Paul Rodden • Season: 2024 • Episode: 358
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Episode 358, In this episode, Paul discusses the proposed 60-mile hydrogen pipeline in the UK, which could play a key role in decarbonizing heavy industries. He also examines the financial risks Air Products is facing with its ambitious green hydrogen investments, raising questions about the balance between ESG goals and economic stability.
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Transcript:
A new hydrogen pipeline in the UK could be a huge boost to industrial decarbonization in the region, and has Air Products overextended its hydrogen reach. I’ll go over this news and give my thoughts on today’s hydrogen podcast.
So the big questions in the energy industry today are, how is hydrogen the primary driving force behind the evolution of energy. Where is capital being deployed for hydrogen projects globally, and where are the best investment opportunities for early adopters who recognize the importance of hydrogen? I will address the critical issues and give you the information you need to deploy capital. Those are the questions that will unlock the potential of hydrogen, and this podcast will give you the answers. My name is Paul Rodden, and welcome to the hydrogen podcast.
First up today in an article in The Telegraph. Matt Oliver writes, British gas giant unveils plans for 60 mile blue hydrogen pipeline.
Matt writes, One of Britain’s biggest gas companies has unveiled plans for a 60-mile “blue hydrogen” pipeline in the north of England amid a row with environmentalists over the technology.
Cadent Gas, owned by a consortium led by investment bank Macquarie, said the “Hynet” underground pipeline will run from a hydrogen production plant near Ellesmere Port out into Cheshire to nearby factories and power plants.
It will be the first scheme of its kind in the UK and is billed by Cadent as “the first building block in a wider network of hydrogen pipelines across our regions”.
Customers are set to include Heineken, Kraft Heinz, Tata Chemicals, cement maker Heidelberg Materials and glass maker Pilkington.
The company launched a public consultation on the plans just days after Ed Miliband, the energy secretary, pledged £22bn of government funding towards carbon capture projects, including one that is connected to the Hynet scheme.
Under the proposals, factories in North Wales, Merseyside and Cheshire will be connected to a network that will whisk away their carbon dioxide emissions and store them in depleted gas fields under the Irish Sea.
However, the scheme already faces opposition from some locals as well as campaigners at Friends of the Earth and Greenpeace, who are against blue hydrogen production and carbon capture because both involve the continued use of fossil fuels.
Blue hydrogen is made through a process where natural gas is combined with steam, with carbon dioxide created as a byproduct. The CO2 from the Stanlow plant will also be captured and stored.
Mike Childs, head of science and policy at Friends of the Earth, said: “Making it using gas is not a clean process. There are carbon emissions when you extract the gas and you also cannot capture all of the emissions from manufacturing. So we are not in favour.”
Both Macquarie and Cadent, which owns gas distribution networks in the North West, West Midlands, East Midlands, East of England and north London, have bet on hydrogen as a major line of future business.
Macquarie also owns National Gas, the former National Grid subsidiary that is leading “Project Union”, a proposal to build a so-called backbone of hydrogen transmission pipelines across the country to connect major industrial clusters.
It would be done by repurposing some existing gas pipelines as well as building some new ones.
Cadent’s dream of piping the gas into millions of homes was dealt a blow last year when a trial in Whitby, Ellesmere Port, was dropped in the face of fierce public opposition.
While there is resistance to using hydrogen to heat homes, it is seen by many experts as critical to the net zero transition because it could potentially be used to decarbonise heavy industry that cannot easily be electrified.
However, there remains significant debate about how big a role the gas should play and the pros and cons of different processes used to make it.
On Friday, Angela Needle, of Cadent, said: “Hynet will serve as a blueprint for industrial decarbonisation, enabling growth across the manufacturing heartlands of the North West and supporting the Government to achieve its clean power 2030 mission.
“The project was formed to meet the demands of industry who seek to decarbonise as they deliver their products and continue to compete in the global economy.
“We need to support these essential industries in their efforts to ensure it is decarbonisation, not de-industrialisation that happens, and Hynet does this.”
Okay… So British Gas and its parent company Centrica has unveiled these plans for a new 60 mile pipeline, which is designed to transport blue hydrogen across the UK. Now this is a major step towards advancing the country’s hydrogen economy and its goal of reducing their carbon emissions by 68% now this is part of the high net initiative which is specifically aimed at decarbonizing industries and providing cleaner energy across the northwest of England. And I really do think that we should all appreciate that this project will enable industries to switch to low carbon hydrogen, which will potentially reduce the CO two emissions in heavy industries. Now this area has a lot of manufacturing and transport, and this should be seen as a significant step towards helping the UK meet its climate goals and transition to cleaner energy sources. But there are investment challenges. This project faces both technical and financial challenges, including securing necessary investment and regulatory approvals. Now the cost of developing the pipeline and producing blue hydrogen is high, though not as high as grain, so success will depend on government backing, and there is the 22 billion pounds that the government has set aside for that. But will they get the policy support and infrastructure development done in order for this to proceed?
Next in an article in Forbes, David Blackmon writes, ESG driven green hydrogen risk at the center of Air Products dispute. David writes, A growing controversy over the ESG-driven capital allocation strategies of industrial gas provider Air Products illustrates the sorts of challenges so many American companies face related to the energy transition. Management at Air Products has come under fire from major investors in recent weeks due largely to the heavy, high-risk investments it has made in green hydrogen, which is classified as hydrogen manufactured in an electrolysis process using zero-carbon power generation sources only.
Major investors including D.E. Shaw & Co. and Mantle Ridge LP, led by activist investor Paul Hilal – are raising concerns about a lack of succession planning for eventually replacing CEO Seifi Ghasemi, as well as the company’s decisions to invest billions of dollars in green hydrogen projects for which it lacks adequate offtake agreements with potential customers. Ghasemi has led the company since 2014 and has said he wants to remain in the job. But at age 80, he ranks among the oldest chief executives at S&P 500 companies, leading to investor concerns about the lack of a detailed succession plan.
At the center of the dispute is the NOEM Project, a major green hydrogen project based in Saudi Arabia. The development is part of a 2020 partnership formed by Air Products with Saudi Arabia’s ACWA Power Co. and the Kingdom’s planned Red Sea City. In a letter sent to the Air Products Board of Directors October 10, D.E. Shaw noted that the original projected cost of the NOEM project of $5 billion has now risen to an estimated $8.5 billion as its timeline has been extended from end-of-year 2025 to the end of 2026.
The letter also points to a similar project timeline delay, as well as a $2 billion projected cost increase in the company’s blue hydrogen (hydrogen made using natural gas) project in Louisiana. D.E. Shaw further notes that the company’s backlog of clean energy projects now amounts to about 20% of Air Products’ current market cap as compared to about 1% for peer companies including Air Liquide and Linde.
Of even more pressing concern to D.E. Shaw is the fact that Air Products management has already spent more than $4 billion and is obligated to $7 billion in additional hydrogen investments in the coming years without having secured offtake agreements for the vast majority of the production from the NOEM and Louisiana projects. Air Products did enter into an agreement in June with TotalEnergies for 35% of the NOEM project’s capacity, but it currently has no offtake deals in place for the Louisiana project. That leaves 80% of the capacity of the two projects unsecured.
At the March, 2023 CERAWeek conference in Houston, Ghasemi laid out a risky plan that would involve shipping much of the green hydrogen produced in Saudi Arabia halfway across the world to serve the needs of the California market, which he sees as a potential bonanza. Ghasemi said then that Air Products would be able to leverage incentives and subsidies in the U.S. Inflation Reduction Act of 2022 (IRA) to make the NOEM project more competitive with American domestic hydrogen suppliers. That may have come as a surprise to West Virginia Senator Joe Manchin, who chairs the Senate Energy Committee, and other IRA supporters in congress since they had repeatedly assured the public those provisions were meant to build a U.S. domestic hydrogen sector that would create thousands of American jobs.
In its letter, D.E. Shaw quotes statements of concern about this approach from several market analysts. Deutsche Bank, for example, said late last year, “in the 3½ years since Air Products unveiled its clean energy strategy with the announcement of the NEOM project in July 2020, investors have grown increasingly concerned about the cost, timing and offtake arrangements for these projects.”
In the end, D.E. Shaw concludes, “Air Products’ clean hydrogen strategy has pushed it further out on the risk curve resulting in higher discount rates and lower valuation multiples being applied to the cash flows of the entire business.” The letter adds that, “Air Products historically traded at a modest premium to industrial gas peers…but capital allocation fears have driven Air Products to trade at a sizeable discount.”
What it all seems to illustrate is a case of external pressures driven by ESG ideology and government policy encouraging companies to assume higher degrees of investment risk based on a bet that new markets will form for what are deemed to be innovative, “clean,” products. But if the markets don’t form – in this example resulting in adequate offtake agreements – investors can be left holding the bag. It’s a bag D.E. Shaw and Mantle Ridge are seeking to avoid.
Okay, so I recently had a lengthy discussion with an energy fund manager about this exact topic, and this article highlights the importance of finding and securing offtake agreements before committing capital to these projects. Now is ESG a bad thing? Well, certainly not, but over emphasizing and over prioritizing ESG goals to the detriment of your company, will lead away from financial stability. Now, the neon project is still moving forward, and there is a massive planned need for hydrogen there, but the runway for that project is still in the decades. Ultimately, my point is this, I do believe that hydrogen is the future of energy, but we have to develop the hydrogen economy the right way. ESG and sustainability has its place, but economics must always be the first consideration when allocating capital.
All right, that’s it for me, everyone. If you have a second, I would really appreciate it. If you could leave a good review on whatever platform it is that you listen to Apple podcasts, Spotify, Google, YouTube, whatever it is, that would be a tremendous help to the show. And as always, if you ever have any feedback, you’re welcome to email me directly at info@thehydrogenpodcast.com. So until next time, keep your eyes up and honor one another. Hey, this is Paul. I hope you liked this podcast. If you did and want to hear more. I’d appreciate it if you would either subscribe to this channel on YouTube, or connect with your favorite platform through my website at www.thehydrogenpodcast.com. Thanks for listening. I very much appreciate it. Have a great day.
