As Hydrogen Picks Up Steam, Midstream Can Help

Summary

Hydrogen has long been conceptualized as the energy of the future given its small carbon footprint. But the industry is only now beginning to ramp up with the help of government incentives.
By 2050, 40-50% of hydrogen produced in the U.S. is expected to be sourced from natural gas. This reinforces long lives for existing natural gas infrastructure.
The hydrogen industry will require traditional midstream assets like storage and transportation infrastructure to connect growing production with rising demand.

Hydrogen is often heralded as the fuel of the future. That’s due to its smaller carbon footprint and ability to power a variety of vehicles and industrial processes. The future may be present, as technology is starting to catch up and large-scale hydrogen production is becoming a reality. The hydrogen industry in the US is expected to become a long-term source of demand for natural gas. Additionally, like traditional energy, hydrogen will require its own storage and transportation infrastructure similar to existing midstream assets. Today’s note looks at how midstream is set to play an important role in the hydrogen value chain and could see long-term benefits.

Witnessing the Hydrogen Revolution

Hydrogen has the potential to advance net-zero initiatives. It can be used as a fuel in various automobiles, waterborne vessels, and airplanes. Hydrogen also has the potential to power energy-intense industries like steel manufacturing. Production in North America is set to grow. Aggressive forecasts estimate that up to 121 million tons of hydrogen could be produced in the North America by 2050, according to a study by McKinsey. For context, the U.S. currently produces around 10 million tons of hydrogen a year.

There are two main categories of low-carbon hydrogen, blue and green, that are differentiated by their production. Hydrogen derived from natural gas that utilizes carbon capture technology (CCS) to reduce the fuel’s carbon footprint is known as blue hydrogen. It is differentiated from green hydrogen, which is produced using renewable energy and water in a process called electrolysis. The US Department of Energy (DOE) estimates that 40-50% of hydrogen produced in the U.S. will be derived from natural gas using CCS by 2050.

On top of the long staying power of natural gas as part of the US and global energy mix, growing hydrogen production could introduce another long-term demand driver. By 2050, global blue hydrogen production could demand 500 billion cubic meters of natural gas a year, according to the McKinsey report. Geographies such as North America and the Middle East, where natural gas supplies are abundant, are expected to see higher proportions of blue hydrogen production.

A handful of projects have been selected by the DOE to receive $7 billion in federal funding to develop regional hydrogen hubs around the country. New incentives, including hydrogen production and carbon capture tax credits that were part of the Inflation Reduction Act (IRA), could help spur significant investment in hydrogen projects (read more). It’s important to note that currently, blue hydrogen projects are eligible to receive the 45Q carbon capture tax credit. But they cannot also receive the 45V hydrogen credits.

Hydrogen Hubs Exploring Blue Hydrogen Potential

While some of the hubs are committed to developing green hydrogen projects, a handful are seeking to develop blue hydrogen projects. For example, the Gulf Coast Hydrogen Hub is centered around Houston, TX, which boasts proximity to ample natural gas reserves and energy export facilities (read more). The Appalachian Regional Clean Hydrogen Hub (ARCH2) can source natural gas from the Marcellus/Utica, the largest producing area in the U.S. The Midwest Alliance for Clean Hydrogen (MACHH2) and Heartland Hydrogen Hub are also expecting to see blue hydrogen production.

Hydrogen production could also contribute to sustained demand for US gas, and therefore midstream infrastructure from production fields to the export centers. The incremental demand brought by production facilities in the Houston area could help solidify the long-term value of gas pipelines connecting natural gas from production areas inland to the coast. Midstream/MLPs have been building out natural gas infrastructure between the Permian and the Gulf Coast (read more).

Hydrogen’s Greater Potential for Midstream

Continued strength in natural gas demand benefits midstream companies. But the hydrogen industry also presents new opportunities for midstream as well. The DOE estimates that half of the clean hydrogen capital investments by 2030 will be earmarked for midstream and end-use infrastructure.

The opportunities stem from the need to store and transport both hydrogen and the CO2 being captured during its production (read more). Midstream/MLPs can offer expertise in pipelines and storage, which could lead to growing midstream involvement as hydrogen projects advance (read more).

For example, MPLX (MPLX) and TC Energy (TRP CN) are both participating in the ARCH2 hub. MPLX is developing storage and connective infrastructure, and TRP is developing two green hydrogen plants in partnership with chemicals company Chemours. And TRP has already blended natural gas and hydrogen to fuel existing Chemours boiler equipment.

TRP has also entered a partnership with Marathon Petroleum Corporation (MPC) on the proposed Prairie Horizon Energy Solutions project supporting the Heartland Hydrogen Hub. TRP and MPC aim to develop clean hydrogen for industrial use, fertilizers, and natural gas blending.

Williams Companies (WMB) is involved in two Hydrogen Hubs selected by the DOE — the Pacific Northwest Hydrogen Hub and ARCH2. In the Pacific Northwest, WMB has been named as a subrecipient of DOE funding. It plans to build hydrogen pipelines to support green hydrogen projects. WMB also has a large network of natural gas infrastructure around ARCH2 and will leverage its footprint to support projects.

Bottom Line:

The hydrogen industry is in relative infancy. But its growing production and demand for hydrogen is expected to bring long-term incremental demand for natural gas. As hydrogen production projects come to market, the need for storage and transportation of hydrogen and carbon dioxide will likely present growth opportunities for midstream/MLPs.