Saudi hydrogen projects — part of the country’s Vision 2030 program — risk suffering from sunk costs and delayed sales revenue.
Like many of the “gigaprojects” associated with Crown Prince Mohammed bin Salman’s Vision 2030 economic transformation program, the massive green hydrogen plant planned for the new city of NEOM basically makes the assumption from “Field of Dreams”: “If you build it, they will come.”
Demand was not thought to be in question when it was first planned back in the late 2010s, given the prevailing conventional wisdom about the global energy transition. Most of the facility’s production would be placed in the European market on long-term contracts, which would be secured well before completion through a reseller.
When financing had closed in 2023, a US company, Air Products, agreed to purchase the entire volume and resell it. Air Products was expected to invest in receiving terminals in Europe as well, putting it in control of the midstream segment of what was assumed would be a burgeoning new flow of fuel.
This seemingly guaranteed demand for the project, allowing construction to begin on the $8.4 billion facility before contracts were in place with end users. Much of the capital outlay has already taken place, with the project, including its solar and wind power generation units, about sixty percent completed by the end of 2024. The first production expected to take place before the end of the summer in 2026.
Exports of both green hydrogen, produced with renewable electricity, and blue hydrogen, produced from natural gas, have been seen as key to maintaining Saudi Arabia as a world leader in energy under Vision 2030, even as oil declines as a share of total energy and in the transportation sector. Much of the hydrogen would be in the form of ammonia.
Saudi Arabia’s abundant renewable energy resources, especially in the form of ample sunlight amid cloudless days, gives it a comparative advantage on development costs, with one recent estimate putting it at $2.16 per kilogram for green hydrogen — on the very low end of competing projects worldwide. The kingdom aims to make up fifteen percent of the eventual market for hydrogen production.
Even with low production costs, though, there are serious questions about whether enough demand will materialize fast enough. Saudi experts have cited a near-term growth expectation of forty percent annually through 2030, with the kingdom becoming the largest exporter in the world due largely to this project. Thus far, though, Air Products has only one contract in place with an offtaker, Total Energy of France, for 70,000 tons of ammonia per year — or about one-third of the total output.
The other two-thirds are not spoken for, and domestic demand in the kingdom is still small. Air Products has chalked up the lag in sales to the fact that the EU has not fully fleshed out regulations and incentives for hydrogen consumption in Europe.
With the politics of climate policy shifting, even in Europe, it remains to be seen whether governments will be willing to force the adoption of a fuel which is still quite a bit more expensive on a per British thermal unit (Btu) basis than existing fuels. With questions hanging over demand, Saudi Arabia also seems to be scaling back its ambitions for blue hydrogen, which could be even harder to place with term-contract offtakers.
The questions surrounding the green hydrogen project in NEOM are similar to those which bedevil other Vision 2030 “gigaprojects” — will they achieve an adequate return on investment (ROI)? In this case, most of the orders for long-lead-time capital goods have already been placed, so in the event that the Saudis accept that demand growth will take time to catch up with supply, they still have to pay for these goods on schedule. This will have a big negative impact on ROI, even if they are eventually able to place the full volume with offtakers.
The same questions about demand uptake hover over projects in tourism, transportation, and real estate — sunk costs with delayed sales revenue hit ROI quickly. If you build it and they don’t come fast enough, investors end up out a lot of money.
About the Author: Greg Priddy
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
Image: Shutterstock/Mfee
