How Mena countries can develop large and viable hydrogen industries

Hydrogen is hot right now – and nowhere more so than in Oman.

Last week, the sultanate’s Hydrogen Oman (Hydrom) signed agreements for two projects to produce the fuel with renewable energy, worth $10 billion, while two weeks ago, the International Energy Agency published a positive report on its prospects.

The question is – how does Oman or any Mena country profit from the lightest element?

The race to make hydrogen is heating up. In Mena, Saudi Arabia’s Neom Green Hydrogen Company (NGHC) project is one of the most advanced worldwide. An $8.4 billion financing package was signed in May with a consortium of local and international institutions.

Like most of those being developed in the region, NGHC will use a mix of solar and wind power to run electrolysers – which split water into its constituent hydrogen and oxygen.

The hydrogen is then converted to ammonia, a key feedstock for fertilisers, and much easier to transport than native hydrogen.

Ammonia can also be used as a shipping fuel, in power generation and steel-making.

Hydrom wants to sign agreements with six projects worth in total $20 billion by the fourth quarter of this year.

Oman could produce 1 million tonnes of renewable hydrogen annually by 2030, 3.25 to 3.75 million tonnes by 2040 and 7.5 to 8.5 million tonnes by 2050, according to the IEA.

That would make the sultanate the world’s sixth-largest hydrogen exporter by 2030, and the largest in the Middle East, followed by the UAE and Saudi Arabia.

By comparison, global hydrogen demand by mid-century is highly uncertain, but the IEA’s net-zero scenario sees it at 452 million tonnes.

The UAE, Egypt and Morocco have numerous hydrogen plants in planning, and Jordan is preparing a green hydrogen strategy.

Abu Dhabi’s clean energy company Masdar wants to produce 1 million tonnes of the gas annually by 2030, including in other countries, such as Azerbaijan.

The best places to make green hydrogen are coastal, with plenty of low-cost sun, wind and available land, good port access and proximity to markets, either domestic or international.

Unlike highly concentrated oil and gas resources, good conditions for hydrogen manufacture are widespread.

Chile and Australia see the potential, and other countries around the world, not previously prime destinations on the energy map, are joining the competition – including Mauritania and Namibia.

Hydrogen is expensive to transport, so even countries with less-than-ideal conditions may make their own rather than importing.

And energy security concerns, combined with industrial policy goals to build local technology and value chains, means key governments support hydrogen production at home.

The US’s Inflation Reduction Act offers very generous subsidies, up to $3 per kilogram of hydrogen produced, which could make it profitable at near-zero sales prices.

The EU is scrambling to put together its own incentives. The Netherlands offered nearly €800 million ($873 million) across seven projects last year, and has just boosted that by €1 billion this year and €3.9 billion in the coming years.

But countries seeking to decarbonise have done much less to create markets for hydrogen, creating problems.

Promising hydrogen production projects need long-term contracts for offtake to secure financing. Neom was successful in this because its offtaker, Air Products, is also one of the three partners, and because of the backing of the kingdom's Public Investment Fund.

Manufacturers of electrolysers need to see more projects moving ahead so they can expand their factories and bring down costs.

This in turn makes hydrogen more viable and creates the virtuous cycle that has succeeded in solar and wind power.

Even given sufficient demand, the challenge for hydrogen production is to generate value for the host country. Hydrogen plants will not employ many people once in operation.

Unlike oil and gas, they do not enjoy large rents – surplus profits – because transport costs to markets are high, and there are numerous countries with extensive coastal, sparsely-populated desert land suitable for electrolysis.

If a country simply allocates land for solar and wind, and all the hydrogen is exported, the plant might as well be on the Moon for all the national value it creates.

But significant taxation, mandates that equipment be manufactured locally, or requirements for a local share, make it less competitive. That problem is magnified when other countries offer such generous subsidies.

To develop large, viable hydrogen industries, Mena countries can choose from a mix of five options.

Going down the subsidy road would be counter-productive and expensive – the point is to add to the national economy, not put further burdens on it.

In the end, they may have to outlast competition from others.

The US might continue subsidising hydrogen for domestic use indefinitely, but will it continue to devote tens of billions of dollars annually to ensure the Europeans and Japanese can get cheap fuel?

It may be worthwhile for Mena states to get a head start by spending selectively on common infrastructure, such as internal pipelines, hydrogen storage and port facilities.

More compelling is a second option, to invest in technology to lower the cost of hydrogen production, conversion and distribution, and overcome some of the technical challenges such as leakage.

Third, Mena countries can look for better ways to get their product to market. Pipelines – especially conversion of existing lines – is preferable over short or medium distances. Morocco, Algeria and Libya have existing pipelines to southern Europe; Egypt and perhaps Mauritania could build them.

Fourth is the diplomatic route: positioning themselves as key energy partners of Europe and East Asia, and trying to secure some of the same trade concessions granted to domestic producers.

That could involve investment by leading industrial groups – and indeed South Korean steel producer Posco, French power developer Engie, and oil companies BP and Shell feature prominently in Oman’s plans.

Fifth is most promising: to use hydrogen in the domestic economy. It can decarbonise oil refining and fertiliser production, make synthetic kerosene for planes and methanol for ships, and replace natural gas in making steel from iron ore. These products are easy to transport and have ready end-user markets.

Oman recognises this, with Jindal Shadeed’s new green steel plant at Duqm a key example. The prize for the sultanate, and the rest of Mena, is to become the world’s low-cost, low-carbon industrial hub.

Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

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