The global oil and natural gas industry is focused on developing hydrogen, but California operators are finding the changeover may require negotiating a winding, rocky road as Gov. Gavin Newsom wants to move the carbon neutrality target to 2035 from 2045.

The California Public Utilities Commission (CPUC) recently rejected a joint application by Sempra’s Southern California Gas Co. and San Diego Gas & Electric Co., as well as Pacific Gas and Electric Co. (PG&E) and Southwest Gas Corp. for a proposed hydrogen blending demonstration program. The CPUC called the application “premature and inefficient” but it did not preclude a refiling.

Regulators said they want the utilities to collaborate closer with other stakeholders in the state, such as the California Energy Commission...