ME hydrogen exports struggle with cost reality

Giant oil producers in the Middle East, such as Saudi Arabia, have in recent years talked up the potential of hydrogen exports as a way to gain a foothold in a renewable energy-focused future, reduce carbon emissions and power various sectors.

Hydrogen can be used as a fuel, either with natural gas as a feedstock (known as ‘blue hydrogen’) or powered by renewable energy (known as ‘green hydrogen). But cost forecasts on either side of the blue or green hydrogen picture are plagued by the lack of scale needed to produce the fuel at a level that is price-attractive, with one analyst remarking that hydrogen exports are nothing but a costly distraction.

Hydrogen as a fuel is structurally unaffordable, according to analysts, and could be used as a predatory delay tactic, to create the illusion of a move towards progress while remaining rooted in fossil fuel extraction.

“Hydrogen as a fuel is being pitched as a decarbonisation solution — when it’s actually a decarbonisation problem,” Paul Martin, head of Spitfire Research and an analyst from the Hydrogen Science Coalition (HSC), told Gas Outlook.

“You can either accept that your industry is going to die, or you can pretend that the fossil methane in the system will be replaced one day with hydrogen, with this false hope being used to keep us burning methane for longer. That’s hydrogen as a fuel in a nutshell,” he said.

Martin says that hydrogen has some potential existing uses outside of as fuel, such as ammonia for fertilisers or for direct iron reduction in steel production. Some proponents have said that there would be better conditions to scale production with larger international demand for hydrogen, which could send production costs downwards.

But many of the global production costs will not be reduced with time and are permanently baked into the price, making it structurally unaffordable. Tanks, pumps and compressors — which make up a significant fraction of the capital cost of hydrogen projects — are already mass-produced and are unlikely to descend in price, even if the costs of electrolysers improve.

Similarly, Jom Maden, a Senior Research Analyst of Scenarios & Technologies at Wood Mackenzie, said there were weak indications from the wider market that hydrogen as a fuel would take off on a large-scale.

“The real question is: where is the rest of the world going? The answer to that is, not in a very good direction,” Maden from WoodMac said. “The demand for low-carbon hydrogen is probably a bit lower than expected.” Martin from HSC points out that many plans to export the fuel from the Middle East are based on fantasies of non-existent infrastructure and markets that don’t yet exist.

“The fantasy that’s being pitched — to carry hydrogen across the Mediterranean to a European market willing to pay an enormous premium is insane. Economically insane. It will never happen,” Martin told Gas Outlook.

Indeed, hydrogen’s energy returns are low — for every 10 kWh of electricity used to make and ship hydrogen in the form of ammonia, it may yield only around 2 kWh back. Similarly, hydrogen-fuelled transport for things like planes could bump up consumer prices which would be politically unfavourable with the public, and disincentivizes economic support.

“As long as people are willing to pay the prices for low carbon, the Middle East would happily switch over,” Maden from WoodMac said. “But one third of an airline’s prices are jet fuel: it’s a tough sell, politically. Everything feeds back into how expensive it is.”

While energy losses are high, there is ample talk of subsidising hydrogen to facilitate production. But even with ultra-favourable conditions, analysts were sceptical that subsidies would create an economically favourable market for both buyers and sellers.

Maden from WoodMac said that the costs for producing green hydrogen in the Middle East are currently prohibitive when measured against oil and gas.

Focusing on dirty blue hydrogen — the fuel produced by fossil fuels — would be an easier strategy for countries such as Saudi Arabia, but there is a risk of being left behind if the green version takes off and such a focus would do little to work towards climate goals, Torbjorn Soltvedt, a Principal MENA Analyst at Verisk Maplecroft, told Gas Outlook.

Hubs like Jubail and Yanbu could be used to leverage hydrogen-dedicated pipelines. But even under optimistic, “dreamland” future cost scenarios (e.g. $3/kg for green hydrogen), the cost of CO₂ abatement is around $350 per ton, according to HSC, making it a worse economic choice than other decarbonisation strategies.

“I don’t think there’s any countries in the region that have a clear strategy and plan beyond small-scale projects for how to scale hydrogen production really quickly,” Soltvedt said.

Martin from the HSC expressed scepticism at small-scale projects, stating that they are often funded with public money and may serve more as a marketing tool than a serious step toward scalable solutions.

These schemes could in fact divert attention away from other key and unavoidable public spending tasks, such as electrifying transport, such as cars, trucks, buses, commuter trains, and heating via heat pumps, or upgrading power grids, he said.

But politicians would need to be willing to look through the hype and towards the maths, which make it challenging, if not impossible, to make hydrogen as a fuel an attractive and cost-effective choice against other options, Martin added.

(Writing by Miriam Malek; editing by Sophie Davies)