In preparation for the global transition to carbon neutrality, Russia has started an active phase of adaptation, with one of the most important objectives for our nation being to preserve its position as the world’s leading producer and exporter of fossil fuels and energy resources.
As a result of the climate change agenda, hydrogen is regaining prominence. Even before the year 2022, NOVATEK emerged as the most nimble of the local natural gas producers, having signed the first arrangement for the industrial export of H2 to Europe even before the country’s first natural gas plant was built.
The hydrogen fuel has managed to withstand multiple waves of interest over the past half-century. However, these waves of interest have not resulted in an increase in investment in hydrogen production or its broad incorporation into energy systems. But now, precisely because of its environmental friendliness, hydrogen has a realistic prospect of becoming a viable energy source. The decarbonization of the economy and the rapid rise of low-carbon technology has reignited discussion about hydrogen as the most promising source of energy once again. However, this time, its potential to be stored and utilized as a clean fuel without causing direct greenhouse gas emissions might be pivotal in the transformation of the world’s energy supply and consumption.
Large gas companies have begun to rethink their long-term commitments. Already in June 2021, NOVATEK said that it would abandon plans to construct a factory for the manufacture of liquefied gas in Yamal, instead of repurposing the site for gas chemistry. As a result, the Ob LNG project was replaced by the Ob GCC, with the first stage of the project expected to begin in 2026 and the second stage scheduled to begin in 2027. The Ob GCC is expected to generate 130 thousand tons of hydrogen and 2.2 million tons of ammonia each year, according to current estimates. Furthermore, the latter chemical will serve as a hydrogen carrier since ammonia is quickly transformed into a liquid phase, which makes it easier to transport.
In relation to the international market
After signing a deal to export hydrogen to Europe, which included provisions for the use of CO2 capture and storage technology as well as the payment of carbon-free fees, NOVATEK became the first Russian business to do so at the end of December 2021. It was announced last week that the German business Uniper had signed the first prospective supply deal. Uniper is prepared to acquire up to 1.2 million tons of Russian “blue” ammonia from the upcoming Yamal facility. As a result, the hydrogen-containing substance will be sold on the German market and transformed into nitrogen and hydrogen gas before being used to power the German water distribution system or shipped to other consumers throughout Europe. Furthermore, Uniper is one of the investors in Nord Stream 2 (Northern Stream 2).
These are not the first agreements reached with the Germans in connection with Russian aspirations to export hydrogen. Liquefied natural gas (LNG) and decarbonization are two areas in which NOVATEK and RWE Supply & Trading GmbH have agreed to collaborate, according to a memorandum of understanding signed in early December. It became evident that the German RWE was interested in low-carbon supplies of ammonia and hydrogen from Russia, despite the fact that no information on quantities was made available at the time. This indicates an increase in long-term LNG supplies from the Arctic LNG-2 project, whose resource base is located 70 kilometers away from the Yamal LNG project, which is also a NOVATEK creation, and which is also expected to be equipped with CO2 utilization technology in the near future.
When we talk about Nord Stream 2, we’re not just talking about the pipeline itself. As a matter of fact, during the last couple of years, there has been discussion on the prospect of using the Russian gas pipeline to carry hydrogen. The German business journal Handelsblatt reported in July 2020 that Gazprom was experimenting with the notion of filling the pipe with at least a blend of natural and synthetic gases. It is estimated that the percentage of hydrogen in future pipelines such as Nord Stream would reach 70 percent, according to Gazprom. In addition, 20 percent hydrogen may be put into ancient natural gas pipelines in conjunction with natural gas.
After learning that Gazprom had approached Germany about the prospect of sending H 2 via pipelines from Russia to Europe, as well as reverse shipments of carbon dioxide to our nation for usage and disposal, it became public in December 2020. And already in July 2021, in the aforementioned German business publication, an announcement was made by Matthias Warnig, the executive director of Nord Stream 2 AG, who stated that he would continue to investigate the possibility of utilizing the pipeline to carry hydrogen. “It is highly likely that we will be able to add hydrogen to one or both threads no later than 10 years from now,” he added.
As a result, it appears that Nord Stream 2 retains its importance even in the context of a worldwide energy shift to low-carbon fuel. In addition, even if the entire European Union decides at some time to transition to hydrogen, Gazprom has the most cost-effective approach so far: it will deliver natural gas to Germany and then use it to manufacture hydrogen. The General Director of Gazprom Hydrogen, Konstantin Romanov, will speak about this in October 2021 at the St. Petersburg International Gas Forum in St. Petersburg, Russia.
The fact that NOVATEK and Gazprom are rivals in this sector should not be overlooked; both companies have begun to reclaim their former positions in the hydrogen energy industry. In addition, the first option proved to be the most expedient option due to the conclusion of letters of intent with overseas corporations. Along with this raw material duo, there is also Rosatom, which is based on the generation of “yellow” hydrogen, which implies the process of water electrolysis, in order to generate electricity. There will be utilization of nuclear energy in this situation, which may result in German condemnation.
Immediately following the disaster in Fukushima, Germany announced a five-stage plan to close all nuclear power facilities by the end of 2022, with the goal of completely eliminating nuclear power by 2050. This has remained the German government’s aim throughout the country’s ten-year foreign strategy. It should come as no surprise that, in the future, Rosatom will either have to carry out electrolysis using renewable energy or explore for alternative means of transporting “yellow” hydrogen that do not need traveling through Germany.
Russia stands to gain from this
Russia’s gas exporters hold out hope that the growth of the climate discussion between the nations would result in a shift in their attitude toward Russian fuel from one that is unduly political to one that is merely commercial.
As of January 4, 2022, the European Union has developed a new taxonomy that identifies industries in which investments are considered to be long-term and sustainable. Despite the fact that nuclear power and natural gas combustion cannot be characterized as “clean” from an environmental standpoint, Europe believes them to be the most appropriate sources of energy during the transition phase for the entire year ahead. While the Europeans are willing to forgive CO2 emissions and other environmental hazards to corporations who aim to make their operations “green” in the future, the United States is not so willing.
The European Union has already been divided as a result of this decision. France, which has a large number of nuclear reactors, and Poland were both vocal in their support for the European Commission’s proposal. Austria, Luxembourg, Germany, and Spain were among the adamant opponents of the war. No matter how much Denmark and Portugal protest, there is little possibility that the inclusion of atoms and natural gas in the EU taxonomy will be overturned in the near future. To do this, at least 20 EU nations comprising 65 percent of the EU’s population, or at least 353 Members of the European Parliament, must vote “no.”
Although the German government continues to oppose nuclear energy as being ecologically favorable, it has approved the use of natural gas in certain circumstances. According to the German state television broadcaster Das Erste, this has occurred. However, there is a twist to this: Berlin establishes standards for the quality of power plants as well as for the transition period from natural gas to the usage of hydrogen. And, based on the recent activities of Gazprom and NOVATEK, it appears that Russia has begun to prepare for this well in advance. The Russian energy giant Gazprom joined the Council of Industrial Partners of the Technological Hydrogen Valley consortium in August 2021 and stated plans to expand the amount of hydrogen generated at its facilities by 1.5 times by 2024, reaching a total of 250,000 tons by then.
Germany’s reluctance to leave natural gas was readily apparent to everyone who looked at the country. When the European Commission, under the leadership of Ursula von der Leyen, recommended the inclusion of natural gas in the taxonomy, the German government had no reservations about the fact that it was an essential energy carrier and raw material for the country’s economic development. As a result, according to the Federal Statistical Office of Germany in Wiesbaden (Destatis), the chemical industry continues to be the country’s largest industrial consumer of energy, accounting for 29.3 percent of total industrial energy consumption in Germany, with more than a third (35 percent) of these volumes being used as raw materials.
Furthermore, the city of Ludwigshafen on the Rhine, where the headquarters of the world’s largest chemical corporation BASF is situated, has the highest per capita gas consumption in the world. The chemical company, through its subsidiary Wintershall (now Wintershall Dea), was instrumental in the development of the Nord Stream gas pipeline, and later became a financial stakeholder in the Nord Stream 2 pipeline as well. Germany’s business leaders have also expressed concern that, as part of the country’s transition to climate neutrality by 2030, the country will require new gas-fired power plants because, with the closure of coal and nuclear power plants, accelerating the development of wind and solar energy will not be sufficient. At the end of last year, it became evident that the demand for natural gas in Germany would only increase in the foreseeable future. And it is apparent that the corporate community in this nation is not interested in the preservation of Nord Stream 2.
Instead of carbon, hydrogen is used
Russian President Vladimir Putin encountered resistance to the resumption of construction of the Nord Stream 2 gas pipeline in early 2022, which was again halted owing to “non-compliance with European criteria” this time. Because of international sanctions, the development of a very critical facility for our country was delayed by two years – instead of being completed by the end of 2019, work was completed only by the end of 2021. Due to the withdrawal of foreign firms from the project, including insurance companies, technical firms, and shipping businesses, Russia was forced to complete the construction of the gas pipeline on its own, using two pipe-laying vessels and six escort vessels, including supply ships.
Despite this, our country came out on top. The construction of the natural gas pipeline is complete. The case is still in the hands of a tiny committee for certification. Germany, on the other hand, had a nasty surprise in store. After the physical construction of Nord Stream 2 was finished in September 2021, the German regulator began inspecting the pipeline to ensure that it complied with the requirements of German legislation. Certification was halted in November, and a German subsidiary, Gas for Europe GmbH (GfE), was established to handle the situation. With the formation of this new corporation came ownership and operation of a 54-kilometer segment of the gas pipeline lying in German territorial waters, along with a location for onshore facilities in the city of Lubmin. Now that Nord Stream 2 has an independent operator, the project may move forward. The European Commission has the opportunity to speak now. The Federal Network Agency (Bundesnetzagentur) of Germany stated in mid-December 2021 that the country’s federal network infrastructure had been completed.
Given Germany’s reliance on natural gas and the necessity for it in the energy complex as a result of the shutdown of not only nuclear but also coal power plants, sabotaging the launch of Nord Stream 2 is tantamount to shooting Germany in the foot from the inside. Germany’s energy growth plan is now intertwined with natural gas, with Russia continuing to be the world’s top exporter of fuel.
Nonetheless, some Russian analysts believe that the EU’s rhetoric has a specific purpose in mind: to disrupt the natural gas market. There is concern that new buildings in Europe may be prohibited from connecting to gas distribution networks in the not-too-distant future. And, given the current exchange rate for natural gas, which is over 1.7 thousand dollars, the switch to hydrogen will no longer be a pipe dream.
As a result, Gazprom has been informed that beyond 2035-2040, he faces the prospect of losing the majority of his contracts with European partners as well as millions of euros in income. As a result, the company’s primary focus over the next 20 years will be on maximizing the benefits of pumping via Nord Stream 2 in order to return the $40 billion that was spent on its development.
Experts, on the other hand, believe that the designation of natural gas as “green” will enable the country to maintain or even increase demand for Russian blue fuel for the next one and a half to two decades, whether it is pipeline gas from Gazprom or liquefied gas from NOVATEK, or in the future, gas from Rosneft, for the foreseeable future.
At the same time, the future of Russia’s gas giants is now inextricably linked to the use of hydrogen. According to the Concept for the Development of Hydrogen Energy in the Russian Federation, which has been approved by the Russian government, additional global demand for hydrogen could reach 40-170 million tons per year by 2050 if national hydrogen programs are implemented in Europe, the Asia-Pacific region, and the United States. This figure is dependent on how quickly the world transitions to a low-carbon economy, as well as the rate of absorption and development of related technologies. The generation of low-carbon hydrogen from fossil raw materials is also a national goal in our country until 2035, according to official estimates.
Even a number of 153 billion euros was reported in the Handelsblatt daily for July 2020 – this is the expected volume of the European hydrogen market by 2050, according to the publication. It is said in the same German source that the Russian ministry’s estimations take into consideration the “fork” by this period, which ranges from 32 to 164 billion euros. This is the profit that Russian hydrogen exporters may expect to make if they reach the market before the competition does. This includes not just the potential earnings of Russian enterprises, but also the money to be received by all levels of government.
