Evaluating the viability and required market conditions for integrating renewable energy into the oil refining process via hydrogen

Abstract

Following a raft of commitments made by major oil companies over the last 12 months to reach net-zero emissions targets, this paper will examine the viability of integrating renewable energy into the oil refining process through the replacement of a fossil fuel-based system for producing hydrogen with an electrolyser using renewable electricity. Hydrogen is an important chemical input in the refining process for road fuels and other oil products whose current production is overwhelmingly natural gas-based and, as such, makes a significant contribution to oil companies’ emissions. The topic is analysed first by establishing a realistic basis for cost comparison, as well as key assumptions regarding technology-specific performance characteristics, between the incumbent technology for hydrogen production and the renewable replacement route. From this point the analysis branches out into various scenarios, where the key price inputs influencing the economic viability of the replacement are allowed to diverge in a range of different ways. For some scenarios, financial support mechanisms of different kinds are assumed. The viability of investing, as well as the cost of producing hydrogen, is assessed for each of these scenarios. Further points of comparison regarding investment viability and hydrogen production costs are also established by assuming price variables for some scenarios which correspond not to the main focus market (Europe), but instead to regions with superior price conditions for long-term renewable electricity supply contracts (the US and the Middle East). The results of the analysis indicate that even favourable market price developments over the coming years struggle to yield any kind of viable investment in an electrolyser as a replacement for the incumbent technology. A consistent additional revenue stream in the form of a subsidy is required to achieve a viable investment case, given the inherent disadvantage for the replacement technology vs. the pre-existing system. Despite the relative difficulty in achieving a positive investment case, a number of the assessed scenarios do suggest low achievable levels for renewable hydrogen production costs, which may be improved further in the future. These should present a compelling alternative to fossil fuel based production routes for new hydrogen production capacity in locations with the requisite pricing constellation.