McKinsey: The clean hydrogen opportunity for hydrocarbon-rich countries

Industry executives are under pressure as the call to keep global warming to 1.5 degrees Celsius has gained traction in the global climate change discussion.

In order to develop and export clean hydrogen, which is defined as hydrogen produced with very low or zero carbon emissions, and its derivatives, including clean fuels, HRCs could take advantage of their hydrocarbon resources, geographic locations, access to abundant renewable energy (in some cases), and highly developed infrastructure.

Clean hydrogen is anticipated to be essential in decarbonizing traditionally challenging industries like heavy industry and long-distance transportation. Significant obstacles must, however, be overcome. The hydrogen value chain is complicated and capital-intensive, and many of its sectors aren’t presently progressing at the same rate. It can also be challenging to keep up with the rapidly changing laws and technologies.

Recent publications from a wide range of fields demonstrate the growing interest in this subject. Our research builds on current value-chain trends to show how important HRC players may make the most of their favorable positioning and extensive domain knowledge to become pioneers in clean hydrogen. Finding the most important sources of value and selecting the appropriate roles in the value chain are necessary for this.

By 2050, the entire demand for hydrogen might reach 600 to 660 million tons, which would reduce world emissions by more than 20%. 2 Nevertheless, to take advantage of this opportunity, all concerned parties must work together to create clean-hydrogen value chains, often spanning many regions. Those who move swiftly in these areas will be in a prime position to develop new sources of wealth and seize the lead in upcoming international energy markets.

Realizing the promise of hydrogen
The majority of hydrogen produced today is “gray,” meaning it derives from hydrocarbons, mostly natural gas. This necessitates the steam reforming procedure, which emits carbon emissions. Although “blue” hydrogen similarly uses hydrocarbons, it also uses carbon capture, utilization, and storage (CCUS) technology to lessen its negative environmental effects. However, this can result in additional costs. Last but not least, “green” hydrogen produces no emissions and is produced using renewable energy, generally by electrolyzing water.

Four issues will need to be resolved in order for the hydrogen promise to materialize for HRCs and for the market to scale: scaling competitive supply; promoting local demand; creating transportation technologies; and facilitating enterprises across value chains, customers, and countries.

1. Scaling competitive supply. This requires HRCs to scale up both blue and green hydrogen. Blue hydrogen will play a key role in the short to medium term, together with green in the medium to long term, as it becomes increasingly economically viable. Access to cost-competitive and abundant natural gas or other hydrocarbons coupled with technological disruption in CCUS can allow for the required decline in the cost of blue hydrogen production by 2030. Complementary wind and solar resources and the continued decline in electrolyzer capital costs can also help. According to a report published by the Hydrogen Council in 2021, the cost of hydrogen for end users could drop by 60 percent from 2020 to 2030. ³ This outlook of continuous cost decline is underpinned by International Renewable Energy Agency (IRENA) scenarios by 2030 and 2050. ⁴
2. Stimulating local demand. To create the foundations of a hydrogen ecosystem, there will need to be a local market for hydrogen in parallel to the development of export corridors. Governments can help by implementing the right regulatory frameworks around decarbonization and clean air to ensure these local demand sectors start. McKinsey analysis shows that with local demand stimulated, steel and ammonia produced using clean hydrogen could be competitive with traditional production pathways by 2030 at carbon prices of around $50 to $100 per ton, depending on local conditions..
3. Developing transportation technology. Hydrogen must be in liquid form or transformed into ammonia before it can be transported. However, liquefying hydrogen is both costly and technically challenging because it needs to be cooled down to –252 degrees Celsius, which is the lowest boiling point of any element. Our analysis shows that converting hydrogen to ammonia for transport to Europe from the Middle East and then converting it back into hydrogen could result in an additional cost of $2.50 to $3.00 per kilogram (kg) of hydrogen in 2030, which is significant, given that green hydrogen production costs could be less than $2.00 per kg by 2030 in the region.
4. Facilitating cooperation across value chains, customers, and countries. The clean-hydrogen value chain is nascent and will require players across the stages to work together to ensure the value chain develops consistently. For example, long-term offtake agreements between customers such as steel or green fertilizer producers and hydrogen producers could de-risk investments in clean-hydrogen projects. Partnerships could enable equipment and infrastructure developers to make investments with some minimum utilization guarantee. Meanwhile, creating government-to-government partnerships could facilitate hydrogen flow between countries, further supporting demand uptake in target markets, and could lock in supply agreements.

Countries that are abundant in hydrocarbons have a history of expanding the world’s supply of energy by taking advantage of their exclusive access to price-competitive natural resources.

Hydrocarbon-rich nations’ contributions to the expansion of clean hydrogen
The United States, Canada, Saudi Arabia, and the United Arab Emirates are all included in the group of countries known as HRCs. The majority of these nations have a history of expanding the world’s energy supply by making use of their exclusive access to price-competitive natural resources. When it comes to hydrogen, HRCs might potentially scale up clean hydrogen by utilizing their expertise and competitive reserves.

A competitive supply of hydrogen from HRCs is anticipated to be fueled by a number of variables, including access to hydrocarbon resources, affordable renewable energy, high local demand, advantageous location, and a track record of developing international energy markets. By utilizing these characteristics, HRCs could grow and become leading clean hydrogen providers, however, depending on how these parameters are applied, different HRCs may hold different competitive positions.

The first reason HRCs are likely to offer blue hydrogen is that it gives them a place to sell their hydrocarbon reserves, a chance to (re)use their midstream infrastructure and reservoirs, and a chance to continue dominating the global energy market. To do this, it is necessary to invest in technologies like CCUS, which will assist ensure that blue hydrogen remains affordable after 2030. Since green hydrogen is anticipated to become cost-competitive after 2030, those who have access to competitive, affordable zero-carbon energy could also capitalize on the green hydrogen trend and make use of any advantageous renewable energy sources to mitigate the risk that blue hydrogen will eventually become more cost-competitive than green hydrogen.

Building a reliable hydrogen supply might enable HRCs to use clean hydrogen to decarbonize downstream industries, including long-distance aviation and marine, downstream oil and gas, and chemical- and energy-intensive businesses. As the need for more infrastructure increases, HRCs might potentially convert existing gas pipelines to clean hydrogen, which would encourage investment in port infrastructure as well as national carriers or transport vessels.

Taking charge: choosing the appropriate roles in the value chain and locating the sources of value
By identifying the sources of value creation and utilizing a variety of unique business strategies, HRCs might take the lead in the future hydrogen market. In order to build an integrated power, hydrogen, and ammonia production plant with export capabilities by 2025, NEOM, ACWA Power, and Air Products have pledged to contribute $5 billion. 5 More than 680 sizable projects, totaling more than $240 billion in mature investments, have been declared at the time of publication.

Recognizing important sources of value

By creating integrated initiatives to reduce the risk of potential limitations or sluggish development of certain value chain segments, several businesses have concentrated on the full value chain. Other participants, primarily original equipment producers, have concentrated on particular value-chain verticals.

In the hydrogen value chain, developing the right plays
There are six plays that are particularly well suited for enhancing players’ comparative advantages in HRCs: 1) The construction of hydrogen equipment; 2) the production of hydrogen; 3) the collection, use, and storage of carbon; 4) the transportation of hydrogen; 5) clean-hydrogen downstream production (such as the fabrication of blue or green steel or synthetic fuels), and 6) integrated project developers.

1. Hydrogen equipment manufacturing: HRCs with high aspirations in hydrogen and a strong manufacturing sector could set up a hydrogen equipment manufacturing champion to facilitate the national road map and to become a global equipment supplier. That said, the most logical equipment manufacturing plays are owned by original-equipment manufacturers, and the kind of equipment plays that would likely make the most sense would be in the final tier of the supply chain, such as the assembly of components in electrolyzer or CO₂-capture equipment. Localizing manufacturing could help secure access to critical electrolyzer or carbon-capture equipment in the event of potential supply-chain constraints associated with projected growth in the hydrogen economy. Furthermore, developing carbon-capture or electrolyzer assembly can also help create jobs and contribute to GDP.
2. Hydrogen production: National oil companies and renewable developers can ensure demand for hydrocarbons or renewable resources. According to the Achieved Commitments scenario in our 2022 Global Energy Perspective, hydrogen will consume 650 billion cubic meters (bcm) of natural gas per year and 17,400 terawatt-hours of electricity per year in 2050, which corresponds to up to 25 percent of expected global renewable generation by that time. ⁶ Chemical companies, particularly those with significant exposure to industrial gases, such as gray hydrogen, have a majority of the capabilities and assets required to produce clean hydrogen today. All three players have experience developing, executing, and operating capital-intensive, complex industrial projects required to develop clean-hydrogen projects.
3. Carbon capture, utilization, and storage: HRC players such as national oil companies, utilities, chemical companies, and energy-intensive industries are the top contributors to national greenhouse gas (GHG) emissions and subsequently could have an important role to play in developing CCUS. Not only is CCUS critical for blue hydrogen production but also it offers opportunities to decarbonize operations across companies’ portfolios. In addition, captured carbon can be used in existing operations, such as enhanced oil recovery or in future products, such as synthetic fuels.
4. Hydrogen transportation: There is ample opportunity for HRCs with strong export infrastructure, shipping sectors, and pipeline networks. To begin, national oil companies can repurpose existing gas pipeline infrastructure or develop new hydrogen networks to facilitate transportation. They can also partner with shipbuilders to develop hydrogen carriers. A number of carriers of liquefied hydrogen will be required to facilitate a global clean-hydrogen market by 2030. Meanwhile, utilities and developers of renewable energy sources can leverage existing pipelines or develop new ones to transport hydrogen locally. National oil companies and utilities can also invest in the electric grid to facilitate the transmission and distribution of green electricity. In Europe, an estimated 39,700 kilometers of hydrogen pipeline infrastructure could be installed by 2040, connecting low-cost production locations with demand hubs. ⁷ Finally, shipping companies could see ammonia transport opportunities, ultimately leading to the development of liquid hydrogen carriers. On this point, green and blue ammonia transport could increase shipped ammonia volumes in 2030, as compared to the scenario in which clean hydrogen is not adopted.
5. Clean-hydrogen downstream production: HRCs with either developed downstream industries or access to cheap hydrogen could become suppliers of clean end products, such as green ammonia. National oil companies could decarbonize products using hydrogen as feedstock. And chemical companies could see new opportunities in the production of green and blue ammonia, for which gray hydrogen is currently a feedstock. The same applies to energy-intensive industries, such as steel. The Hydrogen Council’s 2021 report shows that green steel can cost as little as $515 per ton of crude steel, representing a premium of $45 per ton of CO2e by 2030. 8 Leveraging downstream assets and industries, HRC countries have an opportunity to capitalize on the growing demand for decarbonized products driven by shifting consumer preferences and regulations. For example, our analysis shows that global low-CO2 flat-steel demand could grow to more than about 100 metric tons by 2030. This could be addressed with hydrogen direct reduced iron making (H2-DRI), with the exception of about ten to 20 metric tons, which will come from scrap and electric arc furnaces (EAFs).
6. Integrated project developers: National oil companies can leverage their strong cross-value-chain positions to derisk project and downstream industries as well as their G2G relations to help secure demand. This play is a good fit for oil companies with advantaged access to energy resources, such as hydrocarbons and green energy, as well as advantaged geography, a broad set of energy off-taker relations, and substantial local demand driven by local industries over the long term.

The next stages for HRCs to be a major player in hydrogen
In order to put their respective nations on a successful path as the world adopts clean hydrogen, all stakeholders in HRCs, including governments acting as policymakers and regulators, national oil companies (NOCs), investment funds, utilities, and downstream industries, have important roles to play.

Both locally and globally, governments can take the lead in the early development of the hydrogen economy. To do this, hydrogen road maps would need to be created, along with goals for national hydrogen production, regulations to decarbonize various industries to boost local demand for hydrogen, G2G partnerships to ensure demand for local hydrogen exports, a perspective on the localization of hydrogen production throughout the value chain, and regulatory support for hydrogen deployment.

In order to determine the pertinent opportunities for them throughout the hydrogen value chain and determine where to compete, stakeholders in HRCs will need to build their hydrogen strategies. These could include utilities that act as green hydrogen producers, NOCs that invest in midstream infrastructure, downstream players that produce green products like green steel and green ammonia, and utilities that support the development of technologies like CCUS, liquefied hydrogen transport, direct air capture (DAC), and hydrogen fuel cells for trucks. Last but not least, participants in HRCs will need to focus on a variety of enablers, such as talent development, establishing alliances to ensure the advancement of the necessary technologies, enlarging the supply market, and long-term demand partnerships or offtake agreements.

In the past, HRCs have been crucial in meeting the world’s energy needs. Additionally, they gain by having access to the resources needed to generate affordable green and blue hydrogen. They provide a major breakthrough for expanding the supply of green and blue hydrogen and speeding up cost reductions. Partnerships with hydrogen stakeholders in HRCs can give organizations and nations chances to engage with the hydrogen economy and, more importantly, provide a way to decarbonize their own activities and market segments.

In order to reduce global GHG emissions while maintaining a sufficiently reliable and affordable energy supply, hydrogen is a crucial component. HRCs are in a unique position to assist with the technology’s development and expansion. Those that act responsibly today will not only contribute to staying ahead of the curve by gaining access to new and expanding value pools but will also contribute to a cleaner, greener future.