Energy

S H E A R M A N & S T E R L I N G L L P | 1 3 competitive with conventional energy sources. In light of this, METI proposed that by 2030 Japan would develop commercial scale hydrogen supply chains with the capacity to provide Japan with 300,000 tons/year of hydrogen, and that this would help reduce the cost of hydrogen to ¥30/Nm3. METI's long-term target of reducing the cost of hydrogen to ¥20/Nm3 by further expanding Japan's international hydrogen supply chains provides a framework for developing the domestic market. Hydrogen cost-competitiveness will be critical from a financing perspective. Banks will want certainty that the commercial incentives that drive the commercial structure are sound and remain constant or improve over time, so that financiers can provide long-term financing solutions that are based on solid economic fundamentals. BANKABILITY AND RISK ALLOCATION A hydrogen project can take many forms. A green hydrogen project must be powered entirely by renewable energy such as solar or wind power. Depending on the target market, a hydrogen project could also have elements of an oil and gas, chemical or mining project. As the structure of projects in each of these sectors is very different, a key challenge from a financing perspective will be in identifying and understanding the most appropriate structure for the relevant hydrogen project. Developers and their advisers will therefore need to carefully consider how to present their projects to lenders, as this will have a key impact on the terms available. Despite the growing international consensus that hydrogen will play an important role in the future energy mix and the technological advances being made by various players in the market, developers will need to overcome certain challenges before hydrogen projects can be financed at a commercial level. For example, the electricity supply aspect of a project could be structured to replicate the risk allocation under a traditional power project, including, in the case of green hydrogen projects, relying on intermittent wind or solar resources, which is a resource risk that lenders well understand. However, the offtake arrangements for hydrogen are considerably more complex. Currently there is no spot market, so structuring could bear more resemblance to a long- term LNG/gas offtake. Moreover, the structure of a green hydrogen project will need to take into account the intermittency of the renewable resource, which means it will be challenging for a hydrogen producer to commit to binding supply obligations. There may also be features of LNG export projects that are relevant, such as the practical issues surrounding the shipping and transportation of hydrogen. Given the multi-disciplinary nature of integrated hydrogen projects, some sponsors may opt for a hybrid project structure like we might see in an integrated LNG-to-power project. At present, a bankable hydrogen project is likely to need to involve a long-term offtake of low-carbon hydrogen to one or more existing large-scale creditworthy hydrogen consumers. For example, for the US$5 billion Helios project located at the new city of NEOM in the Kingdom of Saudi Arabia, 10 Air Products, the world's largest supplier of merchant hydrogen, is expected to be the sole offtaker of green ammonia (being the chemical carrier for the green hydrogen that the project produces), which will be distributed to the global market. 8. Based on an exchange rate of 1 US$ = 110 JPY. 9. METI's hydrogen roadmap noted that the IEA's World Energy Outlook of 2018 forecast that LNG prices in Japan would be around US$10/MMBtu (CIF Japan) in 2040. 10. Shearman & Sterling LLP is advising NEOM Company on this project. CONTINUED >

• Cover