Wood Mackenzie Says Middle East Energy Disruptions Are Renewing Interest In Low-Carbon Hydrogen

The global conversation around low-carbon hydrogen is undergoing a significant shift. Just a few years ago, between 2021 and 2023, hydrogen was widely promoted as a versatile solution capable of decarbonizing everything from power generation and transportation to industrial processes and home heating.

However, as the industry has matured, many experts have come to view hydrogen as a technology that can serve multiple purposes but often faces competition from alternatives that are either cheaper, more efficient, or both.Recent geopolitical developments, particularly the conflict in the Middle East, have once again brought hydrogen into the spotlight.

While much of the earlier enthusiasm focused on hydrogen’s potential to reduce greenhouse gas emissions, the current discussion is increasingly centered on energy security. Concerns about the vulnerability of global energy supply chains have highlighted the risks associated with dependence on traditional hydrocarbon exports, especially from the Gulf region.

Before the conflict disrupted regional trade routes, the Strait of Hormuz served as a critical artery for global energy and commodity markets. Approximately 20% of the world’s liquefied natural gas (LNG), 25% of internationally traded ammonia, and 37% of global urea exports moved through the strait. Disruptions to shipping traffic led to sharp increases in LNG, ammonia, and fertilizer prices worldwide.

Although some prices have eased from their peaks, many remain significantly higher than pre-conflict levels, underscoring the fragility of existing energy supply chains.This environment has renewed interest in hydrogen and its derivatives as potential alternatives to conventional fossil fuels. Hydrogen can be used directly as an energy source or converted into products such as ammonia and methanol, which are widely used as industrial feedstocks and transportation fuels.

In sectors such as refining and fertilizer production, where hydrogen is already an essential input, access to competitively priced low-carbon hydrogen could reduce dependence on natural gas while improving supply security.The renewed focus on energy resilience is influencing government strategies around the world. In the United States, despite the Trump administration’s opposition to climate-focused energy policies, support continues for projects that strengthen domestic energy and industrial competitiveness.

One example is CF Industries’ Blue Point facility in Louisiana, which is expected to become the world’s largest low-carbon ammonia project. The facility will produce blue ammonia using natural gas while capturing and storing associated carbon emissions. The project recently received expedited permitting support from the federal government, reflecting broader interest in strengthening domestic energy infrastructure.

China is also accelerating its hydrogen ambitions. The country’s latest Five-Year Plan identifies hydrogen as one of several strategic technologies expected to play a major role in future economic and energy development. China currently accounts for more than half of the world’s green hydrogen production capacity that has reached final investment decision status.

Among its flagship projects is the Envision Chifeng facility in Inner Mongolia, which is considered the world’s largest and lowest-cost green hydrogen and ammonia development.Other major economies continue to advance hydrogen projects despite ongoing economic and technical challenges. India and the European Union remain committed to building domestic hydrogen industries and securing future supply chains.

Earlier this year, Indian green hydrogen developer AM Green and European energy company Uniper signed what is reported to be the world’s largest green ammonia offtake agreement, highlighting growing commercial interest in low-carbon fuels.The European Union has also strengthened its policy support through its Renewable Energy Directive III (RED III), which includes ambitious targets for green hydrogen adoption across industrial sectors.

These measures are expected to play a significant role in shaping Europe’s energy transition and reducing dependence on imported fossil fuels.Despite growing momentum, cost remains the biggest challenge facing the hydrogen sector. Producing low-carbon hydrogen and its derivatives remains significantly more expensive than conventional fossil fuel-based alternatives in most markets. As a result, policymakers and industry leaders are increasingly weighing whether the additional cost can be justified as a form of insurance against future energy supply disruptions.

According to analysts at Wood Mackenzie, recent market conditions have begun to alter some of these calculations. Rising natural gas prices, driven in part by geopolitical instability, have significantly increased the cost of producing conventional grey ammonia. At current European gas prices, grey ammonia production costs are estimated to be around $800 per ton.By comparison, Wood Mackenzie estimates that low-carbon ammonia delivered to Europe currently costs between $700 and $1,100 per ton.

This means that some of the most competitive low-carbon projects are beginning to approach cost parity with traditional ammonia production under current market conditions.However, analysts caution that this competitiveness may be temporary. Many low-carbon hydrogen and ammonia projects are still under development and are not yet capable of supplying significant volumes to the market.

Furthermore, if geopolitical tensions ease and natural gas exports through the Strait of Hormuz return to normal levels, European gas prices could decline substantially, restoring the cost advantage of conventional ammonia production.Even so, the recent price volatility demonstrates the potential value of diversified energy supply chains.

Low-carbon hydrogen could help strengthen Europe’s energy security by reducing reliance on imported hydrocarbons and creating additional sources of fuel and industrial feedstocks.Long-term market dynamics will depend on several factors, including natural gas prices, carbon pricing policies, technological improvements, and the emergence of global hydrogen trade networks.

China’s growing leadership in low-cost green hydrogen production could also present strategic questions for Europe and other regions seeking to reduce dependence on imported fossil fuels without simply replacing one form of energy dependency with another.Wood Mackenzie expects the cost of low-carbon hydrogen to decline over time as technologies mature and production scales up.

However, the research firm believes hydrogen will continue to rely heavily on government support and incentives for at least the next 15 to 20 years before it can consistently compete with conventional hydrocarbons on an unsubsidized basis.Meanwhile, uncertainty in the Middle East continues to influence global energy markets.

Tensions between Israel and Iran escalated again over the weekend, raising concerns about the possibility of prolonged disruptions to regional energy exports and shipping routes. Although both sides have expressed openness to a potential peace agreement, the situation remains fluid, and maritime traffic through the Strait of Hormuz remains well below normal levels.

Data from Wood Mackenzie indicates that vessel movements through the strait have increased modestly in recent days but remain far below pre-conflict averages. Before the conflict, approximately 170 ships typically transited the waterway each day. Recent activity has averaged closer to 30 vessels daily, reflecting continued caution among shipping operators.

The ongoing instability serves as a reminder of the strategic importance of energy diversification. While low-carbon hydrogen may not yet be the lowest-cost option in many markets, recent events have strengthened the argument that its value extends beyond emissions reduction and increasingly includes energy security, supply resilience, and long-term protection against geopolitical disruptions.