The original $5bn budget for the landmark 2.2GW Neom green hydrogen project has increased by 70% to $8.5bn, according to a financial update from co-developer Air Products.

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Inflation, spare parts, upfront fees for land and $1bn of interest on loans have all contributed to the budget increase, said the US industrial gases company, which is developing the project in the desert of northwest Saudi Arabia with partners ACWA Power (a local renewables developer) and Neom.

The latter is the state-owned company developing the hugely ambitious city of the same name, which will largely consist of a 170km-long glass-fronted megastructure that would be home to one million people.

While the green hydrogen project — which would use 4GW of wind, solar and battery storage to produce 1.2 million tonnes of green ammonia per year — is seeing “great progress”, with construction under way, its total capital needs have risen from the original $5bn budget announced in 2020 to a whopping $8.5bn.

Breaking down the $3.5bn price hike, Air Products attributes $500m to inflation, $1.8bn to “project financing costs, upfront fees, interest during construction, additional joint venture costs, spares, land, etc”, and $1.2bn to “additional scope to make project more self-sufficient and lower operating costs”. This means services that the project partners now want to provide themselves, such as transmission lines and other infrastructure costs, according to an Air Products’ call with analysts.

“This increases the capital cost, but it decreases the operating cost, and we decided that was a better trade-off,” said Air Products CEO Seifi Ghasem.

“But the key point was to make sure that the project is not dependent on other people... so that we have everything that we need for the project to be operated.”

He added: “Now, the other item that I'm sure will be a subject of questions from people is the $1.8bn for project financing costs. That is a big number”.

Ghasemi attributed $1bn to interest alone, pointing to the new Neom H2 project strategy of borrowing most of the money through project financing, thus reducing the cash contributions of the partners.

He added that “a few hundred million dollars” are spent on paying upfront for land rights instead of leasing for 50 years, and unspecified costs to spare parts: “Usually you buy the spares as you go forward, we decided to buy all the sales upfront and finance it”.

“That is the beauty of finance, that you can... have the flexibility of bringing forward a lot of your costs that will save your operating costs in the future.”

The price of the ammonia from the Neom project has remained the same, he stated during questions from analysts, adding that the ammonia will be sold at the price agreed in 2020.

The company’s chief operating officer, Samir Serhan said that the Neom H2 project might be able to increase production compared to its previous estimates of 1.2 million tonnes ammonia per year.

The article was updated, correcting the estimated ammonia production to 1.2 million tonnes from 1.2 billion tonnes.