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The Hydrogen Economy: Industrial Gas Companies Are In Pole Position


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The Hydrogen Economy: Industrial Gas Companies Are In Pole Position

(Editor's Note: This article is part of a series following "How Hydrogen Can Fuel The Energy Transition," published Nov. 19, 2020.)

Unlike in other sectors, disruption risk for industrial gas producers from the increasing demand for clean hydrogen appears low. S&P Global Ratings believes the three largest industrial gas companies it rates (Linde, L'Air Liquide, and Air Products And Chemicals Inc.) stand to benefit from their established presence in the traditional hydrogen market, technological expertise, and early participation in some of the most advanced pilot projects across the blue and green hydrogen value chains. These companies have been producing conventional (grey) hydrogen for industrial uses for decades, but it brings in less than 10% of Linde's and Air Liquide's total revenue, and about 25% of Air Products'.

That is about to change. Large hydrogen users, like fertilizer companies, tend to produce most of the hydrogen they need themselves, and by the conventional route. However, the high cost of setting up plants to produce cleaner hydrogen will likely lead to increased outsourcing. This, alongside healthy growth prospects for the hydrogen market, presents an opportunity for industrial gas players. They already have key infrastructure, expertise in liquid-to-gas conversion, and strong logistics capabilities, including pipeline networks, truck and tank fleets, and fueling stations.

In the long term, hydrogen user-producers such as utilities, ammonia producers, and oil and gas companies could take a larger share of the clean hydrogen market. Yet we believe industrial gas companies are in a good position to maintain an important role through the value chain, even if competition increases.

Several Large Pilot Projects Are Already Underway

Blue and green hydrogen plants with hundreds of megawatts (MW) of capacity will be commissioned in the current decade.  Linde, Air Liquide, and Air Products are actively testing various carbon dioxide (CO2) capture methods as part of blue hydrogen projects. They are also exploring green hydrogen production mainly by investing in electrolyzer equipment. Industrial gas companies are also involved in projects to store and distribute clean hydrogen for potential new end uses in transportation (fuel cells) and power generation.

Air Products stood out last year by announcing its participation in a $5 billion green ammonia production project in Saudi Arabia.  The project, which Air Products is working on together with local power and technology companies, will be commissioned in 2025. The company already earns $2.3 billion in revenue from conventional hydrogen business but has committed $3.7 billion to this project, including a distribution network. Air Products will be the sole offtaker, receiving the 1.2 million tons of ammonia produced each year from solar and wind energy. Ammonia acts as a carrier of hydrogen, allowing Air Products to use its network infrastructure to liquefy, transport, and store it in order to transform it into green hydrogen for exports of almost 250 kilotons per year.

Air Products aims to convert ammonia back into hydrogen at its refueling stations, and compress it for use as fuel for trucks or buses. The company is also involved in more than 30 smaller electrolyzer, CO2 capture (at Port Arthur for instance), and mobility projects. However, the Saudi Arabian green ammonia project, so far, has the largest scale from a clean hydrogen production and distribution standpoint.


In January 2021, Linde announced plans to build and operate the world's largest proton exchange membrane (PEM) electrolyzer (24MW) through a joint venture with U.K.-based ITM Power.   The electrolyzer will produce green hydrogen from diverse renewable energy sources at Linde's Leuna facility in Germany by 2022. Overall, Linde operates more than 80 electrolysis plants worldwide (40MW of total capacity). The company also has a 10% stake in Switzerland-based green hydrogen producer Hydrospider AG, and is involved in several mobility projects such as hydrogen refueling stations in California with True Zero. Overall, Linde has already installed close to 200 hydrogen refueling stations, is working on new hydrogen refueling technology with Daimler Trucks by 2023, and will be the first company to provide green hydrogen for ferry transport to Norled by 2022 from its Leuna facility. Another key partnership--with infrastructure company Snam--started in late 2020 and involves collaboration on clean hydrogen production and distribution projects.

Notably, Linde has operated a hydrogen storage cavern since 2007, the first industrial gas company to do so. Conventional hydrogen business generates about $2 billion of revenue per year, and Linde plans to double this figure by 2030. At Linde's storage cavern, which is located in Texas, hydrogen is purified, compressed, and stored in underground salt. We believe this technology could be in high demand as green hydrogen production increases, since it would enable the storage of excess hydrogen during periods of peak power production. As such, it can improve the reliability of supply.

Early this year, Air Liquide announced its acquisition of a 40% stake in H2V Normandy, which plans to construct a 200MW electrolyzer to produce green hydrogen.  H2V will implement this project at the industrial site of Port-Jérôme, France, where Air Liquide already has sizable activities. Air Liquide also developed Cryocap, a leading CO2 capture solution already in use at the Port-Jérôme facility, supplying one of Esso's largest oil refineries. The company aims to further deploy this cryogenic technology, which separates different gases through low temperatures, in other industrial uses such as for steel and thermal power production. Like its peers, Air Liquide also directly and indirectly operates more than 120 hydrogen refueling stations in strategic regions such as California and Japan.

Air Liquide's existing grey hydrogen business brings in about €2 billion in revenue each year, and the company has invested close to €600 million in new hydrogen solutions since 2014. According to its recently announced sustainability targets, Air Liquide plans to triple this activity by 2035 by investing about €8 billion in low-emission hydrogen production, supply chain, and CO2 capture, reaching 3GW of electrolysis capacity by 2030. It already operates about 40 electrolyzers and recently completed the construction of a 20MW PEM electrolyzer at its Bécancour, Canada facility, powered by hydro energy to produce 8.2 tons of green hydrogen per day.

The Main Challenge Is How To Balance Growth And Prudent Financial Policy

We believe that, overall, increasing hydrogen demand represents a long-term opportunity for industrial gas companies to strengthen revenue and earnings, given their historical and strategic position across the value chain. Most of the new clean hydrogen uses remain at an early stage and the big three industrial gas players are already involved in important transport, carbon capture, and green hydrogen projects.

Because clean hydrogen products often involve multi-billion-dollar investments, we anticipate industrial gas companies will maintain significant available cash and commit to large capital expenditure (capex) only if they are confident about the returns in line with their traditional business model. They will most likely enter into more partnerships, especially those related to renewable energy projects, consistent with their track record of prudent financial policies.

In that regard, we believe that even if the largest green hydrogen project--Air Products' $3.7 billion facility--somewhat deviates from the traditional model of investment in exchange for long-term offtake agreements with end customers, it is still well in line with the company's financial policy; it's part of a broader $17 billion envelope Air Products has targeted to spend on diverse projects over 2018-2022.

In our view, an important component to allay risk is the continuation of long-term contracts with customers. This will ensure ongoing cash inflows before a company commits to significant and potentially increasing capex outlays. On the other hand, the prospects of a shift to green and blue hydrogen mean that industrial gas companies might not remain dominant in this niche market. Nevertheless, given the expected overall growth in demand for outsourcing clean hydrogen, and the industrial gas sector's logistical advantages, we believe they are in a good position.

Overall, we anticipate that the three majors will be involved in several valuable partnerships, given their unique know-how in producing, converting, and transporting industrial gases. Such partnerships could also be a way to split potentially mounting investments beyond 2025, allowing industrial gas companies to secure profit growth without compromising their robust balance sheets. In that regard, we view Linde's partnerships with Snam and Daimler, as well as Air Liquide's and Air Products' collaboration with Thyssenkrupp on water electrolysis technology, as good examples of projects that might be quickly replicated in the coming decade.

Editor: Bernadette Stroeder. Digital Content Producer: Tim Hellyer.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Oliver Kroemker, Frankfurt + 49 693 399 9160;
Florent Blot, CFA, Paris + 33 1 40 75 25 42;
Gaetan Michel, Paris + 33 14 420 6726;
Paul J Kurias, New York + 1 (212) 438 3486;
Secondary Contacts:Karl Nietvelt, Paris + 33 14 420 6751;
Massimo Schiavo, Paris + 33 14 420 6718;

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