Saudi Arabia, China Both Explore Green Hydrogen Potential
By Jareer Elass and Henry Liu
Last month’s summit between top Chinese and Saudi leadership reinforced that crude oil is the main component of their trade relationship going forward even as China looks to decrease its reliance on fossil fuels by the next decade as it increasingly turns towards green hydrogen as an alternative energy replacement fuel.
Saudi Arabia expects to remain a major supplier of crude barrels to its largest Asian customer, but it is likely eyeing China as a key market for the kingdom’s export of carbon-free green ammonia derived from green hydrogen. However, Beijing already has a leg up on Saudi Arabia’s push towards developing green hydrogen as China is the current global leader in green hydrogen production.
Both Saudi Arabia and China see green hydrogen as a means of reaching carbon neutrality by 2060, but Riyadh views its green hydrogen investment as an opportunity to diversify its oil-driven economy and cash in on expanding its export capabilities while Beijing hopes green hydrogen supplies will help reduce its dependence on fossil fuels by decarbonizing its transport and heavy industry sectors. But the kingdom could also become a chief beneficiary of China’s pursuit of hydrogen technology innovation.
Chinese President Xi Jinping’s December 9th summit in Riyadh with Saudi Crown Prince Mohammed Bin Salman sought to strengthen already solid economic, oil and political ties between Beijing and Riyadh.
Saudi Arabia is currently China’s top oil supplier, providing 18% of the Asian nation’s crude oil purchases. The Economics and Technology Research Institute, the research arm of Chinese state oil firm CNPC, has predicted that overall Chinese oil demand will peak at 780 million tonnes a year before 2030, with oil demand more than halved by 2050.
As part of the December Sino-Saudi summit, the two countries signed some 34 investment agreements, including on green energy, with the leaders pledging to boost cooperation in hydrogen and other renewable energy sources.
Both Saudi Arabia and China face challenges in achieving their near-term green hydrogen production targets, including the fact that producing green hydrogen economically is highly dependent upon low renewable electricity costs. At a cost ranging from US$5.50-9.50/kilogram (kg), green hydrogen is currently considered the most expensive form of hydrogen to produce.
Saudi Arabian Energy Minister Prince Abdulaziz bin Salman al-Saud stated in October 2021 that the kingdom intends to be the world’s largest producer and exporter of hydrogen. Riyadh hopes to dominate a hydrogen market that some contend could be valued at more than US$1 trillion a year by 2050.
Saudi Aramco has dipped its toe into the hydrogen market, with the state energy giant and partners producing and shipping a test cargo of blue ammonia in the fall of 2020. Prince Abdulaziz has pointed to Saudi Aramco’s US$110 billion Jafurah unconventional gas development as the cornerstone project for the country’s blue hydrogen production.
But Saudi Arabia’s expectations for becoming the pre-eminent global hydrogen player hinges largely on the US$5 billion Helios green hydrogen-based ammonia production plant being built in the futuristic city of NEOM. The plant is designed for a daily output of 650 tons of carbon-free hydrogen, which through conversion will translate into 1.2 million tons of green ammonia annually, or enough hydrogen to maintain around 20,000 city buses.
The Helios plant will require 4.3 GW of renewable energy to operate it, with the goal of using solar energy during the day and wind energy at night. Though plant construction began this past April, high interest rates, inflation and supply chain issues have caused hiccups, with the facility now slated to become operational in 2026, missing an initial 2025 startup. The plant’s partners just last month reached facility financing agreements to cover the US$5 billion project.
Given the high cost of producing green hydrogen, Saudi Arabia seemingly has a strong economic advantage over erstwhile competitors given an abundance of promising solar and wind power capacity and available land. While the NEOM plant’s production costs potentially could reach as low as US$1.50/kg by 2030, the kingdom has been extremely slow to tap into its renewable energy potential to date, which puts into question the viability of the Helios project in reaching the Saudi government’s export target goals.
China is the world’s largest hydrogen producer at 33 million tonnes a year, with approximately 85% of it comprised of grey hydrogen. The country’s current green hydrogen production is under 27,000 tonnes per year as estimated by consultancy Chinese Clean Power Policy and Market Insights. In March, the Chinese government unveiled its first-ever national long-term hydrogen development plan covering the 2021-2035 period, with the production of green hydrogen set as a high priority amid “strict control” over fossil-fuel-based hydrogen production.
The country is targeting modest green hydrogen production of 100,000-200,000 tonnes annually by 2025 as well as 50,000 hydrogen fuel cell vehicles available by then. With this initial push in expanding its nascent green hydrogen production, China has said it expects to see an annual reduction of 1-2 million tonnes in CO2 emissions by 2025, even though the government has not specified from what levels and where these cuts will come.
There are more than 120 green hydrogen projects in various stages of development in the country with the Chinese government driving to have green hydrogen output overtake grey and blue hydrogen production after 2030. Chinese state refiner Sinopec, for one, is making a long-term shift towards green hydrogen. Notably, the energy firm has begun construction of a green hydrogen plant in the country’s northwestern region of Xinjiang – slated to become operational in 2023 – with an annual production capacity of 20,000 tonnes. However, questions are emerging as to just how “green” the hydrogen produced from the facility will be as Sinopec reportedly reduced the size of the plant’s solar capacity and is being vague about the remainder of alternative energy sourcing.
The China Hydrogen Alliance (CHA) has estimated that the nation’s average green hydrogen production cost should fall to US$2.40/kg by 2030, with solar and wind electricity price reductions brought down to US$0.03/kWh. For those economic gains to be made, the CHA suggested that Chinese solar and wind power capacity has to hit 1,600 GW by 2030 – from 635 GW capacity at the end of 2021 – with electrolyzer capacity needing to reach 80 GW by then, from current capacity of around 210 MW.
China is posed to expand its green hydrogen industry and aims to become a global leader in hydrogen technology innovation. The country already accounts for a third of global electrolyzer manufacturing capacity with cost advantages. According to BloombergNEF, the Chinese alkaline electrolysis system is three times cheaper than a similar system produced in the West. Cooperation between Saudi Arabia and China will help Chinese manufacturers in the hydrogen industry march into international markets and develop market share in the Middle East. With Chinese FDI, Saudi Arabia could likely benefit from the spillover effects from Chinese manufacturing capabilities in green energy, which would help improve the innovation performance of local enterprises.
Though Riyadh and Beijing have a proven and successful oil-centric supplier-customer relationship, the type of relationship they form involving green hydrogen will greatly depend on their individual abilities to meet challenging targets they’ve set in the coming decade.
Jareer Elass is an editor at the Fletcher School.
Henry Liu is a Junior Research Fellow at the Fletcher School.