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LNG 101: Hydrogen’s Potential Impact on Natural Gas Exports
Exactly what hydrogen means for the future of natural gas remains a burning question as the energy transition unfolds.
The potential for hydrogen has loomed for decades, but it has yet to be realized in large measure because of its relatively high costs.
More regulations and government subsidies to galvanize a shift away from fossil fuels, coupled with mounting pressure from investors to slash emissions and pledges from private companies to achieve net-zero emissions, is providing unprecedented motivation to further explore hydrogen’s potential as an energy source. Rapidly advancing technology may also make hydrogen more feasible in the coming years.
Although hydrogen remains in its infancy, the fuel poses longer-term financial risks for LNG and pipeline gas exporters in places like Europe, where a push is underway to take the lead in establishing a hydrogen economy.
Two types of hydrogen are being targeted to aid in the energy transition. Blue hydrogen is extracted from fossil fuels and emissions are removed using carbon capture technology. Major oil and gas companies are promising to lead the charge by first developing blue hydrogen given that it is less expensive than producing green hydrogen. Green hydrogen is made by using renewable energy to split water through electrolysis that ultimately produces an emissions-free product.
Hydrogen is taking the spotlight at a time when natural gas is the world’s fastest growing fossil fuel. In 2019, there were 43 countries that imported the super-chilled fuel, according to the International Group of Liquefied Natural Gas Importers. That number has steadily grown since.
Natural gas has gained traction for a variety of reasons. It emits less carbon than oil and coal. However, its primary component, methane, is a potent greenhouse gas and stronger than carbon dioxide. While LNG provides a pathway to cut carbon and serve as a substitute for dirtier fuels across the world, it doesn’t solve the problem of a warming planet.
Hydrogen is a zero-carbon fuel. In a sign of its potential, the European Commission (EC) has published a roadmap for the European Union (EU) to install at least 6 GW of renewable energy hydrogen electrolyser capacity by 2024 and 40 GW by 2030. The continent is a major consumer of LNG and a balancing arm for the global gas market given its abundant storage capacity.
“For hydrogen to contribute to climate neutrality, it needs to achieve a far larger scale and its production must become fully decarbonized,” the EC said, indicating it should be green hydrogen.
Like LNG, hydrogen can be chilled and liquefied for transport on ships. It can also be blended with natural gas in the pipeline stream to reduce carbon emissions. Natural gas liquefaction technology manufacturers like Chart Industries Inc. have also said their equipment could be modified to liquefy hydrogen for export.
These are reasons why leading LNG exporters like Cheniere Energy Inc. and Sempra Energy have said they’re further exploring hydrogen opportunities.
“We believe that LNG has a major role to play in this whole global decarbonization effort across the globe,” Cheniere CEO Jack Fusco said last year during an earnings call. He said “hydrogen may present an opportunity to complement those environmental benefits, as well as leverage our own core competencies in terms of market access, infrastructure development, operations [and] construction.”
For now, the estimated costs to develop and deliver green hydrogen approach $20/MMBtu, according to the International Energy Agency, exponentially higher than natural gas.
Exporting the fuel is also a long way off. Kawasaki Heavy Industries Ltd. launched the world’s first liquefied hydrogen vessel in 2019, and it completed the world’s first liquefied hydrogen receiving terminal for research purposes in Japan last year.
Analysts at Tudor, Pickering, Holt & Co. recently said while hydrogen’s potential “is huge, the hurdles are significant, and meaningful scale is likely multiple decades away.”
The number of countries that have established national hydrogen strategies is growing. About 13 countries already have plans for hydrogen in place, according to a recent analysis by Bloomberg New Energy Finance.
Under such plans, long-term demand for LNG and pipeline gas imports could be weakened if transitioning to hydrogen is successfully carried out. For example, the EC said in its study blending is less efficient and diminishes the value of hydrogen. Blending could also impact the design of gas infrastructure, end-user applications and cross-border system operability. Current gas quality standards in Europe would need to be adjusted to secure cross-border coordination, the EC said.
Two obstacles that would need to be overcome on the continent are building infrastructure to distribute hydrogen and developing a liquid market to provide price transparency, the EC said.
However, in Europe and elsewhere, it is now widely agreed that electrification alone cannot deliver the level of emissions reduction to which many countries aspire. The world’s three largest LNG importers, China, Japan and South Korea, along with the EU, have announced goals for net-zero carbon emissions, practically necessitating a role for hydrogen in energy markets.
Royal Dutch Shell plc CEO Ben van Beurden said recently at CERAWeek by IHS Markit that without hydrogen in the energy mix by 2050, “we cannot aim to be a net zero economy.”
According to Shell’s annual global LNG outlook, consumption increased to 360 million metric tons (mmt) in 2020, versus 358 mmt in 2019, despite the pandemic’s impacts on energy consumption.
China and India led the recovery in demand for LNG following the Covid-19 outbreak, with both countries increasing their LNG imports by 11% year/year. China’s announcement of a target to become carbon neutral by 2060 is expected to continue driving up its LNG demand through “the key role gas can play in decarbonizing hard-to-abate sectors,” Shell said.
Overall, Shell expects global LNG demand to reach 700 mmt by 2040, as demand for natural gas continues to grow strongly in Asia and gains further traction “in powering hard-to-electrify sectors.” Still, “against a backdrop of increasing net zero emissions targets, the industry will need to further innovate to offer cleaner energy supply.”
The LNG sector is doing that with as much zeal as hydrogen’s proponents. Carbon-neutral cargoes are now being offered, supply contracts are being inked that detail emissions along the value chain and liquefaction plants are pursuing plans to capture carbon and curb other emissions.
Editor’s Note: This segment is one in a series by NGI’s LNG Insight aimed at educating the North American market about the global LNG trade.
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