Energy Q-Series Blue Hydrogen: Will it lead the industrial decarbonisation transition?

Global discussions around the potential for a hydrogen (H2) economy have accelerated in the past 12-months, including our own hydrogen 101. With growing number of countries targeting net zero carbon emissions by 2050, H2 has been well discussed as one of the major contributing forces in helping decarbonize the world’s economy, in particular given that some industries cannot easily make the battery shift (ie industrials, aviation, shipping, etc). Over 30 countries have published H2 roadmaps and >200 projects have been proposed with related capex of $300B+ by 2030 (per Hydrogen Council). We see Blue H2 (H2 from natural gas with CCUS & CO2 capture of 95%+) as uniquely positioned to act as both a bridge to Green H2 (produced from renewables) and more importantly has the potential to expand the use case and demand markets for hydrogen in industrial, transportation, and power sectors. One of the key questions from potential H2 suppliers and consumers is whether an equilibrium between demand and supply of H2 can be achieved. We have collaborated with 20+ UBS global sector analysts to review the implications of transition to hydrogen across the value chain and for different industries. With supportive regulatory framework and lower costs, we see a scenario in which H2 could represent over 10% of global energy consumption by 2050 with investment potential greater than $1trillion.

A key debate has been around the current and future cost of blue and green H2. With the current high cost of green H2, we could see initial focus on lower cost blue H2 which could lead the way for potential H2 production growth for the next decade. Existing gas infrastructure could be used to transport and store H2 and improve overall project returns. Some industries are already in the money to make the switch, while a few are on the cusp and a carbon tax would push the economics to a tipping point (we see a carbon tax as more transparent incentive than some alternatives proposed). By 2050 we would expect more than half of hydrogen production will come from renewable sources assuming cost parity of green hydrogen with blue by 2030. However, the use case potential is quite sizable and there is a scenario where both will be needed in 2050+.

New partnerships including businesses across multiple sectors and governments will be required to execute on large scale H2 hub projects which could help reduce costs and provide a proof of concept. Several hubs have already been proposed near industrial     clusters.

We see blue hydrogen as an opportunity for O&G producers and midstream operators of existing natural gas infrastructure as it could expand the terminal value of their assets. Hydrogen economy could be positive for alternative energy, utilities, electrical equipment & multi industry sectors. We think the Airlines and Steel sectors are at risk from being unable to pass higher costs on to end-users without a tax incentive.