Hydrogen: Expensive Bomb Or Multibillion Dollar Opportunity?

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By Tim Boreham, Editor, The New Criterion

Hydrogen: an expensive bomb or a multibillion dollar opportunity?

Australia’s chief scientist Alan Finkel describes hydrogen as “Australia’s next multibillion dollar export opportunity’’ – and judging from two recent equity raisings, investors are willing to back the future of the earth’s most abundant element as a clean energy source.

Creating clean-burning energy from water and oxygen sounds like fairyland stuff that would put a Greens manifesto to shame. Indeed hydrogen production requires a lot of energy to make, which renders the lightweight gas more of a fuel than an energy source itself.

The renewed excitement revolves around carbon abatement and hydrogen’s potential role as an energy storage and transport medium that’s lighter and more efficient than batteries.

“Hydrogen allows you to you take excess renewable energy, transport it and take it where it is needed,” says Hazer CEO Geoff Ward.

Bank of America concurs, in a global research note: “The strong current interest is being driven by a fall in production costs, demand initiatives and targets set by countries like Japan and Korea; and expansion in the number of potential applications.”

Currently, the world produces a modest 115 million tonnes of hydrogen, 69mt directly and 48mt as a by-product of other processes.

The main uses are for production of ammonia (chemical code NH4) and fractionation in oil refining.

Without getting too Julian Sumner Miller-ish, 99% of hydrogen is produced by steam methane reforming, which requires coal or gas. The process is costly and not exactly green.

Investor focus is on the alternative method of electrolysis, which involves liberating the hydrogen with electricity from renewable sources. The hydrogen can be made when the sun is shining or the wind is blowing and transported to where it’s needed at any time.

According to Bank of America, hydrogen is unlikely to supplant lithium ion batteries in most cars, but will come to the fore in “hard to abate” carbon-intensive sectors such as steel, cement, heavy trucks and chemicals.

The economics of electrolysis remain unappealing, with a current production costs of $6.50-7.50 a kilogram forecast to abate to $2-$3.50 kg by 2030.

The Global Hydrogen Council predicts hydrogen could supply 18% of the world’s energy by 2050 – but they would say that.

Meanwhile, seven larger companies are lining up for $70 million of grant funding for hydrogen funding, offered up by the Australian Renewable Energy Agency (ARENA).

The shortlisted companies are BHP Group’s ((BHP)) Nickel West, APT Management Services, ATCO Australia, Australian Gas Networks Limited, Engie Renewables Australia, Macquarie Corporate Holdings ((MQG)) and Woodside Energy ((WPL)).

Combined, the applicants are requesting $200m for $500m of projects.

Hazer Group ((HZR))

The only pure-play hydrogen stock on the ASX, the Perth-based Hazer, is commercialising its eponymous process that uses iron ore as a catalyst to produce hydrogen and useful graphite – rather than CO2 – from methane.

Hazer last month completed an oversubscribed $8.4 million placement and a $6m loan to fund a $15.8m demo plant, at Perth’s Woodman Point wastewater treatment plant.

The Water Corporation provides the biogas feedback, while Hazer is working on a currently non-binding off take deal with BOC Limited.

Hazer CEO Geoff Ward says the most common process involves heating natural gas (methane and ethane) to 1100 degrees in the presence of steam. But for every tonne of hydrogen produced, 10-12 tonnes of CO2 are emitted.

The Hazer process uses an iron ore catalyst to decompose methane into hydrogen molecules and solid graphitic carbon.

“We estimate we will get a 100-150 tonne abatement credit for every tonne of hydrogen produced,” Ward says. “We think that will be a really valuable selling point for the early adopter market.”

The company soon expects to make a final investment decision on the 100 tonnes per annum pilot plant, in view of a full 2500 tpa commercial plant.

Struck at 42c a share and a -26%, the placement was increased from $6m because of strong demand.

Leigh Creek Energy ((LCK))

Then there’s ‘grey’ (fossil fuel derived) hydrogen – but with a twist.

Leigh Creek is furthering coal gasification at its eponymous location, 550 clicks from Adelaide.

Based on the remnants of an old coal mine, the deposit is said to be the biggest 2P (proven and probable) gas reserve in the country and management has been pondering how to monetise its value.

Urea (fertiliser) production is in the mix and the company reasons that if it can produce ammonia and urea (ammonia plus CO2) from its coal derived syngas, it can also produce hydrogen.

What’s more, it expects to produce the gas at a knockout price of $1 a kilogram.

  “Is hydrogen overhyped? It clearly isn’t, it’s just the start,” says CEO Phil Staveley. “We are betting on [hydrogen] it as the next big thing.”

From an emissions perspective there’s little point in being “grey”, as the carbon emissions involved in converting the syngas to hydrogen will offset the benefits.

But the company will achieve carbon neutral status by capturing the CO2 that’s surplus to urea production and injecting it back into the subterranean void created by the gasification.

Staveley laments there’s a Catch 22 situation with the hydrogen market that would confound even Joseph Heller: without an end use hydrogen production is stymied, while there’s no demand because there’s no commercial output.

 “We are breaking that paradigm,” he declares.

Staveley says Leigh Creek’s envisaged $1 a kg production cost compares with the government’s “aspirational” $2/ kg and current production costs of $4 to $10 (depending on the method).

For the last three months Leigh Creek has been proving up its gasification chops with one gasifier, but wants to expand this to multiple units over a longer period.

Beyond that, the company needs to decide on whether to pursue multibillion dollar commitments to hydrogen or urea – or both.

Management also needs to convince the market that its project differs to the Queensland coal gasification programs that came to grief, notably Peter Bond’s Linc Energy.

Investors are convinced enough to oversubscribe the company’s $1 million share purchase plan – struck at a -20% discount – by more than fourfold.

Quite wisely, the board said “I’ll take your money” and accepted the full $4.1 million.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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