Baker Botts walked away from this year’s Legal Business Awards with the trophy for energy/infrastructure team of the year, in recognition of the firm’s work advising Air Products and Chemicals on Saudi Arabia’s landmark NEOM Green Hydrogen Project. LB spoke with two of the lead partners on the deal to discuss getting it over the line, the importance of sector expertise, and what it means for the future of green hydrogen.
The headline figures around the NEOM Green Hydrogen Project are certainly impressive: $8.4bn in financing. A 30-year offtake agreement. Up to 600 tonnes of carbon-free hydrogen per day by the end of 2026, and 5m tonnes of CO2 emissions avoided per year.
But size alone does not make the project an award winner. Even more significant is its status as a market leader – the first green hydrogen project of its scale to reach financial close.
Hydrogen is crucial to energy transition programmes around the world. The US Inflation Reduction Act 2022 provides a tax credit of $3 per kilogram for green hydrogen production over ten years, with total ten-year subsidy costs projected at $13.2bn. This April the EU awarded a total of €720m in its first auction to allocate renewable hydrogen subsidies, while in October Britain’s Labour government pledged up to £21.7bn of funding over 25 years for carbon capture, utilisation and storage (CCUS) and hydrogen.
With all this attention, it is not surprising that investors were keen to get on board with NGHP, part of the Kingdom of Saudi Arabia’s ambitious Vision 2030 programme. ‘Everyone was keen to make it work’, says Stuart Jordan, global head of construction at Baker Botts and the lead partner on the deal. ‘It’s the poster child of the energy transition. It’s the only project of its kind and scale that has got anywhere in terms of funding and is now well into construction. Everybody wanted to be on that bus.’
However, until NGHP, the details of how these projects would be financed were murky. To deliver at scale, a green hydrogen project needs to be able to produce hydrogen for the export market. But transporting hydrogen is notoriously thorny: a gas at room temperature, it takes up a significant amount of space, and both compression and liquefaction are difficult and costly. Enter ammonia: hydrogen can be combined with one nitrogen atom for every three hydrogen atoms into ammonia, which is far easier and more cost-effective to transport.
The core question for any large green hydrogen project, then, is a simple one: who will buy the ammonia that the project produces? It would be a bold and foolhardy investor who pumped billions of dollars into a project that produced a product that has as yet no existing market. ‘The molecules need to be sold’, says Baker Botts projects partner Alex Kerr. ‘Finding a buyer that is willing to commit to long-term offtake is causing a traffic jam when it comes to getting green hydrogen and green ammonia export projects off the ground.’
On NGHP, Baker Botts, led by Kerr, devised a novel offtake agreement that saw Air Products, one of the three partners in the equal joint venture backing the project, agree to purchase all the green ammonia produced at the facility for 30 years.
The lack of an existing market for green ammonia was a key hurdle. Kerr explains: ‘‘Green hydrogen will be incredibly important in the future. But no one knows how much you should pay for it. If you look at natural gas, or other commodities, there is an established market with lots of publicly available information market prices and price forecasts. It is easier for buyers to form a view, and commit to long-term offtake. But this is not where we are with green hydrogen and green ammonia, because the market does not yet exist. Air Products overcame that challenge, and committed to long-term offtake. They had the confidence to come out and be a leader in the market. This unlocked the project, and we were able to start moving forward into the other issues that are, still difficult, yes, but solvable.’
Baker Botts argues that it was the firm’s experience in liquefied natural gas (LNG) that enabled it to work with Air Products to solve the offtake problem – and that positions it to do more green hydrogen work in the future as the market grows. ‘This is a renewable project’, says Kerr, ‘so you might think that the best advisor would be a firm that is best known for solar and wind projects. Whilst we work on such projects, and this project certainly involves a lot of solar and wind, it is not what we’re best known for. What we’re best known for is LNG. Our client showed real vision to say, “The hydrogen is going to be converted into liquid form, loaded onto cargo ships, and shipped around the world – it’s going to look a lot like LNG.” The value chain is very similar. And the challenges for the lenders are going to be very similar to the early days of LNG.’
With this key issue resolved, Baker Botts was able to turn to other aspects of the project. This included negotiating an engineering, procurement, and construction (EPC) contract on behalf of Air Products as primary EPC contractor. ‘What was unusual about it was the novelty of the technology, or rather of the combination of technologies’, says Jordan. ‘It involved pushing two completely different worlds into one single fixed price, fixed schedule EPC contract. The way we build renewables is really simple, no matter how big it is. You look at the nameplate capacity, add it up, and make sure each bit of it reaches its minimum performance capacity, and if it doesn’t, you can reject it and get your money back. The contracting model is simple and quite brutal. Then on the other side we have a process engineering approach, which we would adopt on LNG or petrochemicals, where the teams spend a lot of time working out performance guarantees and the contracts allow for extensive optimization of performance.
‘It would have been simpler to procure these two elements in two separate contracts, but the schedule and price risk of there being two contracts with an interface between them, would not have been banked. So it really required one party to take the whole thing on as one piece.’
He continues: ‘As with any first-of-a-kind project, there were obvious considerations with IP, particularly around the electrolysers and the processing and storing of the ammonia. We were dealing with some original equipment manufacturers (OEMs) whose approach was partly like academic tech developers, and it was a challenge bringing them into the role of EPC subcontractors in a big funded project. They came along with heavily protected proprietary IP, and we also had to find a viable commercial allocation of the foreground IP that would be created from the combination of those proprietary technologies. One goal is learning how to work the systems control and data analysis in order to optimize plant performance. Learning this kind of a thing is an obvious motivation for participants in the project, and that’s going to be an incentive for participants on other green fuels projects in future.’
At a time when many major law firms are pushing hard to win energy transition work, the question of how important sector expertise is looms large. As energy and tech overlap all the more, some argue that, in the words of one partner at a major global firm, ‘knowing how to dig a hole in the ground in Australia isn’t particularly useful’. With its work on NGHP, Baker Botts aims to prove the opposite – that deep experience in conventional power really does give it an edge over the competition.
Jordan argues that ‘the energy transition isn’t being led primarily by green specialists. The investment needed for green fuels and the knowledge of how to solve problems, is coming from people who have spent the last 30 or 40 years in hydrocarbons and in conventional power.’
‘The energy transition isn’t being led by green specialists. The investment and knowledge is coming from people who have spent the last 30 to 40 years in conventional power.’
‘We saw the skills needed to be a market leader in this space’, says Kerr. ‘It’s all well and good to write articles on green hydrogen and the energy transition, but that can only get you so far. The real question is, has a major client committed to you, and trusted you with a really big project? For us, the answer is yes. NEOM was the first stone to start rolling, and now plenty of other clients have followed.’
(The Baker Botts team advising Air Products was led by Stuart Jordan from London, with involvement from partners Alex Kerr, Mark Rowley, and Neil Coulson in London, and Shadi Haroon in Riyadh. Jordan has since relocated to Dubai.)
