Oil Companies Are Eying Federal Climate Funds to Expand Hydrogen Production. Will Their Projects Cut Emissions?

ExxonMobil’s Baytown refinery and petrochemical complex is one of the largest industrial operations in the country, covering 3,400 acres or nearly 15 percent of the city of Baytown, just east of Houston. It is also one of the nation’s largest sources of greenhouse gas pollution, but Exxon says it has a plan to change that.

The proposal hinges on technology that would convert natural gas into hydrogen while capturing the carbon dioxide emissions released in the process. Exxon said the effort would make the Baytown site a major hydrogen producer while helping to lower the refinery’s emissions by “up to 30 percent.” It is part of a larger effort by the oil and gas industry to position itself for a shifting energy landscape.

Up and down the Gulf Coast, oil and chemical companies including BP, Chevron, Air Products and others have proposed a series of similar projects that would combine carbon capture technology with hydrogen production in an attempt to turn the fossil fuel-dependent region into a center for clean energy.

The efforts are being propelled by a colossal wave of federal funding. The Inflation Reduction Act, enacted in August, included new and expanded tax credits that would help finance hydrogen production. In September, the Department of Energy began accepting applications for $7 billion in grants to help build “clean hydrogen hubs” around the country. 

The hope is that hydrogen can help cut greenhouse gas emissions from industrial operations like steel manufacturing and heavy-duty transportation. For the Gulf Coast’s fossil fuel industry, it could also offer a lifeline and a rare opportunity for a new market.

But some environmental advocates and scientists are warning that the Biden administration and the oil industry are rushing into a new technology that could further entrench natural gas in the nation’s economy while failing to deliver significant climate benefits. 

They point to recent academic research showing that increased leaks of super-polluting methane, the primary component of natural gas, which traps more than 80 times more heat over the short term than carbon dioxide, can erode or even negate any benefits drawn from capturing carbon dioxide emissions. One study published last year determined that under some conditions, burning hydrogen made from natural gas can be even worse for the climate than burning the fossil fuel directly, even with carbon capture equipment.

Steven Hamburg, chief scientist at the Environmental Defense Fund, an advocacy group, said that to truly claim to be “clean,” hydrogen projects that use natural gas would need to plug nearly all of the methane leaks in their supply chains while also capturing the vast majority of the carbon dioxide emissions they produce.

“That’s a tall order,” Hamburg said. He added that while projects could clear those hurdles, “to do that, we need tight regulations, we need really good compliance, and that’s currently not what we’re seeing.” 

Hydrogen is a flammable gas that emits only water when burned, and it has been drawing increased attention from scientists and policy experts for the role it could play in helping the global energy system make the transition to cleaner fuels. One study by the National Renewable Energy Laboratory found that the demand for hydrogen could double or even quadruple in the United States by 2050 as part of that transition, helping to cut emissions from sectors of the economy that are hard to electrify like steel production.

Some environmental advocates have argued that any new hydrogen development should focus on efforts to produce the gas with renewable electricity and water, so-called “green hydrogen.” The oil and gas industry, meanwhile, has been pressing the case for “blue hydrogen,” which is made by combining carbon capture technology with conventional hydrogen production from natural gas. Many policy experts, and even some of the scientists who have identified methane leaks as a problem, have argued that the urgency of limiting greenhouse gas emissions demands the pursuit of all possible avenues, including blue hydrogen.

The Energy Department’s hydrogen hubs, which were funded by last year’s infrastructure bill, will devote money to both technologies and to efforts to produce hydrogen from nuclear power. Meanwhile, a new clean hydrogen federal tax credit will be available to companies regardless of which technology they use, as long as they are able to significantly reduce emissions. Some energy policy experts have said that a newly expanded tax credit for carbon capture operations may prove to be more lucrative for blue hydrogen projects, which could struggle to lower emissions enough to qualify for the hydrogen credit. Companies cannot claim both credits.

One analysis by Resources for the Future, an environmental think tank, found that the new tax incentives could make some blue hydrogen projects competitive with conventional hydrogen production without carbon capture technology.

A dizzying array of such new projects could benefit from these incentives, including a proposal by BP and Linde, a chemical company, in Houston; a $4.5 billion proposal in Louisiana; another outside Corpus Christi, Texas; and a plan to capture carbon dioxide at an ammonia plant in Louisiana, where Exxon has signed a deal to transport and store the CO2. (Ammonia is a hydrogen-rich liquid used in fertilizer and other products.) All told nationwide, there are at least 20 proposals to make hydrogen or ammonia with fossil fuels while capturing the carbon emissions, according to the Environmental Integrity Project, a nonprofit watchdog group. Another 11 projects would produce the fuels with renewable energy, while 10 would make hydrogen or ammonia from fossil fuels without the use of carbon capture technology, and therefore be ineligible for the new tax credits.

Most of these proposals remain speculative, however. Exxon has said it could wait “two to three years” to decide whether to pursue its Baytown project.

These impacts have led to a fierce debate among academics and environmentalists over whether the government should support fossil fuel-derived hydrogen projects or focus exclusively on those that would use renewably generated electricity.

Hamburg said it made sense to start piloting different types of projects to see how they performed, and that there could be room for a mix of technologies. But he added: “From a long-term perspective, green hydrogen makes a lot more sense than blue hydrogen. I’ll leave it at that.”

The Claims About Blue Hydrogen

Soon after New York State enacted one of the nation’s most ambitious climate laws, in 2019, Robert Howarth started hearing more about hydrogen. Howarth is a professor of ecology and environmental biology at Cornell University and sits on the state’s Climate Action Council, which was created by the climate law to help put its provisions into force. The fossil fuels used to heat homes and buildings are New York State’s largest sources of emissions, and the natural gas industry began telling the council that hydrogen offered a solution.

“They’re saying, ‘Well, we can move away from natural gas and substitute blue hydrogen into the existing network and everything will be fine,” Howarth said.

The industry’s pitch prompted him to investigate whether the claims about blue hydrogen held up, and ultimately he concluded that they did not. Last year, Howarth published a peer-reviewed paper in the journal Energy Science and Engineering with Mark Jacobson, a professor of civil and environmental engineering at Stanford University, that found that blue hydrogen would provide only marginal climate benefits at best, largely because it could lead to more leaks of methane.

Converting natural gas into hydrogen requires significantly more energy overall than burning the fossil fuel directly because of losses in efficiency when the hydrogen is produced and because of the power required to run carbon capture equipment. Switching a steel mill to blue hydrogen from natural gas, then, would mean that more natural gas will need to be used overall. This increased natural gas demand, the paper found, would amplify any methane leaks in the gas supply chain.

Howarth’s paper argued that if the leaks were relatively high and carbon capture rates low, burning blue hydrogen could actually be worse for the climate than burning natural gas directly, because more methane would be leaking into the atmosphere. Methane traps far more heat in the atmosphere than carbon dioxide, so these additional leaks would outweigh any reductions in carbon dioxide emissions, the paper found.

“The take-home message is that under any range of reasonable assumptions, converting natural gas into blue hydrogen for fuel never gives you emissions that are any better than natural gas,” Howarth said.

The paper drew criticism from many scientists, who questioned several of its assumptions. For example, Howarth and Jacobson based their data on two existing blue hydrogen plants that the critics said were not designed to maximize emissions reductions but merely to demonstrate the technology.

Still, even some of their critics agreed with the larger message of Howarth’s and Jacobson’s work, that methane leaks undermine the benefits of blue hydrogen. Mijndert van der Spek, an associate professor of engineering at Heriot-Watt University in the United Kingdom, said the American scientists’ paper made blue hydrogen look worse that it really is, but his own research has also shown that methane leaks can erode the benefits of capturing carbon dioxide, if to a smaller degree.

Van der Spek was a co-author of a peer-reviewed article published last year in the journal Sustainable Energy and Fuels that determined that methane leaks would need to equal less than 1 percent of total natural gas production for blue hydrogen to deliver emissions benefits similar to those of green hydrogen. Projects would also have to capture more than 90 percent of their carbon dioxide emissions to deliver those benefits, a level that some companies have pledged to reach but none have achieved.

If the leaks amounted to 2 percent of production, van der Spek’s article found, blue hydrogen would reduce emissions by less than half compared with burning natural gas directly, when measured over a period of 20 years. (Because methane breaks down in the atmosphere more quickly than carbon dioxide, its relative impact changes over time). At higher leak rates, the benefits would shrink further, and they would be insignificant if companies captured only about 55 percent of the carbon dioxide emissions.

Still, van der Spek argued in favor of developing blue hydrogen projects, saying that companies and governments would need to plug methane leaks and improve carbon capture rates over time.

No one knows exactly how much methane leaks from the drilling operations, wellheads, compressor stations and pipelines that bring natural gas to market. One major study that has been widely cited put the national average at 2.3 percent, but that was in 2018. In the Permian Basin of Texas and New Mexico, several studies suggest the rate is higher, perhaps significantly so. One paper looked at an area in New Mexico and found that as much as 9 percent of the methane produced leaked to the atmosphere. Leak rates also vary widely among drillers.

“When you think of something like blue hydrogen, what matters is not only in which state you’re developing that facility, but where you get your gas from, the specific wells that supply your gas and the pipeline that it goes through before it comes to your hydrogen production plant,” said Arvind Ravikumar, a research associate professor at the University of Texas at Austin. “That really matters.”

Ravikumar said that any company that produces blue hydrogen will need to have robust, accurate data on leaks throughout its supply chain and have this data analyzed by a third party, with transparent accounting.

Methane leaks remain far too high for blue hydrogen to deliver on its promises, he said, but he sees signs of progress. The Biden administration is working on new regulations to limit leaks from oil and gas equipment, and the Inflation Reduction Act requires that larger energy companies that don’t comply with the new rules pay a financial penalty for methane emissions. Investors are also pressuring companies to plug leaks.

Ultimately, Ravikumar said, it is possible to drive leak rates down to 1 percent or less, and he argues there is no choice but to try.

“The only thing I would say in this ‘blue’ versus ‘green’ debate is that we should do everything,” he said. “I mean, we have already delayed a lot on climate action. There’s no time to wait and see which approach works best.”

A Standard for ‘Clean Hydrogen’

The Houston region is already the largest center of hydrogen production in the country — today, the fuel is used largely in refining and fertilizer production — and the area’s industrial giants want to expand their footprint.

“We just saw a huge regional opportunity for the Gulf Coast region or the state of Texas to become a leader” in a new clean hydrogen economy, said Brett Perlman, chief executive officer at the Center for Houston’s Future, a nonprofit affiliate of the region’s largest industry association..

In May, the center released a report saying that demand for the region’s hydrogen could grow to 21 million metric tons by 2050, up from 3.6 million today. Nearly half of that growth would be for export, the report said, with most of the rest going to local refineries and petrochemical plants and to fuel trucks, ships and planes.

The center has been organizing the region’s industry and academic institutions ahead of a likely bid for funding from the Energy Department, to build a Houston hydrogen hub. Because the hubs need to connect producers with consumers, the applications will likely bring together a collection of companies and possibly local or state agencies.

Of 21 proposals for possible hubs from across the country, at least 10 include plans to produce hydrogen from fossil fuels and at least 14 are considering producing green hydrogen, according to the Center for Strategic and International Studies, a think tank that has been tracking states and industries that could seek funding through the hydrogen hub program. (Some hub proposals, including Houston’s, could include both green and blue hydrogen production.)

Last month, the Energy Department issued a lengthy document that opened the application process, saying it expected to fund six to 10 hubs initially with a total of $7 billion in funding. As directed by the infrastructure bill, those hubs would need to be spread across different regions of the country and to produce hydrogen from a variety of sources, including fossil fuels, renewable electricity and nuclear power. 

The Energy Department has proposed a standard for life-cycle emissions for “clean hydrogen” of no more than four kilograms of carbon dioxide per kilogram of hydrogen produced — conventional hydrogen production from natural gas generally emits at least twice that amount. The department said that a blue hydrogen operation could meet this standard if it captured 95 percent of its carbon dioxide emissions and kept methane leaks to 1 percent of gas production. But it also said that applicants won’t be required to meet this standard as long as they “aid the achievement” of that target.

In comments submitted to the department earlier this year, the Center for Houston’s Future recommended that the hub program should consider allowing companies to initially lower emissions modestly, with a “road map” for increasing reductions over time.

“While some have suggested a target of 90 percent reduction in carbon emissions intensity” of conventional hydrogen production, the center wrote, “our working group participants are concerned that industry will be hesitant to make the capital investments necessary for a 90 percent carbon reduction.”

A spokesman for Exxon, Todd Spitler, declined to answer detailed questions about the company’s plans at the Baytown refinery but said in a statement that “this project would contribute to our 2030 emissions-reduction plans that include a 20 to 30 percent reduction” from 2016 levels in direct corporate emissions.

BP and Linde declined to answer questions about their proposal.

To benefit from the newly expanded federal carbon capture tax credit, blue hydrogen plants would need to show that they have successfully captured and stored carbon dioxide, but they would not need to hit any particular threshold of reductions in fossil fuel emissions — or  specifically cut methane emissions to any degree.

These gaps have led to concerns that the Biden administration is supporting the technology without understanding the true benefits or risks it might pose.

Hydrogen itself can act as an indirect greenhouse gas when it is released to the atmosphere, by interacting with and increasing levels of methane and ozone. As the lightest element, hydrogen molecules are also far smaller than methane, meaning they are prone to leaking from pipelines and other equipment. A recent study by Columbia University’s Center on Global Energy Policy found that there is very little data on how much hydrogen is currently leaking from production plants and pipelines and warned that unless leaks are addressed, they could counteract some of hydrogen’s benefits.

Howarth, the co-author of the controversial article about the risks of blue hydrogen, said the fuel’s supporters were resting their hopes on the notion that energy companies can plug methane leaks and ramp up carbon capture operations to the point that they  prevent nearly all of the carbon emissions from hydrogen production. He noted that companies have been pursuing both of those goals for many years, however, with little to show for it so far.

“When people say, oh you can do better,” Howarth said, “I’d take that with a big grain of salt.”