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Russia, Energy and the Green Hydrogen Revolution

Markets around the world were rocked by the Russian invasion of Ukraine, most acutely felt in volatile price movements in oil and natural gas. The price fluctuations in oil and natural gas will likely continue as the uncertainty around Russian oil and gas production persists even after the war with Ukraine ends. This uncertainty has created an opening for accelerated development of green hydrogen. As recently as January 2022, the cost of green hydrogen was not expected to reach parity with oil and natural gas until sometime around 2030 as the industry grew to scale. The Russian invasion of Ukraine has changed those forecasts and green hydrogen is now substantially cheaper in many energy importing regions.

Oil Uncertainty Premium

The invasion of Ukraine has created an uncertainty premium on oil; a premium that will likely persist for an extended period. While there are no current sanctions on Russian oil and it continues to flow, the business of buying and shipping Russian oil has become challenging. Even with work-arounds being put in place by some emerging market nations to directly buy the oil from Russia, insurance and shipping remain challenging in this environment. This uncertainty premium has also been exacerbated by the refusal of OPEC+ to raise oil production. OPEC+ will likely continue to refuse a production increase because, first and foremost, they benefit from higher oil prices but also more importantly, renegotiating a production agreement among the 20+ nations would be incredibly challenging. Negotiating any new OPEC+ agreement is an arduous process, strictly because every nation wants to maximize their own production targets in the limited cap space. This has created onerous situations; such as when the UAE almost pulled out of a deal in 2021; and when Saudi Arabia flooded the market with oil in 2020. Taking that history and the current environment into account, the view among member nations is that it is generally best for all the members of OPEC+ to stick to the deal rather than renegotiate production quotas. With these constraints in mind, the chance for OPEC+ to help in any way in the current environment is minimal.

These higher prices have made green hydrogen and fuel cells more attractive. In certain regions the cost of using green hydrogen and fuel cells is now cheaper than operating and fueling conventional diesel trucks for heavy duty applications. The current cost of green hydrogen at $2.5-$4 per kg equates to a similar cost for a gallon of diesel. That equivalent price has made green hydrogen an attractive alternative for heavy duty transportation, especially in regions like Europe that have high taxation on fuel as well as a reliance on Russia.

Chaos in Natural Gas Markets

The impact on energy has extended beyond oil, and has even greater implications in the chaotic natural gas markets that now exist. The greatest impact on the natural gas markets has been felt in Europe which relies heavily on Russian imports for natural gas. That reliance has now created incredible challenges as Russia has become an unreliable partner after the invasion of Ukraine. Many European nations began cutting back Russian natural gas purchases, causing huge price spikes around the world, and are now buying huge amounts of LNG. Unfortunately, the global LNG capacity has maxed out in the short term. Russia has itself been limited in exporting to non-European nations since they have limited pipeline and LNG export capacity to these countries. Europe is looking to increase non-Russian sources but that will take three to five years at a minimum to either construct new pipeline capacity or LNG import terminals. These limitations have led natural gas to spike to around $40 per MMBtu in Europe expanding the potential opportunity for green hydrogen.

Green Hydrogen Comes of Age

For the past few years, green hydrogen, the process of using electrolyzers running on excess solar and wind power to create hydrogen gas, has seen an increasing amount of interest and investment. The primary source of investment has been the realization that attaining carbon neutrality and a carbon neutral world, green hydrogen would be needed to decarbonize heavy transportation and industry. The challenge to this investment was that, historically, green hydrogen was significantly costlier than natural gas and oil. Most research shows green hydrogen would have to get to $1-$2 per kg to be competitive with oil and gas, which would be equivalent to $8-$16 MMBTU for the price of natural gas. Even that hydrogen price level would require a massive amount of scaling that would likely not be achieved until around 2030. Yet, the Russian invasion of Ukraine has made the current production cost of green hydrogen that is between $2.5 - $4 per kg very competitive since that equates to a natural gas price of between $20-$32 MMBTU and as mentioned above, a price similar to $2.5 – $4 per gallon of diesel.

The response has been a doubling down on renewable energy and green hydrogen as a way to increase domestic energy production in Europe. Green hydrogen takes advantage of excess electricity that is currently being produced by renewable energy such as wind and solar (the duck curve) to create hydrogen. Not only that, but it is faster to build an electrolyzer plant to create green hydrogen (12-18 months) than it is to build an LNG import terminal (4+ years). Obviously, green hydrogen cannot completely replace natural gas and oil but the current environment will likely hasten green hydrogen adoption as a substitute for many applications. The adoption of green hydrogen is an important part of the energy transition, as it now creates a way to harness excess wind and solar energy to decarbonize heavy trucks and industrial applications. Green hydrogen, which was expected to reach parity in 2030, currently offers a cheaper solution to existing fossil fuel prices in many regions, decarbonizes industries, and offers energy poor regions access to more domestic energy production.

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