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Malaysian national oil company targets blue hydrogen

19 January 2021 Cristina Brooks

Malaysian national oil company Petronas plans to grow its nascent green (no carbon emissions) and blue (low carbon) hydrogen business using carbon capture, utilization and storage (CCUS).

The company is "actively" seeking customers and partners to develop both blue and green hydrogen, banking on its existing relationships selling LNG in Japan and South Korea, the head of Petronas' hydrogen unit, Adlan Ahmad, told the Energy Industries Council's "Outlook on Asia Pacific Transition to Clean Energy" webinar on 12 January.

Petronas decided on marketing low-carbon hydrogen after the OPEC oil crisis and coronavirus lockdowns affected its oil and gas business last year, said Ahmad, adding: "Our customers are already requesting carbon-free LNG and zero-carbon hydrogen, so the stars were lining up and the decision was made to enter the business."

Petronas launched its hydrogen business unit in October after it reported its first quarterly loss in five years. Petronas reported a loss of RM21 billion (US$5.02 billion) in the April-June 2020 period, compared with a profit of RM14.7 billion ($3.64 billion) in the year-ago period. It said the loss was due to impairment charges as the company readjusted its oil price outlook.

"The history behind it is related to the pandemic and OPEC oil crisis, where Petronas' business was severely affected, and there was a need for Petronas to pivot and future-proof its business by entering other businesses. It will make us less exposed to fluctuations in oil and gas prices, not to mention energy transition is already hitting us," said Ahmad.

Momentum is growing around net-zero targets in the oil and gas industry after European majors Shell, BP, and Eni made net-zero pledges last year, rising to prominence in step with the idea that natural gas emissions can be offset or produced using lower-carbon processes. Shell said it sold a carbon-neutral LNG cargo to Japan's Tokyo Gas and GS Energy in 2019.

Petronas is an outlier among national oil companies in making a net-zero carbon emissions pledge. For example, the listed arm of one of China's state-owned oil and natural gas companies, PetroChina, stopped short of a net-zero goal, making a pledge to reach "near-zero" net emissions in August.

"Coupled with our geographical advantage, these provide us with the competitive advantage in providing hydrogen solutions and capturing the growing hydrogen demand in the Northeast Asian market, whilst exploring opportunities in other regions," the company told IHS Markit in an email. "Petronas views that both blue and green hydrogen will co-exist in meeting the increasing demand, with production costs as the key driver and differentiator."

Hesitancy about aiming for net zero by national oil companies could threaten global decarbonization, as they controlled 90% of reserves and accounted for 75% of global oil production in 2011, according to World Bank data.

Oil states may experience less activism and have fewer options with which to reach net zero than private oil companies. "Already, many national oil companies are looking hard at decarbonization in different ways, but they will not be able to abandon oil and gas in the ways that some international oil companies are talking about and they will need to find smarter ways to do it," said EIC Chief Executive Officer Stuart Broadley.

Blue hydrogen agenda

Petronas appears to be on track to accelerate its low-and zero-carbon hydrogen business, which it included in a list of aspirations to help it reach net zero by 2050. It already creates non-low-carbon grey hydrogen, or hydrogen produced through a natural gas steam reforming method.

Traditional oil and gas customers, utilities for example, are beginning to decarbonize, so Petronas is considering using CCUS with steam reforming to make its grey hydrogen into lower carbon blue hydrogen. It plans to produce "zero emission" hydrogen fuel produced from commercial, industrial, and carbon-engineered products in a move aligned with its existing LNG business, CEO Tengku Muhammad Taufik told the ASEAN Energy Business Forum in November.

Green hydrogen produced from renewable electricity is also high on the company's agenda. It is working on in-house electrolyzer technology development, the company said in an email to IHS Markit. What's more, Petronas and Malaysian state-owned utility Sarawak Energy recently agreed to evaluate a large-scale green hydrogen production facility that aims to produce the gas using Sarawak's renewable hydropower, the utility said. It operates a total of 3.452 GW of generation capacity across its hydroelectric power fleet. Sarawak previously made headway in this area, launching a hydrogen vehicle filling station with industrial gas producer Linde two years ago.

Petronas' customers prefer green hydrogen. "Green hydrogen is new to us. We need to partner with suppliers of hydroelectricity in Asia, and we have partners with excess hydroelectricity. We need to look at producing hydrogen from solar, biomass, and other technologies," he said.

But cost remains a barrier to meeting this green hydrogen demand. "The cost to produce 1 kilogram of green hydrogen today is still high. It's about US$5-6 per kilogram and the world is looking more at the point of about US$2 per kilogram. So that is a big challenge for the community," said Ahmad.

There are potential green hydrogen customers in power, transportation, and other industries that use hydrogen as a feedstock. "The key is always what is the cost of the electricity in order for you to do the electrolysis, because it is quite energy intensive, and what is the price the customer is willing to pay," said Ahmad.

"In order for us to be successful in the hydrogen business, it has to be demand-backed. There must be customers who are willing to pay the premium to import and use hydrogen," said Ahmad in the context of explaining how transportation costs impact hydrogen exports. Here, Petronas is already the world's fourth-biggest exporter of cryogenic LNG, which gives it know-how when it comes to exporting cryogenic liquified hydrogen. It has other advantages that would give it an edge in exporting hydrogen, namely its ammonia business, he said. Using ammonia as a carrier eases freezing of hydrogen to enable shipping the liquid gas across oceans.

In another project, Petronas has an agreement with JOGMEC and JX Nippon to research the use of carbon capture and storage (CCS) technology for development of high-carbon-dioxide gas fields in Malaysia, it told IHS Markit.

Yet, the company's decarbonization agenda faces other hurdles. Obstacles include capital constraints affecting its plans for CCUS, given the challenging finances of 2020, according to an IHS Markit company profile. Petronas told Energy Intelligence of its carbon capture plans for the Kasawari gas field, which it aims to sanction by 2022 and complete by the end of 2025.

Petronas is not alone in trying to transition its natural gas business to meet low-carbon gas demand. The national oil company of Qatar, which also owns the largest LNG producer, announced plans for CCS facilities and LNG made "using the latest proven carbon reduction technologies."

Qatar Petroleum also signed in November what it says is the world's first long-term LNG deal that calculates wellhead-to-discharge-port greenhouse gas emissions, supplying Singapore's state-owned company Pavilion Energy. The move was part of Pavilion Energy's plans to eventually make its LNG purchases carbon neutral.

Existing relationships

Petronas hopes its hydrogen business will build on its existing relationships selling LNG to the relatively advanced hydrogen markets of Japan and South Korea, said Ahmad. It currently has commitments to sell LNG in deals worth 2 MMtpa to South Korean buyers as well as 0.5 MMtpa to a Japanese buyer, according to the IHS report.

Japan and South Korea recently approved policies that aim to build hydrogen markets, bringing a potential to expedite hydrogen projects in Asia, said EIC Regional Analyst Farhana Borhanudin.

Japan's Prime Minister Yoshihide Suga pledged ¥2 trillion ($19 billion) in December to fund hydrogen as a fuel for electricity generation, shipping, and aviation. Likewise, the South Korean government has said it will establish a ₩34 billion (US$31 million) Hydrogen Economy Fund. South Korea not only produces hydrogen-powered vehicles, but it has the greatest number of them on its roads, according to a guide by law firm CMS.

China, Japan, and South Korea are all under pressure to decarbonize after making net-zero pledges last year, despite their dependence on coal and oil.

This dependency has given rise to IHS analyst doubts that their net-zero efforts will deliver. Relative emissions targets such as net-zero pledges also could allow oil and gas companies to continue expanding their fossil fuel operations, according to think tank Carbon Tracker.

Posted 19 January 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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