Societe Generale was the first bank to join the Investor Group of the CEO-led Hydrogen Council initiative in 2020, as the firm looked to bring its expertise in innovative financing and energy advisory to develop low-carbon hydrogen solutions.

Hydrogen Economist spoke to Allan Baker, global head of advisory and project finance at Societe Generale, about how the bank hopes to contribute to the development of the sector.

What opportunities does Societe Generale see to contribute to the development of the hydrogen sector?

Baker: We are advising on a number of deals which have a hydrogen component to them—either green or blue, and we see an increasing advisory deal flow in the hydrogen space for both debt and equity.

We have focused on trying to identify which projects we think are going to make sense within the various regulatory frameworks which are being developed around the world, and support our clients to negotiate the contractual frameworks that are required to raise bank financing.

“We have focused on trying to identify which projects we think are going to make sense within the various regulatory frameworks” Baker, Societe Generale

With the UK government’s focus on developing four or more carbon capture and storage clusters around the UK—some supporting the development of large-scale blue hydrogen projects—we believe there will be a significant amount of financial advisory activity in the sector in the next 12-18 months. Societe Generale is a member of the UK hydrogen expert group that was set up by the government to represent the commercial sector in the development of the business models. We have been working closely with the government to help to ensure these models are bankable and have a risk allocation which is sufficiently supportive to really start to develop the industry.

If these business models are negotiated in the timeframe the government anticipates, then we would start to see financing of those projects towards the end of 2022 or in 2023. There is a lot going on in Germany too, although they have really pinned their colours to green hydrogen.

In the Middle East, some of the proposed projects are huge and focused on potential export of hydrogen or derivatives, so the negotiation of what will be first-of-a-kind business models, the contracts to support the development and so forth will require the input of an experienced  financial adviser to help ensure they can raise the significant debt they require to develop the projects. And that is where we are aiming to position ourselves—given our experience on this type of large, complex project. There are several major projects proposed for the Middle East, including in Adu Dhabi, Saudi Arabia and Oman with major sponsors like Adnoc, Oman Oil, Deme, Acwa and others. So it will be interesting to see which projects get traction and how these develop the market for their output.

How will the hydrogen investment landscape change over the next five years?

Baker: If you look at where hydrogen may develop, I think it is going to be largely a domestic business initially. So for the UK, for example, you have business models which support hydrogen development in much the same way as renewables previously in order to create a move towards the hydrogen economy. But these mechanisms are not designed to promote export of hydrogen initially.

There is quite a lot of interest in reusing existing pipeline infrastructure to facilitate development of hydrogen, and one of the options in the UK is to introduce hydrogen into the methane network to decarbonise, for example, domestic heating, although currently this would be limited to around 20pc by volume. The next step may be transporting a certain amount of hydrogen, either locally or regionally by pipeline, and then shipping will come into the mix a bit further down the road as volumes increase and international trade develops. That is the way we see the industry developing—local, regional and then international, with significant cost reductions as volumes increase and technology, shipping logistics and other areas of the industry develop.

Shipping is one of the challenges of the very large export-oriented projects in the Middle East, as the technical and economic practicalities of shipping hydrogen have yet to be proven, although initially green ammonia may be the carrier. With these challenges in mind, it may be 2024 or 2025 before you see project financing of large-scale export projects.

I think we will see other projects around the world based on pipelines for distribution, which could initially be an easier and cheaper alternative.

Do you see the market as eventually developing into a global trade similar to that which we now see in LNG?

Baker: Hydrogen is becoming a key focus for many of the clients that we have previously worked with on LNG projects around the world.

In the Middle East the aim of the projects in Saudi Arabia, Oman and Abu Dhabi is really to produce hydrogen at as low a cost as possible and ship to those markets where they do not have access to low-cost clean hydrogen, and where—for example—the Japanese consumer or the German consumer will pay a premium for green hydrogen as part of a strategy to meet climate objectives.

2025 – Likely date of project financing for large-scale export projects

This sounds like the fundamentals of the LNG business, and I do think in the long term hydrogen could be something like LNG in terms of transportable energy. But at the moment the technology required, and the cost of the ships, makes shipping hydrogen significantly more challenging and expensive than LNG. So a number of the current export projects are looking at converting hydrogen to ammonia initially, which is much easier to ship and can be used in various applications such as green fertiliser production, or in the case of Japan for co-firing alongside coal to decarbonise power generation. In addition, there is a pilot project underway for shipping hydrogen between Australia and Japan. This is being watched closely to see what the economics and practicalities of shipping look like.

I think the reason that you see some of the oil majors getting involved in hydrogen in such a big way is that they see the potential for it to be a global commodity in the medium-term.

When you look at where the money is going to come from, I think there will be some very committed sponsors behind the industry with a lot of support from their core banks to fully realise the potential of the industry.

---

Author: Tom Young