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Chevron is betting $2.5 billion on hydrogen. Does it pay off for investors?


Chevron (CLC -4.57%) unveiled plans to accelerate its lower-carbon ambitions last fall. The oil giant said it would spend $10 billion through 2028 on the strategy, more than triple its previous plan. The company planned to split that money by investing it in renewable natural gas, renewable fuels like renewable diesel and sustainable aviation fuel, hydrogen, and carbon capture.

The company recently provided more details about its hydrogen investment strategy, indicating that it plans to invest $2.5 billion to develop green and blue hydrogen production facilities. Here’s why he’s starting to bet big on hydrogen.

Why hydrogen?

Hydrogen is a versatile, clean-burning fuel that many believe could hold the key to overcoming some of the hurdles the global economy faces in its race to decarbonize. Green hydrogen is an emission-free fuel produced from renewable energy which feeds an electrolyser to convert water into hydrogen and oxygen. Meanwhile, blue hydrogen is made from natural gas and can be emission-free with carbon capture technology.

Many believe that hydrogen could replace natural gas as fuel for power plants and other industrial processes. The energy industry could use a significant portion of its existing infrastructure to transport and store the hydrogen, which would be piped to existing power plants to generate emissions-free electricity.

Given the fuel’s versatility, ability to use existing infrastructure, and carbon emissions profile, analysts see a bright future for hydrogen. For example, investment banking Goldman Sachs estimates that hydrogen could represent a market of 1,000 billion dollars per year by 2050.

Chevron joins hydrogen land grab

Chevron wants to be part of the rise of the hydrogen industry. He has already started dipping his toe in the water. Last fall, Chevron acquired a stake in ACES Delta, a joint venture that owns the Advanced Clean Energy Storage Project. It will produce, store and transport green hydrogen for power generation, transport and industrial industries in the west of the country. Chevron has also invested in Raven SR, a renewable fuels company that wants to build a green hydrogen plant.

Chevron is one of a growing number of major energy companies that are beginning to bet on the future of hydrogen. Oil Giant Friend BP (BP -6.15%) recently acquired a 40.5% stake in the Asian Renewable Energy Hub. The more than $36 billion project would install 26 gigawatts of wind and solar power generation capacity over a 2,500 square mile area in Western Australia. The project would provide renewable energy to mining companies in the region while producing 1.6 million tonnes of green hydrogen per year from 2027. This project is part of BP’s strategy to capture 10% of the hydrogen market over the next decade.

Meanwhile, leading the United States utility NextEra Energy (BORN -0.09%) sees green hydrogen as 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 the production of green hydrogen to help lead the decarbonization of the US economy.

Will Chevron’s hydrogen bet pay off for investors?

At $2.5 billion, Chevron’s investment in hydrogen is small enough not to hurt the company if the fuel fails to deliver on its promise as a cost-effective solution to reducing carbon emissions. However, it is significant enough to allow the company to capture what could be a massive long-term market opportunity. If the hydrogen market develops as much hope, Chevron will have many opportunities to invest more capital in the sector. His initial investment could pay significant dividends down the road.