Oman Doubles Down on Hydrogen

Just before the end of business last Thursday, the Sultanate issued its first ever royal decree pertaining to the rapidly-developing field of hydrogen. Royal Decree 10/2023 Allocating Some Lands for the Purposes of Renewable Energy and Clean Hydrogen Projects is the first of its kind, earmarking sizable parcels of land purely for these projects.

This decree signals Oman’s commitment to the global fight against climate change and its desire to become a hydrogen export powerhouse. However, it also raises some questions on project risk allocation and the meaning of “renewable” and “clean”.

Adopting the principles of public-private partnership (PPP), this decree intends to bring in private developers, by way of auction, to build projects that use renewable energy for the production of clean hydrogen on the earmarked plots.

It also assigns the responsibility of the auction process, the resulting partnership, and what goes on top (and under) these earmarked plots, to Hydrogen Oman Company—more commonly known as Hydrom.

The Growing Role of Hydrom

Established as a company that is fully owned by Energy Development Oman, Hydrom is central to the government’s strategy of becoming a leading force in the nascent hydrogen industry. While not set out in the decree itself, Hydrom is assigned a wide array of duties, including developing the master plan for this sector, attracting foreign direct investment, managing the common infrastructure, and overseeing the execution of the projects.

Besides the multitude of responsibilities and duties, it appears that Hydrom is also taking on a de facto regulatory role in this space. For example, it alone will manage the auction process (as explained below) without the need for oversight of any other government body.

Going Once, Going Twice, Sold!

The auction process appears to be a departure from the government tendering process set out by the Tender Law and—for PPP projects—the Public Private Partnership Law. The decree does, however, seek to ensure fairness, transparency, and competitive tension by requiring the process to adhere to the principles listed in article IV, which are almost identical to the principles listed in article 5 of the Public Private Partnership Law.

While not set out in the decree itself, Hydrom’s page on the auction process states that the project developers are expected to partner up with state-owned enterprises, to develop projects with a competitive levelised cost of hydrogen (i.e., competitively-priced hydrogen), to demonstrate their commitment to building out local supply chains, and to secure the offtakers (i.e., buyers) of the end-product, be it hydrogen or its derivatives.

Weaving the Supply Chain Fibres

It is clear that a bid committing to taking on a more active role in building out the local hydrogen supply chains will be seen favourably during the bidding stage of the auction. What is less clear is how much of these supply chains are expected to be built out by the project developers, and how much will be borne by the Omani government.

For example, will the government take on the role of constructing and commissioning dedicated water desalination plants that feed water into the electrolysers, or are the project developers expected to build their own desalination capacity?

Where the sought end-product is ammonia, will the project developers build their own ammonia plants or will Hydrom orchestrate the efforts to build large ammonia plants as part of the common infrastructure, with each train perhaps being owned by a different group of companies, as was done in the Atlantic LNG project?

Whatever the answer may be, there appears to be an intention to have these supply chains converge into some form of common infrastructure, used by other project developers in the future. If this is indeed the case, then questions on the ownership of this infrastructure (and, in turn, the project-financing models) will also need to be addressed.

Take the Hydrogen, Keep the Land

Interestingly, article III of the decree states that the earmarked plots are to be granted to Hydrom by way of usufruct rather than ownership, based on a request by the Ministry of Energy and Minerals to the relevant government entity in question, being either the Ministry of Housing and Urban Planning or the Public Authority for Special Economic Zones and Free Zones.

It goes on to elaborate in article IV that Hydrom can divide these plots and contract with the private developers to exploit them as needed. The form of agreement to be adopted for this contracting is unclear from both the decree and information pertaining Hydrom in the public sphere.

It may be the case that a sub-usufruct framework is adopted, as is the case for some projects in the Special Economic Zone at Duqm; a partnership agreement framework, as most recently adopted for the Sultanate’s first 42 schools public-private partnership project; or an entirely different framework altogether.

This, in turn, raises questions on the financing side—it is unclear how project developers will be able to mortgage these contracted plots in the absence of a usufruct agreement to which they are a party.

Follow the Money

Besides generating revenue from the usufruct fees it will collect over the leased-out parcels of land, the government will also indirectly enjoy the dividends generated by Hydrom and the state-owned enterprises that partner up with the project developers for each and every project on the earmarked plots.

Notably, the decree does not assign a dedicated usufruct fee for renewable energy and hydrogen projects. Accordingly, the fees set out in Ministerial Decision 92/2016 would apply, which could be pricey due to the considerable amount of space that renewable projects, such as solar PV, require.

The projects are also expected to bring in considerable foreign direct investment into the Sultanate, which—like a domino effect—will increase Oman’s GDP, which in turn will have a positive multiplier effect on the overall economy of the country. 

Last but not least, the projects will also generate jobs, create local expertise and know-how, and by the imposition of certain Omanisation rates, potentially alleviate the Sultanate’s current unemployment rates. 

Define “Renewable”

Our minds tend to automatically think of solar panels and wind turbines when we talk about renewable energy. This is a reasonable assumption, given the prominence of these two technologies. However, the term “renewable energy” is wide-reaching—it encompasses any form of energy derived from a natural source that is replenished at a higher rate than consumed.

In other words, bioenergy plants, which generate energy from biomass (jargon for wood, charcoal, plants, and poop), and waste incineration plants could potentially also be proposed as projects for the earmarked plots.

A key point to highlight here is that “renewable” is not synonymous with “carbon-free”. Some forms of renewable energy, such as burning biomass, can produce more CO2 emissions than fossil fuels. Waste incineration plants, or waste-to-energy plants, are also CO2-belching plants with a high price tag per unit of electricity. Without carbon capture plants or other solutions to offset these emissions, these projects risk not being aligned with the Sultanate’s goal to be carbon neutral by 2050.

Define “Clean”

The decree does not specify the permitted carbon intensity parameters of clean hydrogen. In other words, it is not clear if hydrogen produced by a combination of renewables and fossil fuels would still count as “clean” or not. 

Take the EU’s recently unveiled Delegated Act—it sets out the definition of “renewable hydrogen” (or “green hydrogen” if we’re following the colour scheme) and states that the resulting hydrogen can still qualify as being “renewable” if a portion of its electricity is sourced from the electricity grid at times of insufficient renewable energy output, provided that an equal amount of renewable energy is injected back into the grid at a later time.

This has upset environment-oriented NGOs, which have slammed the act as “greenwashing”, arguing that the electricity supplied by the grid can come from coal-fired power plants, one of the worst offenders in CO2 emissions per unit of electricity, rendering the resulting hydrogen more “brown” than “green”. Oman, thankfully, does not have coal-fired power plants, but the electricity in its grid is almost entirely generated by gas-fired power plants.

Furthermore, it is not clear if blue hydrogen, which is hydrogen extracted from natural gas with the resulting CO2 being captured at source, would also be considered as “clean” for the purposes of this decree. As this decree revolves around renewable energy, it might be the case that the earmarked plots are restricted to green hydrogen projects only.

Regulating the Gigawatts

As these projects will involve a considerable amount of electricity flowing to produce clean hydrogen, the Law on the Regulation and Privatisation of the Electricity and Related Water Sector will apply, meaning that project developers will have to obtain a licence (or an exemption) from the Authority for Public Services Regulation (APSR) before they can build their respective projects.

Further, if these projects intend to sell some of their renewable electricity into the grid, then in the absence of the liberalisation of the electricity market (as defined in the law), these projects will have to sell their output to the Oman Power and Water Procurement Company, in its capacity as the single buyer of electricity in the Sultanate.

Final Thoughts

This is an exciting time for the hydrogen sector—after several false starts, the momentum appears to be unstoppable this time. However, there are still some key issues that need to be answered before this sector can become a permanent fixture of the energy transition.

While this decree focuses on how hydrogen will be produced, it does not answer the question of how it will be exported. Ammonia seems to be the preferred choice here, but with a poor round-trip efficiency of only 11%, especially if cracked back into hydrogen and nitrogen at the destination port, it is unclear if the economics will ever make sense to ship more than a nominal amount of ammonia to wealthy countries that are willing to pay for the green kind.

Another challenge, which unfortunately is not getting enough attention, is hydrogen’s potent impact on the atmosphere that is ton-for-ton 33 times worse than CO2. Being the smallest molecule in the universe, hydrogen is bound to leak and could possibly cause more damage than the very fossil fuels it is trying to replace. 

Proceeding with an abundance of caution will be key.