumpjack. Photo by Lm Otero/AP/REX/Shutterstock