Making the transition to green hydrogen for oil and gas exporters

Many economies are dependent on oil and gas exports, however, the efforts to combat global warming are reducing demand for fossil fuels worldwide and emphasizing the need for diversification. In a new study for the Deutsche Gesellschaft für Internationale Zusammenarbeit (German development agency GIZ), Fraunhofer ISI investigated the possible economic consequences of the market decline for the affected countries. Based on case studies for Saudi-Arabia, Kazakhstan and Nigeria the researchers analyzed to what extent declining export revenues for fossil fuels could be compensated by the export of green hydrogen and its derivatives.

Der Umstieg auf grünen Wasserstoff kann Verluste durch sinkende Öl- und Gas-Exporte für abhängige Volkswirtschaften abmildern.
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The switch from fossil fuels (left) to green hydrogen and its derivatives (right) can mitigate losses for dependent economies due to falling oil and gas exports.

Countries around the world are working to reduce their greenhouse gas emissions and renewable energy sources will increasingly replace fossil fuels: the most ambitious scenarios assume a reduction in the global demand for fossil fuels of up to 75 percent by 2050 compared to 2019/20.

As a result, countries that are currently highly dependent on the trade in oil and gas need to consider new economic strategies. One possibility for economic diversification is the development of value chains for  the production and export of so-called Power-to-X (PtX) products. These include green hydrogen and its derivatives such as ammonia and methanol.

Researchers at Fraunhofer ISI were commissioned by the GIZ to investigate the challenges and opportunities that this transition could entail for countries such as Saudi Arabia, Kazakhstan and Nigeria. They summarized their findings in a study entitled "The role of green hydrogen in the energy transformation of fossil fuel exporters".

Different degrees of dependency and different PtX potentials

Saudi Arabia, Kazakhstan and Nigeria are all currently heavily dependent on oil and gas exports to varying degrees. However, the countries differ in terms of the challenges and framework conditions for economic diversification:

In Saudi Arabia, fossil fuel exports accounted for around 24% of the gross domestic product and around 57% of total export revenues in 2021. Saudi Arabia exports a large proportion of its oil and gas to the growing economies of Asia. The country has one of the lowest costs of oil production in the world, making Saudi Arabia very competitive on the global market. Nevertheless, it  has already begun to diversify its economy. In particular the chemical industry is growing and trade relations for blue ammonia have been established with Japan and South Korea. Saudi Arabia has a particularly high potential for solar energy, which could enable low production costs for green hydrogen. Furthermore, existing gas pipelines could be repurposed for the transportation of hydrogen, giving them an additional competitive advantage.

Kazakhstan's trade in oil and gas accounts for around half of the countries’ export revenues (47% in 2021). Most of the crude oil is sent to the EU, in particular to Germany. Refined oil is mainly exported to the USA, while natural gas is primarily exported to China. The cost of extracting crude oil in Kazakhstan is far below the global average. The country also has large coal deposits and other natural resources as well as a well-developed mining industry. The metal processing industry could be a key sector driving demand for green hydrogen in the production of sustainable steel in the future. The country also has promising potential for wind energy and is currently expanding its maritime trade routes on the Caspian Sea, which could facilitate the export of green hydrogen and its derivatives to Asia and Europe.

In 2021, crude oil and natural gas accounted for more than 90 percent of Nigeria's net export budget. Important trading partners for crude oil are India and Spain. The cost of crude oil production in Nigeria is also far below the global average. However, the country is currently facing massive challenges due to increasing oil theft from its pipelines. Similar to Saudi Arabia, there is great potential for solar energy in Nigeria but this is limited due to the high population density and the resulting limited land area available. In Nigeria, the production of fertilizers could also be a future application for the use of green ammonia, supporting the long-term diversification of the economy into the chemical industry.

Direct and indirect economic effects of the declining demand for fossil fuels

In order to assess the potential macroeconomic effects of economic change in the three countries, the researchers carried out an input-output analysis with a view to value creation and effects on the labor market. The export of fossil fuels represents one of the most important industrial sectors in all three countries. A decline in this sector is also expected to have an impact on other areas, such as manufacturing, wholesale and retail due to economic interdependencies. Even if the number of employees in the directly affected fossil energy sector is currently comparatively low, noticeable job losses as well as secondary impacts on value creation and employment in other sectors such as agriculture and food supply are to be expected. Targeted strategies are therefore required to compensate for the employment effects in the sectors that are primarily and secondarily affected in the long term. The study results imply that the development of a green hydrogen sector could help to create jobs in particular in sectors such as construction, mechanical engineering and the metal and electronics industries in the long term.

The development of a domestic green hydrogen sector could help mitigate losses caused by the declining exports of fossil fuels

The study clearly shows that there is great potential for the production of green hydrogen in all three countries. Even if the future market prices for green hydrogen are currently still difficult to estimate, it can be assumed that the possible revenues from potential hydrogen exports will probably not be sufficient to fully compensate for the losses from the declining export of fossil fuels, as the global demand for hydrogen and e-fuels expected in the future is significantly lower than the current demand for crude oil and natural gas.

"Nevertheless, the development of a Power-to-X sector can help to mitigate the consequences of the decline in global oil and gas demand and contribute significantly to sustainable economic diversification in the countries affected," concludes Dr. Inga Boie, project manager of the study at Fraunhofer ISI.

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