why oil & gas companies should pivot to hydrogen
Updated: Feb 25
The oil & gas industry will still be producing gas for at least another two decades to cater for at least 22% of the world’s energy consumption even in the IEA 2°C Scenario (2DS) as discussed in our earlier article.
Currently the industry still has social licence to operate and the larger exploration and production companies (E&Ps) have availability to finance. However, this is threatened by a gathering resistance in the form of carbon taxation, public / shareholder perception, anticipated lower carbon substitutions for gas (such as hydrogen, fuel cells, etc, in addition to renewables). Also, smaller, independent E&Ps may struggle if they have less access to capital.
“Green” and “blue” hydrogen, discussed in our article “what colour is your hydrogen?”, is a carbon-free or neutral fuel that could be produced by oil & gas companies and enable them to become carbon net zero 2050 compliant. Hydrogen can be used to decarbonise a range of sectors including industry (chemicals, iron, steel, fertiliser, refining), transport, heat (domestic & industrial) and power where it is proving difficult to meaningfully reduce emissions.
This article considers: what are the market factors for hydrogen to become a replacement for gas and how can oil & gas companies make it work?
so how big a deal is hydrogen, and should it be green or blue?
Global demand for hydrogen is currently at 70 Mtpa and is produced using 6% of the world’s natural gas and 2% of the world’s coal. Current uses of hydrogen are largely by industry, in oil refining and ammonia, methanol and steel production.
Less than 2%of hydrogen globally is generated with zero carbon emissions as green hydrogen, from water hydrolysis powered by renewables. This means almost all hydrogen is produced as grey hydrogen, meaning all 830 Mtpa CO2 emissions generated during its production go to atmosphere (approximately 2.5% of global CO2 emissions in 2017).
Notwithstanding increased demand for hydrogen in the future, this presents a significant opportunity for emissions reduction by cleaner alternatives, either by increasing green hydrogen production or a clean version of grey hydrogen, namely blue hydrogen.
Let’s first examine the technical drivers and options available…
Grey hydrogen is most commonly produced by the steam-methane reformation (SMR) process. There is also the autothermal reforming (ATR) process, which is similar to SMR but also adds oxygen via a catalytic process and is more costly, as well as partial oxidation of methane; and coal gasification.
Blue hydrogen is essentially a carbon-neutral version of hydrogen, as it is produced in the same way but with up to 95% of the resulting CO2 emissions either being disposed of via carbon capture and storage (CCS) or offset elsewhere via a carbon “negative” project. Blue hydrogen via SMR using natural gas with CCS currently has the lowest production cost of all types of hydrogen, including green hydrogen presented in our earlier article.
Future global demand for hydrogen between now and 2050 is expected to grow to anywhere between 79 Mtpa and 546 Mtpa (see Figure 1) depending on how big a contribution it makes to the world’s future energy needs.
This wide range of forecasts is based on the views of Shell, International Renewable Energy Agency (IRENA) and The Hydrogen Council plus four scenarios with different pathways for technology and market development. The Hydrogen Council estimate is by far the greatest. This assumes hydrogen provides 18% of the world’s energy demand in the 2050 two-degree scenario (2DS).
Figure 1: Estimated Demand Range for Hydrogen globally in 2050 (above current demand in 2020).
If we assume demand is sufficient to support new entrants, blue hydrogen could be seen as a good fit for E&P companies, at least in the near term, as it offers a large scale, hybrid solution: carbon-neutral, while still using fossil fuels and existing oil & gas industry skills, expertise and know-how.
To add more certainty to this theory, we must understand the competitiveness of the blue hydrogen business environment and identify a strategy for potential profitability.
What are the market factors for hydrogen to become a replacement for gas and how can oil & gas companies make it work?
attractiveness and profitability of the blue hydrogen industry – an emerging market
We can apply “Porter’s Five Forces”  to identify and analyse the competitiveness of the blue hydrogen business environment and to identify a strategy for potential profitability.
Competitive rivalry is moderate, allowing new opportunities for oil & gas companies:
Worldwide, there are currently 10 large blue hydrogen plants with CCS in operation and 11 planned.
Capacity and timing of these is presented in Figure 2 – bubble sizes represent scale of CO2 captured and stored, ranging from Tomakomai’s 100,000 t CO2/yr to Lake Charles Methanol’s 4.2 Mt CO2/yr.
Please note the plot excludes the future world’s largest project to reduce carbon emissions, H21 North of England, as this dwarfs the rest in scale with ultimate hydrogen production of 1.8 Mtpa and CO2 capture of 20 Mtpa by 2035.
Oil & gas companies have ownership of raw materials and appropriate knowledge, quality, expertise and transferrable skillset – including transport of gas, compression, metallurgy, complex plant, gas liquefaction, large scale capital project management
Oil & gas companies have the opportunity to reuse depleted oil and gas fields for carbon capture and storage.
Figure 2 – worldwide large-scale blue hydrogen plants with CCS in operation or planned .
Key projects and their development status:
2. Barriers to entry for others but less so for E&Ps, due to:
Large capital requirements and lead times involved in planning and executing hydrogen and CCS projects. io can assist in this through its experience in the field of CCS and in conducting development studies for such projects as well as smaller studies around business planning, solutioning, market analyses and process engineering.
Specialist competencies needed similar to those currently used by the oil & gas industry (highly transferable skills).
High infrastructure costs – hydrogen transportation by pipeline (convert existing or new) and storage tanks either, as gas or liquid like LNG, salt caverns, etc; CO2 capture, transport and storage (plant, equipment, pipelines, empty field reservoirs). There are issues to be resolved around pipeline conversion (though DNV studies have shown limited challenges) and regulations are required.
Technology protection through licensed processes such as amine/solvent systems.
3. Strength of suppliers appears similar to the oil & gas industry:
High number of suppliers of equipment and services for hydrogen production.
Substitution of similar products and therefore likely less volatility in prices.
4. Large pool of customers due to the many applications for hydrogen – currently used in industry, as discussed earlier, with potential to expand to include:
Transport – using hydrogen fuel cells for vehicles and hydrogen-based fuels for shipping and aviation.
Buildings – hydrogen could be blended into existing natural gas networks and commercial buildings in hydrogen boilers or fuel cells.
Power generation – hydrogen is one of the leading options for storing renewable energy when there is no demand (wind at night or too much sun/solar during the day).
Heavy industrial applications, noting that heavy industry currently produces about 22% of global CO₂ emissions.
5. Low threat of substitute products to carbon-free hydrogen:
Blue hydrogen has the lowest production cost of all hydrogen categories as noted earlier.
Mature process – SMR with CCS is well proven and has been in operation for almost two decades. Alternatively, ATR offers a higher CO2 capture rate (95% vs SMR’s 90%) through increased gas processing efficiency and a more cost effective option when factoring in CCS as the CO2 is contained at process pressure, therefore reducing compression costs.
Commercially scalable – existing hydrogen production facilities with CCS produce 1,000 tonnes hydrogen per day. In contrast, electrolysis accounts for less than 2% of the current 70 Mtpa of hydrogen globally produced today3. The largest individual electrolysis project installed to date was 10 MW in 2018
Less electrically intensive than green hydrogen – blue hydrogen requires less than 1/10th of the electricity needed by electrolysis. Producing the current world hydrogen output from electrolysis would require an electricity demand of 3,600 TWh, more than the total annual electricity generation of the European Union.
Blue hydrogen is a cost effective, low carbon solution that enables creation of a hydrogen infrastructure which would facilitate smoother transition and integration of green hydrogen when green is more feasible on an industrial scale.
The lifespan of blue hydrogen will depend on electricity and gas prices but can also be influenced by individual government policies. Whilst policymakers and industry must work together to encourage investment and trade, based on the above evidence, io sees viable opportunities for oil & gas companies to invest in blue hydrogen.
Speak to io about your hydrogen solutions or entering the hydrogen market:
Hydrogen market entry strategy
Hydrogen commercial contract design
Blue hydrogen solutions – CCS, Transport & Storage and Reservoir studies
Green hydrogen solutions and energy storage solutions
Clean energy portfolio migration support
 Starting the Energy Transition in E&P – part 1: risks for independent E&Ps, io consulting, 16 Jan 2020.
 IEA (2019), “The Future of Hydrogen”, IEA, Paris https://www.iea.org/reports/the-future-of-hydrogen
 Global Status of CCS 2019, Targeting Climate Change, Global CCS Institute Ltd.
 Key World Energy Statistics, IEA, 2019
 Deloitte, Australian and Global Hydrogen Demand Growth Scenario Analysis, COAG Energy Council – National Hydrogen Strategy Taskforce, November 2019.
 Hydrogen Council, Hydrogen Scaling up, “A sustainable pathway for the global energy transition”, November 2017.
 COAG Energy Council, Australia’s National Hydrogen Strategy, 2019.
 Porter, M. E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press, 1980.
 Delayed and expanding projects, new initiatives and revivals, GeoEngineering Monitor, 21 Aug 2019. http://www.geoengineeringmonitor.org/2019/08/rotterdams-carbon-capture-indias-cloud-seeding-and-other-updates-august-2019/
 The potential for CCS and CCU in Europe, Report to the Thirty Second Meeting of the European Gas Regulatory Forum 5-6 June 2019, Coordinated By IOGP
 DNV GL, 2017. Verkenning waterstofinfrastructuur, s.l.: s.n.
 Low-Carbon Heat Solutions for Heavy Industry: Sources, Options, and Costs Today, Columbia SIPA Center on Global Energy Policy, by S. Julio Friedmann, Zhiyuan Fan and Ke Tang, October 7, 2019.
 IEA (2019), “Tracking Energy Integration”, IEA, Paris https://www.iea.org/reports/tracking-energy-integration