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US oil, gas producers advantaged in blue hydrogen adoption: S&P Global Ratings

Highlights

Low-cost US gas, potentially cheap feedstock for hydrogen

Vast reserves, existing infrastructure offer cost advantages

US oil and natural gas producers could be well positioned to leverage blue hydrogen production as a cost-competitive bridge to carbon neutrality, according to S&P Global Ratings.

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Comparatively low-cost natural gas feedstock and extensive reserves, along with existing infrastructure for hydrogen transportation by pipeline and for carbon capture and storage in legacy depleted wells, give US producers a strategic advantage to produce the zero-carbon fuel.

"In the U.S., we believe blue will be the hydrogen choice for oil and gas companies over the coming decade given its lower operational and capital costs," S&P Global Ratings says in a new report.

As the global oil and gas industry faces increasing scrutiny from investors and regulators, many producers have already announced ambitious goals to reduce greenhouse gas emissions. In the near term, upstream methane-emissions tracking and certification and carbon capture and storage (CCS) are two immediately viable options for producers looking to transition toward low- or zero-carbon goals.

Longer term, though, the industry faces tough strategic decisions needed to survive in a future where global gas consumption is widely forecast to eventually decline. As that future approaches, many producers are already considering hydrogen as a potential alternative business model.

US versus Europe

As GHG emissions regulations tighten across the globe, S&P Global Ratings expects that gas producers in the US and Europe will likely follow different paths toward carbon neutrality.

In the EU, decarbonization plans call for the phasing out of natural gas, to be replaced potentially by green hydrogen produced via electrolysis and renewable power. In the US, comparatively low-priced gas and large existing infrastructure investments for the fuel make blue hydrogen a more cost-advantaged alternative.

Currently, natural gas accounts for about 60% to 80% of the total production cost for gray hydrogen – a standard, existing technology that involves significant carbon emissions. If paired with low-cost CCS, though, the process could yield zero-carbon blue hydrogen.

With US gas prices near $3/MMBtu, compared to levels closer to $7 in Europe, US oil and gas producers could make low-cost blue hydrogen at the wellhead by sequestering captured carbon in legacy depleted wells. At blends of up to 15%, the fuel could then be injected into the existing gas pipeline system for delivery to end users. More extensive, and potentially costly, modifications to the existing pipeline system would be required for higher blends.

Adoption

According to Ratings' analysts, a meaningful shift in the market balance between gas and hydrogen isn't likely in the US until after 2030. Still, some producers have already announced measurable steps toward GHG emissions reductions – potentially an overture toward hydrogen adoption.

Earlier this month, the US' largest gas producer, EQT, said that its Marcellus production would undergo an independent assessment of its environmental impact, including measurement of its methane emissions.

On a recent earnings call, Exxon announced its own strategy to reduce upstream GHG emissions some 30% by 2025. The company will rely largely on CCS technology to meet that goal and has already announced a plan to construct a $100 billion CCS facility on the Houston Ship Channel to capture emissions from refineries and petrochemical plants.