Uruguay joins race to make e-fuels for thirsty EU market

Uruguay is deepening its commitment to the energy transition with a $4 billion bet on hydrogen-based e-fuels, mainly for export to the EU.

On June 9, Alur, the biofuels subsidiary of Uruguay’s state-owned oil company ANCAP, awarded a tender to transform 150,000 tonnes per year of CO2₂ from its fermentation and biomass operations at its Paysandú facility in western Uruguay.

The winner was HIF Global, a Chile-based company whose proposed project would combine 710,000 t/yr of CO₂ from Alur and other sources with 100,000 t/yr of green hydrogen to produce 180,000 t/yr of e-fuels.

HIF Global, which is also developing projects in Chile, the U.S. and Australia, highlighted Uruguay’s technical and market conditions for producing e-fuels. The country has “accessible low-cost renewable energy, abundant availability of CO₂ sources, state incentives and a stable legal framework,” the company’s Latin America regional manager Victor Turpaud told Gas Outlook in a statement.

HIF Global will now study whether the Uruguayan project is feasible, then carry out detailed engineering. A final investment decision is expected next year, and construction would kick off by the end of 2024, according to ANCAP President Alejandro Stipanicic.

For Uruguay, the e-fuels project would represent the largest-ever foreign investment. HIF’s e-fuels plant would require $1.9 billion, while a renewable solar and wind energy transmission component would need another $2 billion. ANCAP could participate with up to a 30% stake in the project.

Uruguay has long stood out from its big oil and gas-producing neighbours Brazil and Argentina for its mostly carbon-free power generation, thanks to a combination of hydroelectric plants, wind farms, solar parks and biomass plants as well as thermal back-up. But with enormous potential for more renewable energy that far surpasses the demand of its 3.5 million inhabitants, Uruguay is turning to green hydrogen and its derivatives.

Green hydrogen, also known as renewable hydrogen, is derived from water molecules split apart from oxygen through electrolysis powered by renewable energy. The green hydrogen is synthesised with biogenic CO2₂ — CO2₂ derived from organic sources — to produce green methanol, which is then converted into carbon-neutral synthetic fuels, also known as e-fuels.

At a June 9 conference in Montevideo, Uruguay’s Industry, Energy and Mining Minister Omar Paganini described the country’s availability of biogenic CO2₂ as a competitive advantage over other aspiring producers such as Namibia. In addition, Uruguay boasts fresh water supply from the Uruguay River and a track record of political and economic stability.

U.S. consultancy McKinsey estimates that Uruguay could produce green hydrogen for a competitive $1.4 per kilogram, on par with Spain and less than Germany’s estimated $2/kg but still shy of low-cost leader Chile at $1/kg.

The Uruguayan project is not without challenges. Two gigawatts of new renewable energy would be needed to run the planned 1 GW electrolyser. That means that Uruguay’s installed generating capacity, which totaled 4.9 GW in 2022, would need to be expanded by a full 40%.

All of this renewable energy will require land. Uruguayan officials say the new renewable energy will be installed onshore, within a 180-kilometer radius of Paysandù. The government is separately promoting offshore wind development, in conjunction with offshore drilling for hydrocarbons that are still part of the country’s energy plans.

Chile e-fuels pilot

Uruguay is monitoring the hydrogen and e-fuels experience of nearby Chile, where HIF Global is already operating an e-fuels pilot plant. The Chilean project, located in deep south Magallanes, has sparked some local tension over land-use regulations and environmental impacts. And although they are not directly related to hydrogen, some renewable power generators in Chile are experiencing cash flow problems that have drawn concern at their local and international headquarters, especially in Europe.

Nonetheless, confidence in South America’s role as a future green energy supplier is running high in the EU, where hydrogen is a mandated pillar of energy transition. On a June 14 visit to Chile by European Commission president Ursula von der Leyen, the EU and Chile signed new hydrogen agreements to promote investment, financing and technical assistance.

In July, the EU is expected to sign an energy Memorandum of Understanding with Uruguay, part of a wider Global Gateway campaign to line up international green hydrogen and critical minerals supply.

The EU “intends to buy much green hydrogen, e-fuels and other derivatives in the coming years, from all around the world. Companies will buy where conditions are the most favourable,” the EU’s ambassador in Uruguay Paolo Berizzi told Gas Outlook in a statement. “All conditions for green hydrogen are present in Uruguay.”

Although there is consensus around the vital role for green hydrogen in the energy transition, experts are somewhat more cautious about e-fuels. Because they can be used in existing combustion engines, without the need for additional infrastructure, e-fuels are easier to deploy than full electrification, particularly in sectors that are hard to electrify such as maritime shipping and aviation. But this “versatility is counterbalanced by their fragile climate effectiveness, high costs and uncertain availability,” according to a 2021 report, Potential and risks of hydrogen-based e-fuels in climate change mitigation, published in Nature Climate Change, by Falko Ueckerdt et al. “Neglecting demand-side transformations threatens to lock in a fossil-fuel dependency if e-fuels fall short of expectations.”

Ueckerdt told Gas Outlook that e-fuels are “indispensable for climate mitigation. We need a rapid scale up. There will be huge markets.” But they “should simply not be treated as silver bullets for climate mitigation in all sectors.”

For Latin America’s aspiring green energy exporters, such concerns take a backseat to the promise of transforming their economies in line with their net-zero climate goals.

Green hydrogen will become an “absolutely new export sector, on par with forestry and cattle-raising, creating thousands of jobs, bringing in foreign exchange and technology, and positioning Uruguay in the world,” Paganini said. “We’ve shown we can do it.”