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Midstream Companies And The Fuel Of The Future

Feb. 13, 2021 8:00 AM ETCCLP, EPD, ET, KMI, MPLX, WMB, AROC227 Comments

Summary

  • Hydrogen is the fuel of the future. The most practical way to transport it is via existing natural gas midstream infrastructure.
  • This would work by blending up to 15% hydrogen with natural gas, analogous to corn-ethanol being blended with gasoline.
  • Thus, existing natural gas midstream assets owned by the likes of MPLX LP, Enterprise Products Partners, Kinder Morgan, and Energy Transfer would benefit from ongoing demand and extended useful lives.
  • The recent combination of Spartan Energy Partners (private) with CSI Compressco (CCLP) is our favorite high risk/reward way to invest in this opportunity.
  • This idea was discussed in more depth with members of my private investing community, Cash Flow Kingdom. Get started today »

Note: This article was produced together with Darren McCammon.

Think hydrogen is the fuel of the future? Maybe that future isn't as far away as you think, as we will lay out in this macro-focused report.

Hydrogen gas is seen as one of the main technologies that could result in lower CO2 emissions in the future, thus the technology has a lot of potential in combating climate change. Hydrogen gas is, however, not as easy to handle as some types of other fuels.

Hydrogen is, at least on this planet, gaseous at normal temperatures. Research indicates hydrogen can be incorporated into existing natural gas systems at concentrations up to 15%, with only minor system modifications. Thus, hydrogen might eventually be to natural gas what corn-based ethanol is to gasoline; an additive that is transported in combination utilizing existing infrastructure. Recently, BTU Analytics noted:

“...eleven power plants around the US that have announced they plan to use a hydrogen/natural gas blend or pure hydrogen, and given the ESG movement’s momentum, we are likely to see more. This creates opportunities for pipelines to help transport a carbon-free fuel and help off-takers meet climate and emissions goals...”

This has obvious implications for the ongoing usefulness and demand for existing midstream energy infrastructure.

Existing pipelines and LNG ships are the most practical way to transport hydrogen (as an additive) from the site of production to end-users. Furthermore, it should be noted that existing petroleum refineries and chemical plants on the Gulf Coast and other recipients from major pipelines already use hydrogen in their processes. In fact, 95% of industrial hydrogen is made from natural gas via a process called steam reforming. Unfortunately, steam reforming of natural gas, while cost-effective, also produces carbon as an unwanted byproduct. Thus, the hydrogen that results from steam reforming is commonly referred to as

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This article was written by

Jonathan Weber profile picture
49.3K Followers

Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He has been sharing his research on Seeking Alpha since 2014. Jonathan’s primary focus is on value and income stocks but he covers growth occasionally.

He is a contributing author for the investing group Learn more.

Analyst’s Disclosure: I am/we are long EPD, ET, AROC, KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (227)

FredFrog profile picture

Thank you Jonathan. When our interests have intersected it has been my experience that you write well-reasoned and well-organized articles.

For those with political comments. My mother explained to me a long time ago: when it comes to politics facts are irrelevant. Please keep your political bias out of the conversation and stick to facts. SA is not a political forum.

Question:

One thing that has always concerned me about hydrogen in large-scale usage as a fuel is what happens with all of that water being pumped into the atmosphere? Will this produce flooding or some other unpleasant side-effect?

For the record.

-- I am an engineer (retired) and not the kind that is knowledgeable about fuels and chemistry.

-- I own shares in oil and gas companies (including pipelines).

-- I believe climate change (global warming) is a real phenomenon and is primarily caused by humans.

-- I embrace the notion of stopping the poisoning of our planet.

-- I prefer to have heat in the winter (NatGas until there is a better alternative).

-- It has been my experience that the vast majority of Federal employees embrace science and engineering; they seek the best overall solution that the political appointees allow them to pursue.

-- I believe that well-intentioned engineers (with the help of scientists) can solve the technical problems confronting humankind when they are allowed to do so.

-- There is no single solution.

-- Well-meaning people make mistakes; we can learn from our mistakes and move forward to a better solution.

Let the good times roll.
Modest_Engineer profile picture

@Fred the Frog if burning H2 could cause flooding then you would already have some indication of that

oil is -CH2-CH2- repeated multiple times, and natgas is CH4 - both give out copious amounts of H2O when burnt. Burning hydrogen directly will just generate twice the amount (for the same calories) of H2O as CH4

compared to the amount of water you get in rains it will be miniscule
FredFrog profile picture

@Modest_Engineer -- "compared to the amount of water you get in rains it will be [minuscule]"

Thanks for your response.

Rain is recycled water, not new water. At a time when glaciers and large ice sheets are melting en masse, doubling the added water produced by fuel doesn't seem like a good direction to head. Perhaps it is better than introducing more carbon into the atmosphere; it is easier to float than to stop breathing. There is a shortage of fresh water, maybe the additional water could be pumped into the aquifers to help replenish them.

It is apparent to many that a replacement for rare-earth batteries is needed. Hydrogen has potential to be part of that replacement. My suspicion is that the better answer will be found in the quantum realm; though we don't really have time to wait on that one. A problem as big as global warming does not have a simple, one size fits all, solution.
Modest_Engineer profile picture

@Fred the Frog yes, water capture from steam will be much easier than CO2 capture, and that water can then perhaps be used to recharge aquifers (or better yet, used in municipal supply etc. which should then not draw water from the aquifer in the first place)

but the amount of water generated by burning H2 will be really really small

the biggest draw the hydrogen in my mind is hydrogen based energy storage - it is much more efficient than batteries once electricity costs drop below $0.01/kwh at grid level

your comment on quantum realm - that solution is nuclear energy; other than the question of costs, it is better than nearly everything we have currently
Greg_Maryland profile picture

Interesting note.

Darren McCammon profile picture

CSI Compressco (CCLP) is up over 10% this morning on at least 4x average volume.

"Is Green Hydrogen Part Of The End Game For The Spartan Energy - CSI Compressco Deal?"

seekingalpha.com/...
s

It is clear hydrogen is most ideological fuel, and can get government grants for that reason, but the big question can it be profitable? Not that the people distributing grants care about profitability and professors in various universities receiving those grants of course brainwash government agencies about glowing future of the most politically correct fuel of the 21st. century.

s

@svetlanakhachaturyan1 I remember professors brainwashing the government agencies about trains floating in the air due to high temperature superconductors and raking huge grants in process.

manaman profile picture

I fuel for the future? I am guessing that Texas has had enough of wind power!!

Nearly half of the wind turbines in the state of Texas froze in recent winter weather, hurting state power supplies, according to state authorities.

The Austin American-Statesman reported Sunday:

Nearly half of Texas’ installed wind power generation capacity has been offline because of frozen wind turbines in West Texas, according to Texas grid operators.

Wind farms across the state generate up to a combined 25,100 megawatts of energy. But unusually moist winter conditions in West Texas brought on by the weekend’s freezing rain and historically low temperatures have iced many of those wind turbines to a halt.

As of Sunday morning, those iced turbines comprise 12,000 megawatts of Texas’ installed wind generation capacity, although those West Texas turbines don’t typically spin to their full generation capacity this time of year.

The problems in Texas echo difficulties with renewable energy that California experienced during a heat wave in September, when there were rolling blackouts because there was no wind, while overcast skies meant there was little solar energy.

www.breitbart.com/...

www.statesman.com/...
houtex profile picture

@manaman

ERCOT announced that over 30,000 MW of capacity has been forced off the system, the majority of that is thermal. Unfortunately this is a problem across the generating fleet. Stay warm everyone!
manaman profile picture

@houtex You are correct. Some offline electricity is gas fired. I will need to verify the percentage?

It is my understanding that the gas fired elec. generation is not the problem, but the source gas wells are not operating? Am I wrong?

I need to look into this. Regardless, it is my understanding that the wind turbines are 100% out.
Darren McCammon profile picture

One week ago on February 8th we warned Cash Flow Kingdom members, "Propane stocks are low, and its about to get cold. If it becomes an issue, what you will see is higher domestic propane prices and lower exports." We also included a specific related trade we were making.

Tumblebug profile picture

All this nonsense to solve a problem - man caused global warming - that doesn't exist.

Tumblebug profile picture

"those worried about climate change should be embracing natural gas/hydrogen pipelines instead of opposing them". Except that the real reason, for those in the know, is that they are opposed to capitalism. Global warming scare mongering is simply their tactical approach to shutting down commerce.

k

@Tumblebug Agree!

pdtor profile picture

@Tumblebug

Hope they did not need an EV ambulance, or EV fire truck during the storm. Ha could not even call for help, electricity and internet down.

Bottom line, do not mess with Mother Nature.
L

You state, Mr Weber: “The most practical way to transport it is via existing natural gas midstream infrastructure.”

Have you considered hydrogen embrittlement? Perhaps someone else mentioned this further on in the comment section but I stopped reading your article after that line.
S

"Hydrogen is the fuel of the future"...not convinced at all. Before moving ahead with ANY of your hypothesis, you have to make a better case. And not just that's it's "greener". It has to make sense from an energy, efficiency and economic standpoint. Very few of the "green energy" initiatives can meet those basic low-level hurdles.

Tumblebug profile picture

@Stillhunter888 - remember the mindset of those pushing "green". It does not need to make economic or efficiency sense as long as it is thought of as "green". The laws of physics do not apply to them, nor does common sense. Case in point - "The Green New Deal".

d

A solution in search of a problem. We have abundant nat gas at extremely low cost, and an incredible pipeline infrastructure to move it. CO2 Is not a problem! The warmunists are the problem!

natejackson1027 profile picture

Great I bought ceqp.b preferred shares. Didn't see that on your list. Oh well. I like your ju ju Makes sense. problem is, nothing in the U.S. makes sense anymore. Bearish

www.eia.gov/...

www.nature.com/...

"The biggest challenge to green hydrogen is that it will require vast amounts of renewable power. The IEA estimates that meeting today's hydrogen demand through water electrolysis would require 3,600 TWh a year, or more than the EU's entire annual electricity production2.Aug 27, 2020"

Laws of Thermodynamics. Every time energy is transformed, much is lost to the purpose.

Hydrogen economy will require nuclear power. As it is less 'energy-dense' than natural gas, it will not solve the intermittency problem we witness today. Critical natural das shortages around America.

We could have our homes cold and or cars unable to move.

www.energy.gov/...

"Also, in times of excess electricity production from wind farms, instead of curtailing the electricity as is commonly done, it is possible to use this excess electricity to produce hydrogen through electrolysis."

The real solution to all the above problems? DO NOT overbuild windmills in the first place.

This is a good example of our political captured therefore corrupted government agency.

The whole thought all its capital investment will be sitting around waiting for excess wind power? So we can be really stupid and dump it into the natural gas stream?

Hey how about we keep the nuclear plants and stop building increasingly useless windmills! What an idea!

Stop digging. But that is what Joe Dotard is good for!

If we really want to implode America? Arm this completely dysfunctional government with a carbon tax! THe WSJ Editorial Section just can not let it go!

GONE FISHING! Soon as it warms up!
D

Burning hydrogen to power an IC engine is not as nasty as burning gasoline or nat gas, but it's not clean. Burning hydrogen in nat gas power plants lowers the carbon footprint very little, and good luck concentrating hydrogen sulfide...it's 50x as toxic as what killed 25,000 Indians in Bhopal in 1984 that forced Union Carbide Linde into bankruptcy. The best way to power both transportation and the grid is next gen nuclear. Reliable, abundant, carbon free. That's why extra smart people- those who are blessed w some degree of pre-cognition, like Bill Gates, are investing in it. One of my favorites is LightBridge, (LTBR) grossly underfollowed developers/licensors of advanced nuclear fuel that is more efficient, safer- runs 1000degrees C cooler than existing fuel- and is not corruptible for weapon manufacture. I do agree that hydrogen is a better way to store energy than lithium, but it requires abundant, reliable, 24/7 electricity from the grid to produce it. I think if you want to play how hydrogen is contained and moved, at this point would leave midstream O&G pipelines out of it. The main player is in Norway- Hexagon Composites HXGCF adrs on Nasdaq. There is another container player in So Cal which may be negotiating to go public via SPAC, and I am not at liberty to discuss this one further at this time...

Joe4stocks profile picture

@Doug Scher

Lightbridge was my favorite back when its name was Thorium Power. The fuel rod packages designed by Radkovsky showed lots of promise [and using thorium to burn-up Pu and currently-stored "waste" is a very good idea] ... but, it takes many years of experiments and testing to find all the little things that could go wrong ... but then, it has now been 20-ish years...... hmmm...
Gilariverman profile picture

Hydrogen has a heating value of only 325 btu/cf, while methane has a heating value of 1,000 btu/cf. So any gas transmission pipeline that introduces 15% hydrogen into its system, automatically reduces its btu transport capacity by ~10% in addition to lots of commercial and marketing problems. Why would any pipeline want to do that, and why would the U.S. wish to lower its effective gas pipe capacity by 10%? By the way, where is all this hydrogen going to come from?

houtex profile picture

@Gilariverman

Would more ethane rejection help?
Gilariverman profile picture

Processors can reject ethane when it makes economic sense without the need for hydrogen. Also, some pipes have interchangeability (Wobbe) specs that make it more difficult to continuously change the pipe’s gas mixtures.

houtex profile picture

@Gilariverman

What I meant was your point about H2 resulting in underspec gas. Adding ethane would presumably bring the btu content back up? It isn’t that H2 additions allows for ethane rejection, just that adding h2 might require ethane rejection to get the heat content back up to spec. Obviously there would be a cost to that but as far as I can see none of this is necessarily based on economics anyway (so that’s beside the point).

Do you know if the Wobbe thing would be screwed by replacing C1 with some H2 and C2? Wikipedia tells me that H2 is less than C1 which is less than C2. I don’t know if it’s a weighted average calculation or what.
Smarty_Pants profile picture

So we use H2 for fuel to reduce CO2 emissions?

We do realize that producing one ton of H2 via steam reforming also produces 9 to 12 tons of CO2, right? We're Saaaaaaved, NOT.

Did any of the green revolution types ever take a chemistry or thermodynamics class?
Modest_Engineer profile picture

@Smarty_Pants I did; now what's your point

G

@Smarty_Pants Does not sound as if you read much past the first few lines.

Had you read past that, you would not be asking your unjustified snarky questions.

If you do, you will learn that author agrees with you.
PipelineDancer profile picture

@GreenPen1 - You'll note that they aren't talking about steam reforming. They are talking about the greener alternatives.

secorewb profile picture

The true believers (non-church type) are trying to kill off natural gas in California. Just ponder that for a second or two.

Darren McCammon profile picture

Bill Gates Energy Ventures, ENI Next, AP Ventures and Mitsubishi are backing C-Zero and their Natural Gas Pyrolysis technology. This technology transforms natural gas into Hydrogen and Carbon with the Hydrogen being used for power and the carbon either being used for other industrial purpose or disposed of in a landfill. Installing a C-Zero reactor at the point where existing natural-gas pipelines feed into power plants could be a far less capital-intensive solution than building or retrofitting a pipeline to carry hydrogen from far-off sources. Notice once again natural gas and natural gas midstream assets are not considered the problem, but part of the solution.

https://www.czero.energy/
k

@Darren McCammon

That was very helpful. Thank You!!
G

@Darren McCammon

There are advantages and disadvantages with the different approaches.

Article's approach takes advantages when wind and solar electric generation can be colocated at point of hydrogen production and injection into the pipeline by taking advantage of existing grounds and structures that are away from populated areas.

Furthermore, sourcing and using energy locally eliminates the cost and efficiency losses of over grid transportation likely required when H is produced at point of use.

Just pointing out that multiple solutions may be valid for optimization of results and it's not necessarily one size fits all.
PlumberMD profile picture

@Darren McCammon Very interesting. This technology would use existing NatGas pipes and Methane but convert the Methane to Hydrogen and Carbon at the end user ie Electricity Power Generator using the Hydrogen to power the turbines to create the electricity “Methane pyrolysis is very interesting to us, as clean and low CO2 hydrogen can be produced with limited consumption of energy and no water usage. Scaling-up this process will potentially be an enormous advantage to produce hydrogen for energy or commodity chemical applications,” said a spokesperson from Eni Next.

“MHI is committed to expanding the hydrogen value chain from production to utilization by developing technologies such as hydrogen gas turbines and by partnering with innovative technology and solution providers such as C-Zero,” said Yoshihiro Shiraiwa, President and CEO of MHI America. “We believe this technology will lead to more solutions that help us and our customers achieve our decarbonization goals.”

"Methane pyrolysis offers an efficient pathway to producing low-emission and low-cost hydrogen," said Kevin Eggers, AP Ventures. “The low-cost turquoise hydrogen produced by C-Zero will have a material impact in reducing global CO2 emissions.’’
okeedoke profile picture

Well your still going to need energy to charge all those EV autos and oil to pave those roads so you can drive those EV autos on. oil for all the plastic that your going to put in those EV autos. Oil is going to be used far into the future and the demand may not increase as much but demand will still increase.

c

@okeedoke I don't think anybody is seriously proposing zero oil. The problem for oil is that renewables could start taking market share and create price wars among the producers...

houtex profile picture

@cereba

Too few people realize that if the btu and combustion market goes away for oil and gas, every last producer’s business will be destroyed. Every one. Yes plastics, rubbers, chemicals are crucially important and irreplaceable, but today’s equity and debt would not survive in world where those are the only markets.

I don’t think we’re going that way, but because of a difference in premise (combustion use isn’t going away).
b

the sun's fuel is Hydrogen, the most abundant element in the universe!!

G

@breastdoc Maybe Musk will come up with ways to build a pipeline from the sun to earth and solve the energy problem for humanity.

;-)
r

@GreenPen1 "build a pipeline from the sun to earth"

Yes.. They can go at night so they won't get burned ;)
mookdoc profile picture

Ummm... One last time! Anybody here pay to heat their homes from electrictricity in the Upper Midwest or Northeast? Only an idiot like John Kerry would assume these pipes as stranded assets in 2030....Good Lord! Love the Nasty Gas...

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