Hydrogen is Big Oil’s Last Grand Scam
Alex Grant, Principal, Jade Cove Partners, San Francisco, USA
Paul Martin, Chemical Process Development Expert, Toronto, Canada
January 2021
The PDF of this article is available here and its associated LinkedIn post is available here. This article was cross-published in CleanTechnica.
Exxon first correctly identified combustion of their hydrocarbon products as the cause of future catastrophic climate change as early as 1977. (1) But for decades, Exxon successfully ensured that their investors and the world’s governments would not know what they knew. Exxon, and other fossil fuel companies, waged a multi-generational information war of spreading fear, uncertainty, and doubt (FUD) about climate science and new energy technology so that the market for their hydrocarbon products would not contract. (2, 3) It was the same playbook used by the tobacco industry to prevent cigarette regulations, which was sometimes operationalized by the same lobbyists. (4, 5, 6)
Meanwhile, climate has changed, and it will continue to rapidly change away from the slow dynamic equilibrium that we took for granted when we built a planetary civilization, unless we stop using the atmosphere as a free CO2 disposal facility. Many of our lives will be worsened by climate change, some of them will be lost, and we know exactly who caused it and let it happen. The fossil fuel industry’s unquestionable multi-generational FUD campaign has allowed them to scam trillions of dollars out of us while they desecrated the global commons. The smoky skies of Russia, California, and Australia, are both a testament and a vision of the future if we don’t transition to a low carbon energy system. (7)
We can transition if we electrify everything. Electrical energy can be used to perform most of the operations required to make a technological world spin. Electricity can be produced using wind turbines, solar panels, and hydroelectric dams, emitting on average less than 30 gCO2/kWh compared to methane’s 400 gCO2/kWh and coal’s 1,000 gCO2/kWh. That low carbon electricity can be stored in batteries or in pumped hydro to operate electronics, vehicles, houses, communities, industries, and entire countries. (8, 9)
Today, markets for solar power, wind power, batteries, and electric vehicles (EVs) are growing rapidly because they have been demonstrated to be extremely cheap at scale. As of 2020, solar is the cheapest energy humans have ever harnessed, (10) to the extent that it is economic to “waste” large quantities of it (which, as a reminder, we already do if we don’t capture it with solar panels). (11) Wind power is following a similar cost decline, and in some cases, pairs well with solar’s intermittency profile. Meanwhile, lithium-ion batteries are successfully stabilizing entire grids that are powered by solar and wind. (12, 13, 14)
Financial markets have realized the opportunity for these technologies to create significant value. As investors were locked inside with their children for most of 2020, they came to appreciate the importance of the transition to a low carbon energy system to their own offspring’s future. (15) The value of equities exposed to electrification and decarbonization took off like rocket ships, while the value of equities exposed to the old energy system tanked. The most exceptional market story of 2020 was the increase of Tesla’s market capitalization. By the end of the year, it was more valuable than Exxon Mobil, and as valuable as all of the world’s incumbent auto-manufacturers combined. (16)
In 2020, there was also a fair share of conversation about hydrogen’s role in the new energy system. Historically, a vision of a “hydrogen economy” has interested technologists, where hydrogen could be produced by splitting water electrochemically, then recombined with oxygen in the air to make water again, releasing useful energy in the process. It was thought that this could be applied to ground transport, aviation, or stationary energy storage. A decade ago, EVs powered by lithium-ion batteries and hydrogen fuel cell vehicles were seen as competing solutions for decarbonizing ground transport. However, EVs have scaled up, have been enthusiastically adopted, and are now being deployed rapidly by Tesla and other auto-manufacturers, while the same has not occurred for fuel cell vehicles. So why did hydrogen receive so much attention in 2020 when no hydrogen-powered technology company had any significant breakout, and the transition away from conventional internal combustion engine vehicles appears to strongly favor EVs?
This is a curious situation, as major fossil fuel companies have been asking governments around the world for Covid-19 stimulus funding to invest in hydrogen technology production. (17) The International Energy Agency poses the hydrogen opportunity as: “There have been false starts for hydrogen in the past; this time could be different. The recent successes of solar PV, wind, batteries, and electric vehicles have shown that policy and technology innovation have the power to build global clean energy industries.” (18) But why exactly could this time be different for hydrogen, just because EVs have been so wildly successful? What logic justifies this conceptual leap?
If anything, the success of lithium-ion batteries and EVs shows that hydrogen is not needed in many places where it was previously proposed, with batteries being deployed in both trucks and small aircraft, long contemplated as sure-fire market segments for hydrogen. (19) If batteries have captured most of these market segments for energy technology, then why do we need hydrogen? Hydrogen proponents again and again make a “cleantech adjacency argument” for the fuel: they believe that the success of batteries in various applications justifies investment in hydrogen, but there is no obvious logic for this conceptual leap, since batteries appear to be winning. Fossil fuel companies have employed the cleantech adjacency argument more aggressively than almost any other industry. (20)
Because hydrogen is similar to methane (both are gases that release heat when reacted with oxygen), it allows oil companies to re-purpose some of their petrochemical infrastructure for the new energy economy and leverage historic technical expertise. Hydrogen is more interesting to oil companies than batteries, because they know better how to control it using existing infrastructure and know-how. But do oil companies have the same ideas about hydrogen as technologists have for decades? (21)
To dissect that question, let’s examine the main proposed pathways for producing hydrogen. Below is a schematic of the different ways that hydrogen can be made from different feedstocks. In popular discourse, these hydrogen products are differentiated by color signifiers. In 2019, 95% of hydrogen was brown and black (from methane and coal), and this has not changed significantly in the last year. (22, 23, 24)
Blue and green hydrogen appear to be compelling opportunities to assist with decarbonization by transporting energy around as hydrogen and releasing it where it is needed. Green hydrogen has been a passion project of technologists since the 1970s, but has historically not been able to economically compete with brown and black hydrogen because electrolyzer technologies that enable it are not mass-manufactured, thus are too capital intense. (25)
Though hydrogen is certainly needed to make chemicals like ammonia which we depend on for fertilizer, there are a number of technical issues with the various visions of using hydrogen as an energy technology. Some of these include:
Methane leakage is a huge problem with methane extraction and transport. In blue hydrogen schemes, this problem is not included in the scope drawn by fossil fuel companies. For context, standards for methane emissions from US infrastructure are so bad that France recently rejected more American fracked methane from being sold in Europe. (26, 27)
Hydrogen cannot be substituted into parts of the methane pipeline network at high concentrations because it embrittles the materials that those pipes are made of. This means that significant infrastructure would need to be built to move hydrogen around, which EVs don’t need because most buildings already have electricity. Low-pressure hydrogen is 4x less energy dense on a volumetric basis than methane, meaning some of the useful functions of methane pipelines cannot be replicated with hydrogen. Medium and high-pressure pipes would need to be replaced, but every compressor in the network would also need to be replaced either way, partly because the energy consumption to move it would increase by a factor of three. (28, 29, 30)
Blue hydrogen sounds good in theory but there is a problem. It doesn’t exist. More specifically, carbon capture and storage (CCS) doesn’t meaningfully exist at commercial scale. If CCS is viable or needs to become viable, then governments should mandate all large CO2 streams (like already existing power plants and chemical operations) to use CCS. This would largely solve the climate crisis, however fossil fuel companies do not promote mandatory CCS because they know that it would make the use of their hydrocarbon products too expensive, thus destroying their business, and accelerating the transition to non-hydrocarbon energy technologies. Further, conventional CCS in a blue hydrogen context would likely only capture upwards of 70% of the CO2, and the rest of it would be emitted unless more sophisticated processes like oxy-fuel autothermal reforming are substituted. (31, 32)
To the extent that energy is necessary to convert water or methane into hydrogen, that energy could be converted into electricity and delivered directly to the wheels of an electric vehicle, instead of passing through an intermediate hydrogen chemical, losing energy with each conversion. For example, around 3x more wind turbines would need to be built in order to power a fuel cell vehicle fleet (~30% efficient) compared to an EV fleet (~90% efficient) just based on how much energy is lost along the way from wind to wheel. This is one reason why converting all of Europe’s vehicle fleet to hydrogen would consume more renewable power than its entire 2019 electricity demand. (33)
There is no hydrogen transport infrastructure the same way there is a vast, global electricity transport infrastructure. According to IRENA, only 15% of hydrogen in Europe today leaves the site where it is produced, meaning it is entirely consumed at its source. This dramatically diminishes the value proposition of hydrogen-powered ground transport, and is a major reason why there is a single digit number of fuel cell vehicles available but hundreds of EVs on the market in 2021. (34)
So why is the fossil fuel industry trying to convince Covid-19 stimulus capital allocators in governments around the world to fund new hydrogen projects? O&G companies surely understand the major drawbacks of hydrogen for transport and other new energy system uses where it is currently not used. Based on technical and commercial realities, we believe that their messaging on hydrogen should be viewed as disinformation. The hydrogen story pushed by fossil fuel companies is a new chapter in their multi-generational “FUD” campaign to preserve the profitability of extracting and processing hydrocarbons, specifically methane.
More precisely, it is a bait-and-switch scam.
Most people think of green hydrogen when they think of hydrogen. But fossil fuel companies are suggesting that the “hydrogen economy” could get started out running on brown hydrogen, then switch later on to blue hydrogen, and yet later on to green hydrogen, as CCS and finally electrolyzer technology becomes less expensive. Despite the theoretical low CO2 emissions of blue hydrogen (assuming methane leaks are solved, CCS developed and paid for, hydrogen transport infrastructure developed, etc.), they know it will always be cheaper to simply dump the CO2 in the atmosphere than capture it. So, voters and investors might think they’re getting green hydrogen funded by Covid-19 relief packages, but they are actually being propositioned with polluting blue hydrogen, and will most likely end up with more brown hydrogen.
Switching later on to blue and green hydrogen does not make sense because that is not how CAPEX works. When a large project like a chemical plant or mine is built, it costs hundreds of millions to billions of dollars. The reason investors give money to build big projects is because after they pay for themselves after a couple years, investors continue earning dividends from the operation for decades. Chemical plants don’t get built for 5-10 years then switched off, they get built for 20-50 years. So, hydrogen infrastructure built in the 2020s will almost certainly continue to operate for decades. If it’s brown hydrogen, that would represent continued significant CO2 emissions that we do not have a carbon budget for.
The relative scale of historic investments in new energy technologies by fossil fuel companies corroborates the fact that they are unlikely to scale up CCS or even solve methane leakage issues any time soon. Exxon claims to have invested around $10B into low carbon energy technology R&D since the year 2000, or about 0.2% of its revenue in that period. (35, 36) Meanwhile, Tesla raised $12B in 2020 alone, (37) and LG Energy Solutions committed to invest $10B into a new battery manufacturing project in Indonesia in December 2020. (38) Exxon could have been investing so much more, but their tiny commitments to technology development compared to other firms demonstrates that they have never actually cared about advancing new energy technology or reducing CO2 emissions. In fact, in 2020 a document leaked from Exxon showing that the company actually plans to continue investing in fossil fuels, and even increase emissions in the 2020s! (39, 40)
Exxon and most other fossil fuel companies never did, currently don't, and never will actually care about mitigating climate change. They only care about maximizing the value of their historical assets and infrastructure to buoy market capitalizations. Asset valuation write-downs would hurt share price, so in a sense, they are fulfilling their first order fiduciary duties to their shareholders to make sure they can extract value from methane assets. (41) This might seem creepy and sadistic, but it is characteristic and the incentives are clear.
Big Oil’s hydrogen scam would not be the first time that a “cleantech adjacency argument” for hydrogen has been used to advance a hydrogen technology project that turned out to be a likely scam. Nikola Motors is a hydrogen truck developer which went public via a SPAC in 2020, riding a wave of interest in EVs that orchestrators of the transaction used to sell the stock. After the architects of the deal were able to cash out, it became public information that Nikola’s truck demonstration used in marketing materials was fake. The vehicle depicted could not propel itself with hydrogen or in fact, any energy technology. It was a frame of a vehicle literally rolled down a hill to make it look like it was driving. (42) This led to the resignation of Nikola’s CEO Trevor Milton with a handsome pay-out from investors. (43) Milton frequently invoked Elon Musk and Tesla when talking about his own hydrogen truck technology company, which many found peculiar, considering that the two companies were developing different technology platforms which inherently do not share the same scale-up and deployment opportunities and risks. (44) One poetic Twitter interaction between Trevor Milton and a Tesla Twitter influencer with handle @vincent13031925 merely suggested that Milton stop invoking Tesla in his marketing, and it led to an awkward debate that Milton did not win. (45) In this Twitter exchange, we see the cleantech adjacency argument for hydrogen articulated and easily debunked.
When challenged on their long-term plans for hydrogen, fossil fuel companies’ cleantech adjacency arguments for hydrogen mostly crumble. For green hydrogen to flourish, we must entirely throw ourselves into it now, not later. This is necessary in order to achieve economies of scale for manufacturing electrolyzers, which will bring the cost of green hydrogen down, just as Tesla was able to bring down the cost of making EVs in the 2010s by focusing on them. Unfortunately, hydrogen lacks high value transitional markets like cellphones and laptops which were what took lithium-ion batteries from high-cost oddities to commercial scale for EVs in just two decades.
Fossil fuel companies are hardly even hiding their long-term lack of interest in green hydrogen. It would be absurd to give them a seat at the table and allow them to guide capital allocators towards brown hydrogen infrastructure build-out. Tesla did not ask incumbent auto-manufactures for advice on how to make EVs. They focused on first principles technology development, forged their own way, and even eschewed conventional and historic auto-manufacturing practices so as to not be contaminated with antiquated problem-solving structures. (46)
If fossil fuel companies want to survive, they must create low-carbon, long-term shareholder value. There are a couple ways to do this, including:
Stop wasting time and energy trying to scam the European Union and other governments into using Covid-19 relief for extending the life of methane assets. (47, 48)
Graciously cede leadership in energy technology to batteries and renewable energy. Become chemical companies. Double down on green hydrogen for chemical processing like ammonia synthesis for fertilizer. Find sensible new markets for hydrogen as a chemical reagent, not an energy commodity. Hydrogen, like all chemical products and intermediaries, must be decarbonized, and green hydrogen is the best way to do it as prices of wind and solar continue to drop. (49, 50, 51)
Use drilling and well completion technical expertise to scale up geothermal energy or other non-hydrocarbon industries which need to surgically maneuver underground fluids. (52, 53, 54) O&G companies could also leverage their experience with managing large capital projects to help build the extractive industries which are necessary for manufacturing electronics and batteries. This includes investing in lithium, nickel, manganese, cobalt, and graphite extraction and processing projects. (55, 56, 57)
Be the limited partner to the energy transition. After oil prices fully recover from the Covid-19 pandemic in 2021-2022, low-cost O&G companies will be profitable for a couple more years until demand starts to drop because of higher EV market penetration. That profit could be used to passively invest in new energy system technologies and projects, such as electricity which emits less than 40gCO2/kWh emissions, and energy storage projects like battery farms. (58)
Because of the “dematerialization” effect associated with the energy transition, (59) there will be less operating income to be collected in the new energy system than in fossil fuel production. Thus, only the fossil fuel companies which pursue these opportunities now are likely to still exist within a decade or two. This is why we call hydrogen their “last” grand scam: this scam won’t work.
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Alex Grant is a Forbes 30 Under 30 honoree in Energy 2021. He is Principal at Jade Cove Partners, a technology advisory based in San Francisco. He is Partner at Minviro, a life cycle assessment firm based in London, and Technology Innovation Advisor to Zelandez, a lithium brinefield services company. He has a B.Eng. from McGill and a M.Sc. from Northwestern.
Paul Martin is a senior chemical technology expert based in Toronto. He has brought numerous novel chemical processes to life for global clientele in his 30-year career, including processes which convert methane into other chemical products, hydrogen production technologies, and battery chemical processing. He has an M.A.Sc. from the University of Waterloo and is an Ontario licensed professional engineer.
Acknowledgements
Thank you to our engineer friends who graciously reviewed this article and provided helpful feedback. Special thanks to a friend at a California EV company who argued enthusiastically in favor of green hydrogen. Perhaps when you are in the thick of it, other grass may seem greener. Thank you finally to @vincent13031925 for sharing his Trevor Milton Twitter exchange screenshots. Trevor’s account no longer exists but the previously public screenshots are available here.
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