Gazprom - 'H-Day' Highlights Long-Term Opportunities in New Industry

Gazprom yesterday held a round table on hydrogen with global experts at which it also presented its own views and plans. Overall, the consensus seems to be that hydrogen's importance as an option for decarbonizing the energy sector is rising. However, it will take time to lower production costs sufficiently, scale up technologies and set up a market. Gazprom is prioritizing its methane pyrolysis pilots and R&D investments in general to be ready to compete for market share. > Wood Mackenzie. The 2050 net zero targets are a good start, but there is still a lot to be done in terms of adopting and implementing actual policies. The share of hydrocarbons could decline from 80% of the global energy balance, according to Wood Mackenzie's base case, to 59-67% in 2040 and 37-50% in 2050 assuming the goal is to keep the expected increase in global temperatures at 1.5-2.0 degrees Celsius or less. The biggest reduction is expected to come in coal and oil consumption, while gas should be relatively resilient. Carbon prices are expected to rise $110-160 per tonne in these scenarios. Reaching net zero targets will require not only boosting renewables, but also faster adoption of new technologies (including hydrogen and CCS). Hydrogen accounts for 62 GW of green projects in the current pipeline (versus 3 GW as of end-2019). Low-hydrogen projects will be important for decarbonizing those segments of the economy that would be difficult for renewables. The global hydrogen market will reach 240 mln tonnes by 2050 in the base case and 380-530 mln tonnes in more upbeat scenarios. There are opportunities for Russia in blue hydrogen with CCS - given low gas feedstock costs and the extensive gas pipeline network - as well as in green and pink hydrogen. Green hydrogen is expected to be cost-competitive with hydrogen from fossil fuels by 2040.> Energy Aspects. Not much activity is expected in terms of hydrogen development until 2030, as a big reduction in the production costs is required first. Green hydrogen should become competitive with gray hydrogen by 2040 thanks to expected growth in carbon prices (green hydrogen production costs are expected to decline to about $2.5-3.5 per kg), while blue hydrogen looks set to remain cheaper (at $2.1 per kg). Hydrogen demand growth should help to sustain natural gas consumption in the long term.> IHS Markit. A wave of national hydrogen strategies emerged last year, as well as a shift from fuel cells to broader low-carbon hydrogen use. At this point, the hydrogen pipeline of 62 GW would produce the energy equivalent of 15-20 bcm of natural gas per year over 10 years. The goals are still modest, though significant scale could be achieved as early as the 2030s, but more likely in the 2040s. Annual global spending on hydrogen R&D has averaged $800 mln per year for the past 10 years, while funding from just the five largest European economies is expected to total $4.4 bln per year through 2030. The announced policies leave the door open for blue hydrogen. The Russian government has approved a hydrogen industry road map until 2024, which will require subsidies and regulatory support. Exporting Russian gas with methane reforming and CCS in Europe is more cost-efficient than producing and transporting hydrogen from Russia to Europe. Green hydrogen production in Russia could be more than three times more expensive than blue hydrogen production.> Gazprom. The company is actively participating in hydrogen production pilot projects and is also funding related R&D. There are two research projects ongoing: on plasma pyrolysis with Tomsk Polytechnic University and on metal melting pyrolysis with Samara Polytechnic University. The most cost-efficient approach with a low carbon footprint would be building a methane pyrolysis site at the end of the Nord Stream pipelines. The cost was estimated at $1.4 per kg of H2, the lowest among low-carbon hydrogen production options (for hydrogen projects in the EU, as per the chart below). According to the company, electrolysis is very unlikely to become cost-competitive with methane pyrolysis. The EU strategy does not divide hydrogen by colors but is rather aimed at developing low-carbon hydrogen (carbon footprint below 4.4 kg per kg of hydrogen). > Ammonia production projects might also be considered by the company given that some countries (particularly Japan) are interested in using ammonia broadly in the economy. However, carbon emissions regulation needs to be taken into account - for example, ammonia production is already included in the new EU CBAM (Carbon Border Adjustment Mechanism). > Mixing hydrogen with methane in the pipeline for transportation is unlikely to be a competitive approach, according to Gazprom, because it would not bring about a sufficiently substantial reduction in the carbon footprint while requiring high spending and raising corrosion risks (especially at connections and pumping stations). > The company's approach to developing the hydrogen business will be the same as that for natural gas: any large-scale project will require signing a long-term supply contract before a FID. Gazprom is discussing opportunities with its customers, in particular potentially supplying hydrogen to German metallurgical companies after 2029, as well as negotiations with Japanese companies on blue ammonia. The Gazprom Hydrogen subsidiary has been set up as a project office, and it will coordinate all the activity in the hydrogen field.