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Polish energy company PKN Orlen unveils $2 billion plan for hydrogen production

07 March 2022 Kevin Adler

Polish's largest refiner and petrochemicals producer PKN Orlen announced that it will invest 7.4 billion zloty ($1.9 billion) by 2030 in a series of projects to develop and distribute low- and zero-carbon hydrogen fuels. It says it will be able to produce 60,000 metric tons (mt)/year of green hydrogen and 120,000 mt/year of blue hydrogen (with carbon capture) by 2030.

The green hydrogen will be manufactured with the support of 540 MW of renewable energy that will be installed, complementing the company's plan to ramp up its renewable energy portfolio to 2.5 GW by 2030 from 0.5 GW today. By 2030, it also plans to have about 100 hydrogen fueling stations in Poland, primarily for rail and bus operators and trucking.

"We already have strong capabilities in developing hydrogen technologies, backed by our vast experience in the [petrochemicals] field. And the implementation of our hydrogen strategy will position us as a partner of choice in building a hydrogen economy in Central and Eastern Europe," Orlen President Daniel Obajtek said in a press statement.

In its most recent quarter, which ended on 31 December, Orlen said that 60% of its electricity output of 3.2 TWh was from zero- and low-carbon sources, including natural gas. It serves 3 million power customers.

In addition to its renewable power capacity, Orlen owns 1.5 GW of gas-fired power capacity, along with six refineries and petrochemicals operations. It has small oil and gas operations in Poland and Canada, producing about 18,000 barrels/day (b/d) of oil-equivalent.

Orlen2030

Orlen announced a net-zero carbon plan in September 2020, aiming by 2030 to reduce CO2 emissions from existing refining and petrochemical assets by 20% and by 33% from its power generation business. Also, it set a net-zero target for its Scope 1 and 2 emissions (from direct operations and electricity purchases) by 2050.

The company said it will spend $6 billion for about 100 projects this decade aimed at emissions reductions. Hydrogen investments alone could reduce CO2 emissions by 1.6 million mt/year when full capacity is reached, it said.

Orlen opened its first hydrogen plant in 2021 in Trzebinia, using natural gas as its feedstock. The emissions are neither captured nor offset, so this hydrogen output is considered a "gray" product. Construction is underway for its second carbon operation in Wloclawek, which it says will produce 19,000 mt/year of green hydrogen for industrial and transportation uses.

To distribute hydrogen for trucks, Orlen plans to build a network of refueling stations in Poland, the Czech Republic, and Slovakia.

Merger soon to close

Given the company's scale in Poland's energy industry, Orlen's impact on the country's ability to meet environmental goals is significant. This can be seen in the support by the government for a merger of Orlen with the LOTOS Group, the other refinery operator in Poland.

In January, Orlen announced it has come to terms with EU regulators about divestitures needed for approval of the merger, and it expects to complete the deal later this year.

"The combined entity will be based on a fully integrated value chain, from exploration and production, through refining, petrochemicals and modern power and heat generation, to retail," Orlen said last year, while also pledging: "The group will invest in green energy, petrochemicals, hydrogen, and further development of the retail business."

The merger will bring to Orlen more than 200,000 b/d of Saudi crude that is contracted by LOTOS, and which it said "will cover up to 45% of total oil demand from the entire Orlen Group, in Poland, Lithuania, and the Czech Republic."

The consolidation of refining assets will enable the company to invest in reducing emissions from the sector, said government officials. "Their integration would improve operational efficiency boosting financial performance and would give the combined group more capacity to invest in new promising areas," said Jacek Sasin, Poland deputy prime minister, minister of state assets, in a prepared statement.

Those actions indicate Poland will continue to rely significantly on fossil fuels for decades, said Bharti Agarwal, a research analyst at S&P Global Commodity Insights.

"Upstream oil and refining are carbon intensive," Agarwal said. "PKN [Orlen] is not shutting them down. It is improving efficiency and energy intensity in order to reach its Scope 1 and 2 goals."

The Orlen2030 plan identifies strategic priorities such as building a portfolio of gas production assets; expanding gas-fired power; and improving refinery efficiency. "These will be very significant to shaping the entire [energy] landscape in Poland," Agarwal said.

The company also has stated that it will rely on carbon capture and storage to reduce emissions from the use of oil and gas, including for production of hydrogen.

"PKN Orlen is focusing on increasing synergies in its existing businesses and strengthening its competitive position," Agarwal said. This includes expanding its retail fuel sales in Poland and Hungary (where the merger brings 144 retail outlets), and a commitment to raise its biofuels production from a current 300,000 mt/year to 2 million mt/year by 2030.

Wind power

To expand its renewables portfolio to 2.5 GW by 2030, Orlen has submitted applications for seven new licenses for offshore wind farms in the Baltic Sea. The projects could support 7 GW of new capacity, it said on 22 February.

So far, 2.2 GW of offshore wind capacity has been installed in the Baltic Sea by other Polish developers, but the Polish government sees much more potential, due to strong wind conditions and the relative ease of installations in shallow water. The Poland Energy Policy by 2040 (PEP2040), which was approved in February 2021, sets a target of 9-11 GW of offshore wind capacity by 2040 in Polish waters, according Orlen.

The Baltic Power Management Board is coordinating all offshore wind projects in the Baltic, and it held a conference in December about bidding for procurement of turbines, foundations, and other equipment, as well as installation. It projects that as much as 93 GW of offshore wind could be installed in the Baltic by 2050.

The need for offshore wind for Orlen and other Polish energy companies comes from PEP2040's aim to wean Poland from its heavy dependence on coal-fired power. Coal accounted for 72% of the generation mix in 2020, but this is targeted to fall to 56% in 2030; 22% in 2040; and no coal operations by 2049, said international law firm Denton's in a report.

To replace that power, the government expects multiple sources to fill the gap. In addition to 9-11 GW of offshore wind, its targets are 7 GW of solar PV, 10 GW of onshore wind, and nuclear of 6-9 GW of capacity by 2040. The country's first nuclear power plant is expected to be operating by 2033.

As a member of the EU, Poland is bound by the EU's goal of a 55% reduction in GHG emissions by 2030 from its 1990 baseline. This will require not only shifting away from coal power, but also energy conservation measures, a transition to electric vehicles, and other investments, according to PEP2040.

The European Investment Bank has chipped in with support in December through a loan of €180 million ($196 million) in December to Orlen for three projects related to research in biofuels and biochemicals and the scaling up of R&D projects at the company's new R&D Centre in Plock.

Posted 07 March 2022 by Kevin Adler, Chief Editor



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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