Oil & Gas Practice

The clean hydrogen

opportunity for hydrocarbon-
rich countries
Hydrogen could play an important role in helping hard-to-abate sectors meet climate
targets. Countries with hydrocarbon resources and industry expertise can help build
and scale the needed technology.

This article is a collaborative effort by Arnout de Pee, Tarek El Sayed, Mohamed Ghonima, Ruchin Jain, Rachid Majiti, Joe Rahi,
and Maurits Waardenburg, representing views from McKinsey’s Global Energy & Materials Practice.

© audioundwerbung/Getty Images

November 2022
 Industry leaders are under pressure as the Materializing the hydrogen promise
global climate change debate has amplified the Today, most hydrogen is “gray,” which means it
call to limit global warming to 1.5 degrees Celsius.1 comes from hydrocarbons, typically natural gas.
Hydrocarbon-rich countries (HRCs) could turn this This requires a process known as steam reforming,
challenge into an opportunity by taking advantage which releases carbon emissions. “Blue” hydrogen
of their hydrocarbon resources, geographic also relies on hydrocarbons but is coupled with
locations, access to abundant renewable energy (in carbon capture, utilization, and storage (CCUS)
certain cases), and highly developed infrastructure technology, which helps mitigate the environmental
to develop and export clean hydrogen, defined as impact but can require incremental investments.
hydrogen produced with very low or zero carbon Finally, “green” hydrogen is created using renewable
emissions, and its derivatives, including clean fuels. energy, typically through the electrolysis of water,
and results in no emissions.
Clean hydrogen is expected to play a critical role
in decarbonizing typically hard-to-abate sectors For the hydrogen promise to materialize for HRCs
such as heavy industries and long-haul transport. and for the market to scale, four areas will need
However, significant challenges must be resolved. to be addressed: scaling competitive supply;
The hydrogen value chain is both complex and stimulating local demand; developing transportation
capital intensive, many segments are not yet technology; and facilitating corporations across
developing at the same rate, and staying abreast of value chains, customers, and countries.
constantly evolving technologies and regulations
can be daunting. 1. Scaling competitive supply. This requires HRCs
to scale up both blue and green hydrogen.
Numerous recent publications illustrate the Blue hydrogen will play a key role in the short
increasing attention around this topic. Our analysis to medium term, together with green in the
builds on current value-chain trends to illustrate how medium to long term, as it becomes increasingly
key players in HRCs can leverage their advantaged economically viable. Access to cost-competitive
positions and deep industry experience to become and abundant natural gas or other hydrocarbons
leaders in clean hydrogen. Doing so requires coupled with technological disruption in
identifying key sources of value and choosing the CCUS can allow for the required decline in the
right roles in the value chain. cost for blue hydrogen production by 2030.
Complementary wind and solar resources and
According to McKinsey research, total hydrogen the continued decline in electrolyzer capital
demand can reach 600 to 660 million tons by costs can also help. According to a report
2050, abating more than 20 percent of global published by the Hydrogen Council in 2021, the
emissions.2 That said, realizing this opportunity will cost of hydrogen for end users could drop by
require all relevant stakeholders to come together 60 percent from 2020 to 2030.3 This outlook
to develop clean-hydrogen value chains—often of continuous cost decline is underpinned by
across geographies. Those that take decisive International Renewable Energy Agency (IRENA)
action in these areas will be uniquely positioned to scenarios by 2030 and 2050.4
create new sources of value and play a leading role
in future global energy markets. 2. Stimulating local demand. To create the
foundations of a hydrogen ecosystem, there

1
For more, see “The 1.5-degree challenge” on McKinsey.com.
2
Global demand of 600 million tons in 2050 assumes net-zero commitments are achieved by leading countries while followers transition at a
slower pace, as per McKinsey’s Global Energy Perspective Achieved Commitments (AC) scenario. The demand of 660 million tons by 2050
assumes that the 1.5° pathway is adopted globally, driving rapid decarbonization. Emission savings are calculated by comparing total emissions
in the AC scenario to emissions in the Current Trajectory scenario.
3
Hydrogen Insights: A perspective on hydrogen investment, market development and cost competitiveness, Hydrogen Council and McKinsey,
February 2021, hydrogencouncil.com.
4
Herib Blanco, Marcelo Carmo, Raul Miranda, and Emanuele Taibi, Green hydrogen cost reduction, International Renewable Energy Agency
(IRENA), 2020, irena.org.

2 The clean hydrogen opportunity for hydrocarbon-rich countries

Hydrocarbon-rich countries … have a
track record of building and scaling
up global energy supply by leveraging
their unique access to competitive
natural resources.

will need to be a local market for hydrogen in between customers such as steel or green
parallel to the development of export corridors. fertilizer producers and hydrogen producers
Governments can help by implementing the right could derisk investments in clean-hydrogen
regulatory frameworks around decarbonization projects. Partnerships could enable equipment
and clean air to ensure these local demand and infrastructure developers to make
sectors start. McKinsey analysis shows that with investments with some minimum utilization
local demand stimulated, steel and ammonia guarantee. Meanwhile, creating government-
produced using clean hydrogen could be to-government partnerships could facilitate
competitive with traditional production pathways hydrogen flow between countries, further
by 2030 at carbon prices of around $50 to $100 supporting demand uptake in target markets,
per ton, depending on local conditions. and could lock in supply agreements.

3. Developing transportation technology.

Hydrogen must be in liquid form or transformed The role of hydrocarbon-rich countries
into ammonia before it can be transported. in the scale-up of clean hydrogen
However, liquefying hydrogen is both costly HRCs are a group across geographies and include
and technically challenging because it needs countries such as Saudi Arabia and the United
to be cooled down to –252 degrees Celsius, Arab Emirates as well as the United States and
which is the lowest boiling point of any element. Canada. Most of these countries have a track record
Our analysis shows that converting hydrogen of building and scaling up global energy supply
to ammonia for transport to Europe from by leveraging their unique access to competitive
the Middle East then converting it back into natural resources. In the case of hydrogen, HRCs
hydrogen could result in an additional cost of could also leverage their know-how and competitive
$2.50 to $3.00 per kilogram (kg) of hydrogen reserves to scale up clean hydrogen.
in 2030, which is significant, given that green
hydrogen production costs could be less than Several factors are expected to drive a competitive
$2.00 per kg by 2030 in the region. supply of hydrogen from HRCs, including access to
hydrocarbon resources, cheap renewable energy,
4. Facilitating cooperation across value chains, strong domestic demand, advantaged location, and
customers, and countries. The clean-hydrogen a proven track record in establishing global energy
value chain is nascent and will require players markets. HRCs could develop and become leading
across the stages to work together to ensure suppliers of clean hydrogen by leveraging these
the value chain develops consistently. For factors, but their competitive positions may vary
example, long-term offtake agreements depending on the applicability of these factors.

The clean hydrogen opportunity for hydrocarbon-rich countries 3

 To begin, HRCs are likely to supply blue hydrogen downstream industries, such as downstream oil and
because it provides an outlet for their hydrocarbon gas and chemical- and energy-intensive industries,
reserves, an opportunity to (re)use hydrocarbon as well as long-distance aviation and marine. HRCs
reservoirs and midstream infrastructure, as well as could also repurpose existing gas pipelines for clean
an opportunity to maintain positions of leadership hydrogen as demand for additional infrastructure
in the global energy market. Doing so requires grows, helping spur investment in port infrastructure
investing in technologies such as CCUS to help and national carriers or transport ships.
ensure blue hydrogen remains competitive after
2030. Because green hydrogen is expected to
become competitive after 2030, those with access Taking the lead: Identifying sources of
to competitive, low-cost zero-carbon energy could value and choosing the right roles in
also build on the green-hydrogen momentum the value chain
and leverage any favorable renewable-energy HRCs could gain leadership positions in the future
sources to hedge the risk of blue hydrogen’s cost hydrogen market by identifying the sources of value
competitiveness versus green hydrogen in the creation and using a number of distinct business
decades to come (Exhibit 1). models (Exhibit 2). For instance, NEOM, ACWA
Power, and Air Products have committed to invest
Building a robust supply of hydrogen could allow $5 billion into an integrated power hydrogen, and
HRCs to leverage clean hydrogen to decarbonize ammonia production plant—including export

Exhibit 1

Green hydrogen production costs

costs are
are expected
expectedto
tofall
fallby
byapproximately
approximately
50 percent
percent by
by 2030.
2030.
Forecast as of September 2022

Projected global production cost of hydrogen, $/kilogram

6 Average cost
50% Optimal cost
drop in the cost of
5 green hydrogen for
end users by 2030

Gray hydrogen,1
3 including
carbon costs2

2
Blue hydrogen3

1 Large-scale blue Green hydrogen4

hydrogen projects
possible around 2025
0
2020 2030 2040 2050

1
Steam methane reforming (SMR) without carbon capture, utilization, and storage (CCUS).
2
Based on projected average global CO₂ costs of $57/ton (2030), $94/ton (2040), and $131/ton (2050). For Saudi Arabia, CO₂ costs are assumed to be
$33/ton in 2030, $69/ton in 2040, and $105/ton in 2050.
3
Gas prices of $2.60 to $6.80/MMBtu (approximately $3/MMBtu in Saudi Arabia).
4
Refers to the cheapest green hydrogen, which is provided by solar energy.
Source: McKinsey Hydrogen & Derivatives Flows Model, October 2022

4 The clean hydrogen opportunity for hydrocarbon-rich countries

 facilities—by 2025.5 At the time of publication, could potentially be limited or slow development of
more than 680 large-scale projects have been certain segments of the value chain. Other players,
announced globally, representing more than $240 mainly original-equipment manufacturers, have
billion in mature investments. focused on specific value-chain verticals.

Identifying key sources of value

Many players have focused on the entire value chain
by developing integrated projects to derisk what

Exhibit 2

The full
fullhydrogen
hydrogenvalue
valuechain
chainhas
hasaavariety
varietyofofsources
sourcesof
ofvalue—and
value—and challenges—
challenges—at
at each stage. each stage.

Value chain1 Upstream Midstream Downstream

$45–$55 $11–$14 $11–$14

billion billion billion

What it includes • Energy generation and • Equipment (compression/ • Conversion to end products
resources (eg, hydrocarbons, liquefaction and (eg, blue and green steel,
renewable energy) reconversion) synthetic fuel, ammonia)
• Production of hydrogen • Shipping (services) • Fuel cells and tanks
(eg, electrolyzers, reformers, • Infrastructure (eg, ports, • Vehicles, vessels, aircraft,
and CCUS2 projects) ships, and pipelines) and generators
• Equipment • Last-mile delivery

Sources of value • Advantaged access to • Technology and • Captive demand

conventional energy innovation • Advantaged location
resources • Existing infrastructure • Government to
• Advantaged access to that may be repurposed government relations
renewable energy to lock in demand
• Technology

Challenges • Uncertainty regarding • Technological unlock • Significant investments

evolution of demand and required for liquefied required to redesign
how it will impact the hydrogen transport technologies in certain
scaling of production of sectors such as in
electrolyzers or CCUS2 long-haul vehicle
transport

Estimated earnings before interest and taxes by 2030.

1

Carbon capture, utilization, and storage.

2

5
“Air Products, ACWA Power and NEOM sign agreement for $5 billion production facility in NEOM powered by renewable energy for production
and export of green hydrogen to global markets,” July 7, 2020, airproducts.com.

The clean hydrogen opportunity for hydrocarbon-rich countries 5

 Developing the right plays in the hydrogen production, 3) carbon capture, utilization, and
value chain storage, 4) hydrogen transportation, 5) clean-
There are six plays ideally suited for building on the hydrogen downstream production (such as blue
competitive advantages of players in HRCs: or green steel or synthetic fuels) and 6) integrated
1) hydrogen equipment manufacturing, 2) hydrogen project developers (Exhibit 3).

Exhibit 3
There are six
six plays
playsideally
ideallysuited
suitedfor
forbuilding
buildingononthe
thecompetitive
competitiveadvantages
advantagesof
of
players in HRCs.
players in HRCs.
HRC Stakeholder archetype
Potential clean Utilities/ Energy
hydrogen plays National oil RES Chemical intensive
for HRC companies developers companies industry Shipping Rationale for plays

Hydrogen Secure critical equipment supply

equipment Carbon-capture equipment can
manufacture be used to decarbonize other
Electrolyzers products in the portfolio
Carbon-capture Contribute to economic
equipment development of the HRC

Hydrogen Capabilities to produce and sell

production energy globally and execute large
capital projects
Experience in developing renewables
and executing large capital projects
Capabilities to develop and operate
complex industrial processes and
executing large capital projects

Carbon capture, Technology and processes can

utilization, and be applied to decarbonize other
storage products in the portfolio
Potential applications for carbon,
such as enhanced oil recovery or
synthetic oil production
Hydrogen transportation
Hydrogen pipeline, Existing infrastructure and
port, or marine capabilities to develop and
transport operate pipelines and shipping
energy products globally
Hydrogen pipeline Synergies between pipeline asset
development and operations and
existing transmission assets
Port and marine Existing daily shipping fleet and
transport port-operations capabilities

Clean-hydrogen Existing assets that consume

downstream hydrogen, such as ammonia and
industry steel production
Decarbonize products such as
steel and synthetic aviation and
marine fuels

Integrated Capability to develop value chain

project developers and demand to de-risk projects

6 The clean hydrogen opportunity for hydrocarbon-rich countries

 Hydrogen is a necessary part of curbing
greenhouse gas emissions across the
world while ensuring sufficiently stable
and affordable energy supply.

1. Hydrogen equipment manufacturing: HRCs such as gray hydrogen, have a majority of the
with high aspirations in hydrogen and a strong capabilities and assets required to produce
manufacturing sector could set up a hydrogen clean hydrogen today. All three players have
equipment manufacturing champion to experience developing, executing, and operating
facilitate the national road map and to become capital-intensive, complex industrial projects
a global equipment supplier. That said, the most required to develop clean-hydrogen projects.
logical equipment manufacturing plays are
owned by original-equipment manufacturers, 3. Carbon capture, utilization, and storage:
and the kind of equipment plays that would HRC players such as national oil companies,
likely make the most sense would be in the final utilities, chemical companies, and energy-
tier of the supply chain, such as the assembly intensive industries are the top contributors
of components in electrolyzer or CO₂-capture to national greenhouse gas (GHG) emissions
equipment. Localizing manufacturing could and subsequently could have an important role
help secure access to critical electrolyzer or to play in developing CCUS. Not only is CCUS
carbon-capture equipment in the event of critical for blue hydrogen production but also it
potential supply-chain constrains associated offers opportunities to decarbonize operations
with projected growth in the hydrogen across companies’ portfolios. In addition,
economy. Furthermore, developing carbon- captured carbon can be used in existing
capture or electrolyzer assembly can also help operations, such as enhanced oil recovery or in
create jobs and contribute to GDP. future products, such as synthetic fuels.

2. Hydrogen production: National oil companies 4. Hydrogen transportation: There is ample

and renewable developers can ensure opportunity for HRCs with strong export
demand for hydrocarbons or renewable infrastructure, shipping sectors, and pipeline
resources. According to the Achieved networks. To begin, national oil companies
Commitments scenario in our 2022 Global can repurpose existing gas pipeline
Energy Perspective, producing 600 million infrastructure or develop new hydrogen
tons of hydrogen will require 650 billion cubic networks to facilitate transportation. They
meters (bcm) of natural gas per year and 17,400 can also partner with ship builders to develop
terawatt-hours of electricity per year in 2050, hydrogen carriers. A number of carriers
which corresponds to up to 25 percent of of liquefied hydrogen will be required to
expected global renewable generation by that facilitate a global clean-hydrogen market by
time.6 Chemical companies, particularly those 2030. Meanwhile, utilities and developers
with significant exposure to industrial gases, of renewable energy sources can leverage

6
Achieved Commitments scenario from Global Energy Perspective 2022, McKinsey, April 26, 2022.

The clean hydrogen opportunity for hydrocarbon-rich countries 7

 existing pipelines or develop new ones to 6. Integrated project developers: National oil
transport hydrogen locally. National oil companies can leverage their strong cross-
companies and utilities can also invest in the value-chain positions to derisk project and
electric grid to facilitate the transmission and downstream industries as well as their G2G
distribution of green electricity. In Europe, an relations to help secure demand. This play is
estimated 39,700 kilometers of hydrogen a good fit for oil companies with advantaged
pipeline infrastructure could be installed access to energy resources, such as
by 2040, connecting low-cost production hydrocarbons and green energy, as well as
locations with demand hubs.7 Finally, shipping advantaged geography, a broad set of G2G
companies could see ammonia transport relations in energy, and substantial local
opportunities, ultimately leading to the demand driven by local industries over the
development of liquid hydrogen carriers. On long term.
this point, green and blue ammonia transport
could increase shipped ammonia volumes in
2030, as compared to the scenario in which Next steps for HRCs to play a prominent
clean hydrogen is not adopted. role in hydrogen
All stakeholders in HRCs, including governments as
5. Clean-hydrogen downstream production: policy makers and regulators, national oil companies
HRCs with either developed downstream (NOCs), investment funds, utilities, and downstream
industry or access to cheap hydrogen could industries, have key roles to play in setting up their
become suppliers of clean end products, such respective countries on a successful path as the
as green ammonia. National oil companies world adopts clean hydrogen.
could decarbonize products using hydrogen as
feedstock. And chemical companies could see Governments can play a leading role in the initial
new opportunities in the production of green development of the hydrogen economy both
and blue ammonia, for which gray hydrogen locally and internationally. Doing so would require
is currently a feedstock. The same applies to developing hydrogen road maps, including setting
energy-intensive industries, such as steel. The ambitions for national hydrogen production,
Hydrogen Council’s 2021 report shows that implementing regulations to decarbonize different
green steel can cost as little as $515 per ton of sectors to spur local demand for hydrogen, setting
crude steel, representing a premium of $45 per up G2G partnerships to secure demand for local
ton of CO2e by 2030.⁸ Leveraging downstream hydrogen exports, developing a perspective on
assets and industries, HRC countries have an the localization of hydrogen production across the
opportunity to capitalize on growing demand value chain, and supporting hydrogen deployment
for decarbonized products driven by shifting through regulatory support.
consumer preferences and regulations. For
example, our analysis shows that global low- Stakeholders in hydrogen value chain in HRCs
CO2 flat-steel demand could grow to more than will need to develop their hydrogen strategies
about 100 metric tons by 2030. This could be to identify the relevant opportunities for them
addressed with hydrogen direct reduced iron along the hydrogen value chain and assess
making (H2-DRI), with the exception of about where to compete. These could include utilities
ten to 20 metric tons, which will come from playing the role of green hydrogen producers;
scrap and electric arc furnaces (EAFs). NOCs supporting development of technologies

7
“European hydrogen backbone grows to 40,000 km, covering 11 new countries,” Gas for Climate, April 13, 2021.
8
Premiums will vary depending on local conditions.

8 The clean hydrogen opportunity for hydrocarbon-rich countries

that are critical for hydrogen development, and blue hydrogen supply and accelerating
namely CCUS, liquefied hydrogen transport, cost reductions. Partnerships with hydrogen
direct air capture (DAC), and hydrogen fuel stakeholders in HRCs can offer companies and
cells for trucks; NOCs investing in midstream countries opportunities to gain exposure to the
infrastructure; and downstream players producing hydrogen economy and, more important, offer a
green products, such as green steel and green path to decarbonize their respective operations
ammonia, and capturing their value pools. Last, and sectors.
players in HRCs will need to work on a number of
enablers, including talent development, forming
partnerships to ensure development of the
required technology, expansion of the supply Hydrogen is a necessary part of curbing GHG
market, and long-term demand partnerships or emissions across the world while ensuring
offtake agreements. sufficiently stable and affordable energy supply.
HRCs are in a unique position to help develop and
HRCs have traditionally played an important role scale the technology. Those that take the right
in supplying the world’s energy needs. They also actions today will not only help stay ahead of the
benefit from access to the resources required to curve accessing new and growing value pools but
produce green and blue hydrogen at competitive will also help provide a cleaner, greener future.
costs. They offer a key unlock in scaling green

Arnout de Pee is a partner in McKinsey’s Amsterdam office; Tarek El Sayed is a senior partner in the Riyadh office; Mohamed
Ghonima is associate partner in the Dubai office, where Ruchin Jain is a partner and Rachid Majiti is a senior partner; Joe Rahi is
a partner in the Doha office; and Maurits Waardenburg is an expert associate partner in the Brussels office.

The authors wish to thank Abdullah Bajammal, Chiara Gulli, and Markus Wilthaner for their contributions to this article.

Copyright © 2022 McKinsey & Company. All rights reserved.

The clean hydrogen opportunity for hydrocarbon-rich countries 9