Chevron (CVX 0.57%) unveiled its intention to accelerate its lower carbon ambitions last fall. The oil giant said it would spend $10 billion through 2028 on that strategy, more than triple its previous plan. The company expected to spread that money around by investing it in renewable natural gas, renewable fuels like renewable diesel and sustainable aviation fuel, hydrogen, and carbon capture.
The company recently provided some more details about its hydrogen investment strategy, stating that it plans to invest $2.5 billion to develop green and blue hydrogen production facilities. Here's why it's starting to bet big on hydrogen.
Why hydrogen?
Hydrogen is a versatile and clean-burning fuel many believe could be the key to addressing some of the obstacles the global economy is facing in its race to decarbonize. Green hydrogen is an emission-free fuel produced using renewable energy that powers an electrolyzer to turn water into hydrogen and oxygen. Meanwhile, blue hydrogen is made from natural gas and can be emissions-free with carbon capture technology.
Many believe that hydrogen could replace natural gas as a fuel for power plants and other industrial processes. The energy industry could utilize a significant portion of its existing infrastructure to transport and store hydrogen, which would flow into existing power plants to produce emissions-free electricity.
Given the fuel's versatility, ability to utilize existing infrastructure, and carbon emissions profile, analysts see a bright future for hydrogen. For example, investment bank Goldman Sachs believes that hydrogen could be a $1 trillion a year market by 2050.
Chevron is joining the hydrogen land grab
Chevron wants to be part of the ramp-up of the hydrogen industry. It has already started to dip its toe in the water. Last fall, Chevron acquired an equity interest in ACES Delta, a joint venture that owns the Advanced Clean Energy Storage Project. It will produce, store, and transport green hydrogen for the power generation, transportation, and industrial industries in the Western part of the country. Chevron also invested in Raven SR, a renewable fuels company that wants to build a waste-to-green hydrogen plant.
Chevron is one of a growing number of large energy companies starting to bet on the future of hydrogen. Fellow oil giant BP (BP 0.98%) recently acquired a 40.5% stake in the Asian Renewable Energy Hub. The upwards of $36 billion project would install 26 gigawatts of wind and solar energy generating capacity over a 2,500 square mile area in Western Australia. The project would supply renewable energy to mining companies in the area while also producing 1.6 million tons of green hydrogen annually as early as 2027. That project is part of BP's strategy to grab 10% of the hydrogen market over the next decade.
Meanwhile, leading U.S. utility NextEra Energy (NEE 1.36%) sees green hydrogen as a key to its Real Zero plan to eliminate carbon emissions from its operations by 2045 without using carbon offsets. NextEra plans to convert 16 GW of its existing natural gas power plants to run on green hydrogen. The company has already launched a pilot project to start replacing natural gas with green hydrogen at one of its plants. The utility aims to become a leader in green hydrogen production to help lead the decarbonization of the U.S. economy.
Will Chevron's hydrogen bet pay off for investors?
At $2.5 billion, Chevron's hydrogen investment is small enough that it won't hurt the company if the fuel fails to deliver on its promise as a cost-effective solution for reducing carbon emissions. However, it's meaningful enough that it will get the company a toehold in what could be a massive market opportunity over the long term. If the hydrogen market develops as many hope, Chevron will have plenty of opportunities to invest more capital into the sector. Its initial investment could pay significant dividends down the road.
