hydrogen users challenge

Hydrogen Users

August 2014

How to deal with financial stormy

weather

© Esprit Associates 2014 2

Hydrogen users -How to deal with financial stormy weather

Industrial users of hydrogen have two basic choices, they can either produce the hydrogen

themselves, the “make” option, or buy it from a third party supplier, the “buy” option. In the last

twenty years the majority of users in developed countries have moved to the “buy” option, and even

in developing countries, there is a move towards the “buy” option for new demands, if that option

exists. Hydrogen is used generally for its power as a reducing agent which can remove oxygen or

other undesirable molecules from atmospheres or ingredients or, as in the case of oils and fats, to

saturate unsaturated hydrocarbons.

*excludes approximately 120-130 billion Nm3/y produced from off-gases and used within refineries

The table shows the primary uses of hydrogen from on-purpose production. In the case of ammonia

and methanol, the use is as a synthesis gas mix, but in other cases essentially as pure hydrogen. The

Year 2014 Nm3/y billions

Captive

Users

North

America

European

Union

Asia

Pacific ROW Total

Ammonia 41 29 202 65 338

Refineries* 58 37 43 24 162

Methanol 11 7 27 14 58

Other 10 7 4 4 24

Sub-total 120 80 276 106 582

Merchant

and On-Site 64 19 11 12 107

Total 184 99 288 118 689

NoAM Captive On-site Bulk Total Growth

Ammonia 41.0 0.0 0.00 41.0 1.9%

Refineries 58.3 51.4 0.00 109.7 3.8%

Methanol 10.6 0.0 0.00 10.6 2.6%

Bulk Chemical 9.0 7.3 0.00 16.3 2.6%

Fats and Oils 0.1 0.2 0.12 0.40 1.0%

Glass 0.0 0.0 0.01 0.07 2.0%

Electronics 0.0 0.2 0.31 0.55 7.8%

Speciality Chemicals 0.5 2.2 0.87 3.51 5.1%

Metallurgy 0.0 1.0 0.48 1.48 3.4%

Space 0.0 0.0 0.03 0.03 2.0%

Utility Power 0.0 0.0 0.08 0.11 2.5%

Fuel Cell Hydrogen 0.0 0.0 0.07 0.073 40.0%

119.6 62.3 1.974 183.9 3.2%


merchant and onsite production serves a range of industries and the table above gives a further

breakdown for North America. The growth rates shown reflect the overall growth in hydrogen use

but it should be recognised that the growth in on-site hydrogen is substantially higher since about

80% of the total growth is supplied this way giving an on-site growth rate of about than 10%. It

should also be noted that the cost of hydrogen as a percentage product cost is often small but the

absence of hydrogen means no product. Users therefore focus on availability rather than cost

savings in dealing with the suppliers. This misses significant opportunities for cost savings that go

straight to the bottom line.

Most of the hydrogen supplied by the major industrial gas companies is governed by medium to

long-term contracts. In the case of tonnage quantities such contracts are generally 15 years and for

bulk users between 3 and 7 years, depending on local regulations. Most of these contracts have

some form of take-or-pay, usually in the form of a base facility charge, and a price escalation

formulae to take account of changes in labour, maintenance material and utility and feedstock costs.

This means that the unit volume cost of the hydrogen rises with reduction in volume. Some vendors

habitually incorporate an escalation formula that more than compensates and yields extra profit.

There are two opportunities to make savings:

Extend the contract for a significant reduction in the facility charges

Reset the escalation formulae to market pricing and ensure that they correctly

reflect the suppliers cost profile.


The two are often related, with the contract extension giving and opportunity to revise any

inappropriate escalation formulae.

The renegotiation can save as much as an average 20% of annual fixed costs by resetting the

escalation formulae and a similar amount by rolling the contract for another period. In the case of a

very large on-site contract this could reduce costs by as much as $10 million per year, well worth

having.

The graph shows a simple roll of a ten-year contract, with a simple depreciation spread in year 5 and

a roll for a further 15 years, in year 15, with pricing offering the supplier a similar internal rate of

return. This is for a large hydrogen plant.

Even in the case of smaller contracts the savings are relatively important. The skill is creating the

win-win with the suppliers to ensure that they meet at least their original financial objectives on the

new deal. Esprit Associates’ experts are uniquely positioned to offer support to achieve these

savings based on our successful track record with hydrogen users.

www.espritassociates.com or www.igasexpert.com

http://www.espritassociates.com/


Esprit Associates Overview

Esprit Associates specialises in the industrial gas business. We provide insight on the production and use of industrial gases to suppliers, users and other interested parties. Our goal is to assist them their decision making processes for all industrial gas business or technology issues such as the gases, related equipment, services and financial performance.

Esprit Associates gives unique advice based on in depth knowledge and experience of the industrial gas industry. Esprit Associates has a database of industrial gas production facilities, techno-economic and forecasting models and other regional data that are without equal in the industry. Esprit Associates consultants have spent at least 25 years at senior levels in the business and have outstanding analytical skills that allow them to provide the right answer for any client. Esprit Associates provides a wide range of services to its clients in support of their business and technology needs. These include:

Techno-economic analysis

Interim Management and targeted Management Recruitment

Business development and Strategic planning

Technical, Economic and Supply Chain Audits

M & A activity and Industry Analysis

Resources

Database Esprit Associates maintains a database of more than 10000 industrial gas facilities. This is continually updated by reference to gas providers’ and their customers’ press releases, reference lists from the principal equipment providers and feedback from regional and other sources. The database affords the opportunity to establish the supply chain for industrial gas services and through this to provide benchmarking and other market data to both users and providers of industrial gases. The database records the type of facility, contracts, location – city, country region and postcode – production capacities, build year and status. It also records the source of data, comments and production technology details when appropriate. All entries are identified by a unique reference number and a facility classification. The 2000 largest facilities have been plotted on Google Earth™ which enables delivery logistics and plant conditions to be established. This is an ongoing activity.

Techno-economic models Esprit has a number of techno-economic models for industrial gas production and distribution based on data gathered over many years. We have used the deep


experience of our consultants to perform parametric analysis of the data and this enables us to produce detailed cost and pricing information for past, present and future investments in industrial gas facilities. These models take into account location, date, and owner, technology and product delivery requirements. They also allow issues such as cross-subsidies to be evaluated and to define accurate escalation equations to benchmark existing contracts and current bids. The models include:

ASU and Liquefier with choice of add-ons such as back-up storage, argon, multiple train and steam turbine drives

Steam Methane Reformer (SMR) with options for Hydrogen, Syngas or CO production and the use of RFG or other alternative feedstocks. The model also deals with steam credits and CO2 capture or taxation.

Partial Oxidation facilities (Gasifiers) which deals with the same options as the SMR Model but allows for various technologies and a choice of feedstocks. It can also incorporate ASU CAPEX and OPEX for the oxygen requirements.

Non-Cryogenic models for Nitrogen or Oxygen production and Hydrogen purification. These cover both adsorption and membranes.

Liquid Hydrogen

Liquid CO2

Bulk Liquid and Bulk Gas distribution and Packaged gas production and distribution models. These reflect changes in the cost of both production and transport and the various contracts for different customer sizes.

CAPEX models which identify the level of capital spending required for an industrial gas company to maintain market share for various growth scenarios

Valuation models that identify the potential value of a business from the known production and distribution facilities by applying the techno-economic models to each.

Forecasting Models Esprit Associates has developed a forecasting model which predicts the growth in the industrial gas business and captive industrial gas production for more than 80 countries. It also consolidates the information by region and globally. The model is based on the analysis of industrial gas use by 14 industry sector groupings, such as pulp & paper, against Industrial Production over the past ten years. The model then predicts forward for up to ten years against forecast changes in IP indices from a macroeconomic specialist company. The model breaks historical and forecast revenues into the basic delivery mechanisms - onsite & pipeline, bulk and packaged gases - for the major (Tier 1) suppliers. It also takes into account captive capacity when looking at both historical sector intensity and growth. The model uses historical and forecast changes in currency rates to deliver headline growth and changes in power and natural gas prices to deliver underlying growth. Generally the model has underestimated growth


on a global basis by about ½ % to 1% because of expansion of offerings and captive-to-onsite conversion. There are a number of correction factors that can be applied to offset this. Specific forecasting models also exist for industrial gases such as Hydrogen. These look at the growth in the gas volumes by industry, delivery mechanism and region. They provide a more focused view of potential for the gas. We also have a number of standard templates which enable a breakdown of the sectors into delivery mode and gases used. They are often used to define the expected growth in particular gases or gas mixtures in a particular territory and by delivery mechanism.

Other Models We have many models that have been developed for specific projects that can be generally applied to new challenges. These include Monte Carlo analyses for reliability of supply on pipeline systems, price trends in bulk deliveries and net present value for termination of contracts.

Other Data We have a significant archive of press releases, earnings presentations and other public documents for the industrial gas industry which enable us to cross-check and update our various models. We also publish a quick quarterly analysis of the largest companies and an annual report in more detail for subscribers. We regularly use this archive to identify changes of strategy and roduct lines for the companies


Esprit Associates

Global reach but local service – our consultants are world-wide.

Head Office Clevedon, Windsor Road, Medstead, Alton Hants GU34 5EF UK Tel +44 1420 562802 Fax +44 1420 561634 Mobile +44 7802 223000 Email: [email protected] Central Europe Tel: + 43 1 729 17 05 Fax: + 43 1 729 17 05 / 55 Mobile: + 43 (0) 699 11 54 54 58 Email:[email protected] Esprit Associates Inc 2150 Ardis Drive San Jose CA 95125 UNITED STATES Tel: +1 208 292 1304 Fax: +1 208 273 6406 Email:[email protected] We also have relationships with other consultancies in Asia and North America

More details of the company can be found on our website www.espritassociates.com

mailto:[email protected]




More details of the company can be found on our website www.espritassociates.com

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