The U.S. Gulf Coast has seen a bevy of potential deals and partnerships as large Asian natural gas buyers eye using gas-derivative, low-carbon fuels to help meet ambitious climate goals.
Specifically, Japanese and South Korean plans to lean on ammonia and hydrogen made from natural gas to decarbonize existing infrastructure are raising the interest of U.S. firms from LNG exporters to fertilizer producers.
However, the potential upside for the domestic gas market from ammonia or hydrogen projects could prove much more complicated than the future of liquefied natural gas.
Anne-Sophie Corbeau, a global research scholar with Columbia University’s Center on Global Energy Policy, told NGI the course for U.S. alternative fuel exports is particularly unclear because potential buyers like Japan are still plotting a piecemeal course to growing fuel supply chains.
“The problem is there doesn’t seem to be a consensus on how Japan wants to import the hydrogen,” Corbeau said. “As far as Japan is concerned, they are trying everything.”
Many Approaches
Japanese integrated energy firms have been forging partnerships to study the potential of importing hydrogen and ammonia made from natural gas from the United States. Jera Co. Inc., Japan’s leading power producer and one of the world’s top buyers of LNG, signed two tentative offtake agreements for ammonia from a potential 1 million metric ton/year (mmty) production hub in Louisiana.
At the same time, large Japanese utilities have also been leveraging existing partnerships with U.S. natural gas producers and LNG exporters to create supply chains for a mixture of ammonia and carbon dioxide called synthetic methane. In August, Sempra Infrastructure formally joined a partnership with Osaka Gas Co. Ltd., Toho Gas Co. Ltd., Tokyo Gas Co. Ltd. and Mitsubishi Corp. to export synthetic methane from Cameron LNG in Louisiana.
The production of hydrogen or ammonia combined with carbon capture technology, referred to as blue hydrogen, could account for around 205 billion cubic meters/year (7 Tcf) of global gas demand by 2050, according to the latest estimate from the Gas Exporting Countries Forum. Asia is expected to lead demand growth for gas-derived fuels and natural gas through the middle of the century.
In 2021, 62% of the world’s hydrogen was produced from natural gas. In 2022, the Global CCS Institute reported that 40 hydrogen facilities equipped with carbon capture and storage (CCS) are at various stages of development, around 30 of which are in the United States.
Corbeau said that, while Asian firms haven’t picked one singular direction, ammonia has proven to be a popular choice as there is already an international market and it could mean the least amount of change to existing infrastructure.
Although ammonia and hydrogen production in the United States could serve as another source of gas demand as other sectors transition to renewables, Corbeau added that Asia’s interest in blue ammonia is more related to the extension of coal than a transition to natural gas.
Skipping Gas for Coal
Japanese and South Korean energy transition plans currently call for replacing between 20-30% of coal used in power plants with ammonia or hydrogen by 2030 before becoming carbon neutral in 2050. To meet those goals, Japan would need to secure an estimated 3 million tons (Mt) of alternative fuels by 2030 and 20 Mt by 2050, according to Japanese newspaper Nikkei. South Korea, which generates around 40% of its power with coal, would need 4 Mt in 2030 and 28 Mt in 2050.
Saudi Aramco began exporting limited amounts of blue ammonia to Japan in 2020 as part of a pilot program to test the feasibility of using carbon capture and by-product gasses from refining to create low-carbon fuels for Asia. Jera and IHI Corp. have also been testing using up to 20% ammonia in Japan’s largest coal-fired power plant in Hekinan.
Companies like Tohoku Electric Power Co. have also been testing the co-firing of hydrogen in natural gas power plants in Japan, with the aim of replacing around 1% of its LNG supply with the alternative fuel by November.
Overall, hydrogen and ammonia could be but a small fraction of the power mix in both countries, only reaching around 1% by 2030 in the case of Japan, Corbeau said. Meanwhile, both countries have complementary plans to increase nuclear and renewable generation in step with retiring fossil fuel power plants.
Which Price is Right?
The price of gas-derivative fuels could also be one of the largest deciding factors of whether buyers will place their bets on U.S. production. Large-scale production of blue hydrogen or ammonia is still considered more cost-effective than fuels made with renewable energy, but more expensive than most fossil fuels.
Evercore ISI recently estimated that blue hydrogen production using carbon capture could have costs ranging between $1.43-$2.27/kilogram, compared with a cost of $1.16-$1.63 for hydrogen produced with coal.
The potential of tax credit and funding programs created with the passage of the 2022 Inflation Reduction Act (IRA) has surged interest from investors as firms look at lower up-front costs for production hubs.
Last month, South Korea’s largest steelmaker Posco Holdings Inc. signed a tentative offtake and investment agreement in CF Industries Holdings Inc.’s proposed blue ammonia plant in Louisiana. A study is expected to be completed after next summer.
"The United States is one of the key strategic regions for Posco Group as it is actively pursuing the establishment of an economical and reliable overseas hydrogen and ammonia supply network through the IRA support policy,” Posco’s Yoo Byeong-ok, chief green materials and energy business officer said.
However, Corbeau said if IRA-related tax credits and government grants became a building block for large-scale export projects, it could likely add to political backlash for the Biden administration’s energy transition goals.
“Cost is definitely a big factor… but are U.S. taxpayers happy to be basically subsidizing hydrogen to export to Japan?” Corbeau said. “I am not sure.”
But, when considering the future costs of carbon, the price threshold Asian manufacturers are willing to pay to keep an economic edge could increase as more countries assess carbon taxes and levies to reduce greenhouse gas emissions.
For example, the European Union’s(EU) Carbon Border Adjustment Mechanism (CBAM), which takes full effect in 2026, would require exporters marketing goods in the bloc to pay carbon levies proportional to the emissions produced in manufacturing their product. Some industries will be required to begin reporting emissions data on goods this month.
Steel manufacturers could be the first producers to feel a direct impact from the CBAM, according to Wood Mackenzie. Steel is considered a hard-to-ebate sector, as it requires large amounts of fossil fuels to generate effective heat for forging while remaining cost effective. Steel and iron manufacturing accounts for around 7% of global emissions, according to RMI.
Asia, and specifically China, currently produces the majority of the world’s steel. Wood Mackenzie estimates the CBAM could increase the cost of Chinese and Indian steel imported to the EU by 49% and 56% respectively by 2034.
To take advantage of those potential economic incentives, however, U.S. producers and exports will have to make large strides in the next few years to certify emissions through the entire natural gas supply chain.
“We need to find a global and common methodology on how exactly we are going to calculate the carbon intensity of hydrogen or ammonia,” Corbeau said. “Something which is traceable is going to be absolutely crucial, and I'm sure this is going to be the case for LNG as well.”
