Despite all of the rhetoric about the need for green hydrogen, we see most of the large ammonia producers pursuing large blue projects – with Nutrien’s announcement yesterday coming on the heels of a CF new facility announcement and the CO2 capture project announced by LSB a couple of weeks ago. While there are some small (proof of concept) green projects in the works, they are very small, tiny when compared with the ammonia need, whether to replace lost material from Russia and Ukraine or whether to supply what could be substantial needs in Asia to co-fire coal plants, or as a shipping fuel, or as a carrier for hydrogen (see third chart below). The ammonia majors are not waiting around for “green” economics to improve as they see meaningful near-term demand that cannot wait for scale efficiencies of available power on the green side. Large-scale sources of cheap renewable power are hard to find, and where they may exist, there is competition from uses that may be able to pay more.
The CCS spending chart below is quite detailed, but shows the limited amount of spending in 2021 and 2022 and may underestimate the amount of seismic spending needed, especially in the US, as companies prepare permit applications. We do not expect to see much spending in the US before mid-decade beyond permit applications. However, as we discuss in today’s ESG and Climate report, should the API proposed carbon tax, or something similar, be additive to the 45Q tax credit, we could see a step-change in CCS when/if the tax is approved. The tax on its own is likely not enough to drive decarbonizing investment, but when added to 45Q it could be a specific trigger for CCS investment, and we could see a step-change in the second half of the decade. This might involve large-scale blue hydrogen production, especially on the Gulf Coast to decarbonize the refining and chemical industries.
The two charts below today are interesting bedfellows as while one talks about yet more, likely impractical, hydrogen ambitions, the other talks about a possible solution.
The Texas hydrogen hub is getting a lot of press and we also cover the idea in our ESG and Climate report today. We see this as not a lot more than intent today and would be surprised if any part of the project would be up and running, assuming it gets built at all, before the end of the decade. Green hydrogen economics do not (yet) make sense and some considerable efficiency learning curves need to emerge before any project could expect to make economic sense without significant subsidy. We have talked at length about the inflationary effects of material shortages and this is the core topic of our ESG report again today, where we suggest that a global recession may be the best thing for the renewable industry as it would slow other sectors' demand for critical materials. But the other wild card is renewable power demand, and how many industrial and materials companies along the Gulf Coast have their eyes on the same renewable power capacity to meet 2030 emission reduction goals. No one must buy renewable power today, because no one has 2022 emission goals. So, renewable power demand is likely understated and it is why the premium to buy renewable power in Texas today is quite low. Fast forward to 2030 – when promises have been made – and we will likely see demand spike and prices rise relative to conventionally generated power. This would materially impact the economics of the green hydrogen hub in Texas even if the electrolyzer costs could be reduced. Given the abundant pore space both onshore and offshore, blue hydrogen makes much more economic sense for Houston.
The Evonik discussion around CO2 prices is both relevant and important as CO2 values will be a critical component of investment decisions for many industries going forward. Those waiting for explicit guidance on CO2 prices are likely to be disappointed as we are not seeing much global coordination today and as we discussed yesterday, the European market, which had been the better indicator in our view over the last 18 months, has collapsed in the wake of the Russia/Ukraine conflict as some countries ask for it be suspended, while speculators are assuming that lower gas supplies into Europe will lead to lower emissions and less demand for credits. One of the options here is to take the bp approach and assume a carbon price in investment decisions. Early last year, bp indicated that it would fix on a carbon price of $100 per ton in its longer-term planning. We believe that this is a ballpark steady-state for CO2 pricing but that traded prices could be quite volatile around that level, depending on the mechanisms used. But even if we have a consistent carbon price, we will see significant changes in industry costs and competitive cost curves based on the various costs of carbon abatement. We have written in the past that we could see huge benefits to the US manufacturing base because of the combination of relatively low-cost hydrocarbons and relatively low-cost CCS opportunities. By contrast, we see costs rising steeply in places like central West Europe, where the local CCS opportunity is off the table. Even if Europe can produce cost-effective blue hydrogen on the coast, getting it to central Europe will be an issue. The landscape is less clear in Asia, but we expect to see some competitive edge for countries with low-cost CCS options – Malaysia, Indonesia, Thailand, and parts of China. See more in today's daily.
Playing right into the central argument of our ESG and Climate report is today’s ExxonMobil investor day, and we include a couple of key slides around the company's proposed path to net-zero below. The first slide shows just how much blue hydrogen (with CCS) the company plans to add to offset its emission-generating fuels – the volumes implied in the chart are high.
There is a lot in the ESG section of today's daily report and we will elaborate more in our ESG and Climate report next week (to be found here). The Bloom Energy results were strong and the modular nature of what Bloom is offering, in our view, should only increase the level of interest going forward. SMR and ATR base blue hydrogen projects are very large, requiring billions of dollars of capital and taking years to construct. The projects are further complicated by the likely need to build dedicated CCS with each unit. The methane fuel cells that Bloom offers are modular and can be much smaller and more incremental from an investment perspective. For blue hydrogen, they will still need CCS, but they offer a lower capital-based route to hydrogen and power today. We can see an opportunity to deploy these units, or something similar, everywhere there is CCS, as either an incremental source of hydrogen and power or a large source. Bloom still has work to do on lowering costs, but much less work than green hydrogen appears to have today, in our view.
We view the hydrogen tax credit discussed in today's daily report as potentially very harmful, as it could give life to projects that will further increase demand on a renewable energy industry that has finite limits to its rate of growth. The credit could encourage inherently uneconomic projects – even with a longer-term “abundant power” view. If the incentives are used to back clean rather than green projects it would make more sense as blue hydrogen could be produced in very large quantities without breaking the bank and would allow constrained renewable power investments to focus on other harder to decarbonize power needs. If the hydrogen subsidy could be added to the 45Q sequestration credit we would likely see a wave of blue hydrogen investments in the US – primarily aimed at decarbonizing industrial applications and refining.
The linked Covestro headline from today's ESG & Climate report is a reminder that the chemicals and polymer makers are dealing with more than just recycling and product lifecycle management. Customers are equally focused on the carbon footprint of the products they buy and the green hydrogen move by Covestro (assuming that affordable green hydrogen is possible) would replace hydrogen made from fossil fuels and replace other fuels for heat in some cases. Germany has some considerable issues with decarbonizing, as the blue hydrogen route will be challenging in a country that will likely not allow onshore CCS. Covestro and others may have little choice but to buy green hydrogen and/or green power, even if supplies come up short of plan and costs are higher as a result. This is a good illustration of why we believe that the right policies in the US could drive some additional competitive edge while meeting climate objectives. Cheap hydrocarbons coupled with cheap CCS may only be matched in some parts of the Middle East.
The Green Plains Institute analysis below draws heavily on the EPA emissions data by facility, but correctly, in our view, identifies where CCS makes the most sense in the US. We still struggle with the pipeline distances associated with some of these ideas as CO2 disposal is still a cost for emitters and in any attempt to reduce costs, pipeline distances will be key. We have discussed the opportunity recently for massive blue hydrogen investment (including CCS) to replace industrial heating fuel and this would apply in all of the regions below. Note our conclusions in today’s ESG and Climate report that we expect renewable power installation goals to fall short – requiring more use of natural gas (for power generation or hydrogen production) with accompanying CCS.