The current state of carbon capture, utilization and storage (CCUS) is dominated by the supermajors and large midstream companies who can afford to absorb risks in this emerging market. CCUS project developers are forging ahead without the typical commitments between an oil and gas producer and midstream pipeline developer. And, as we argued in our last blog on CCUS, the economics simply aren’t good. CCUS as it stands today could never turn a profit.
The U.S. 45Q tax credit, while generous, only covers part of the total cost to build and operate CCUS from source to sink. Canada’s Investment Tax Credit (ITC) similarly falls short of full coverage. Some might say it’s a bet, but with the unstoppable forces of net zero policies, Wall Street ESG sentiment and an upgrade to 45Q from $50 to $85 per ton of CO2, it’s likely a safe bet.
Pairing emissions with subsurface storage estimates and operating pipeline location provides a solid view of the opportunity landscape and a starting point for project developers and investors to focus their efforts. Now, let’s review some of the trends we are seeing in planned projects to help frame your investment decisions.
Tracking CCUS opportunities
So, just where are the centers of gravity for CCUS projects? If we look at the raft of announced projects and total planned CO2 capture capacity, Alberta, Canada, stands out as the most aggressive at 65% of annual emissions. Government award rounds for right of way are driving this surge in Alberta, compared to the U.S., where private landowners hold land rights.
Canada and Texas combined are the drivers for North American CCUS growth, especially from Gulf Coast hubs, transportation and storage clusters that serve emitters across many sectors and seek to minimize costs through large economies of scale.
Going forward, we can assess CCUS opportunities on multiple dimensions, including the capture capacity as a ratio of annual emissions (a good indicator of early adoption) and emission-weighted capture breakeven costs. Here, we can clearly see that Louisiana is the earliest adopter in the Lower 48, benefiting from low-cost capture capacity and proximity to viable storage in the Frio Formation.
It’s also important to analyze where the adoption rate is driven by sectors fed by multiple subsectors. These include petroleum and natural gas systems and power generation. The latter has seen accelerated CCUS growth due to U.S. Department of Energy initiatives, despite the uneconomic capture costs and competition from renewable energy. We are seeing hub-style buildout of transportation and storage infrastructure bringing in CO2 from multiple subsectors to support these areas of CCUS growth.
Many CCUS project developers have adopted a “build it and they will come” mindset, proceeding with projects without upfront commitments from emitters. In this light, carbon capture can be seen as carrying similar risks as water management, where it’s a necessary cost for emitters and a continuous revenue stream for transporters.
A breakdown of CCUS project announcements as of the end of 2021 shows that hub-style projects — those that source multiple sectors — dominate the mix, followed by onshore production, coal-fired power generation and ethanol production. And while the latter has one of the lowest capture costs, it has some of the highest transportation costs given that projects must cover multiple states due to the distribution of ethanol facilities.
Because of climate change optics and interest by investors in ESG, CCUS is often synonymous with disposal of CO2. But for years the petroleum industry has utilized CO2 for enhanced oil recovery (EOR), effectively creating a loop of reusage as CO2 is injected into reservoirs and finds its way back to the wellhead. However, the focus in CCUS projects is shifting from EOR to pure carbon capture and sequestration along with climate change urgency and Wall Street sentiment.
North American policy makers have disparate views of EOR. CO2 EOR has fallen out of favor in Canada and consequently has been omitted from the ITC, but is still covered in the U.S. 45Q.
While a few pure play CCUS players have emerged, 80% of CCUS projects are led by upstream and midstream companies, including supermajors and large operators who can afford to be first movers and absorb more of the policy and technical risks. ExxonMobil and its partners in a Houston carbon capture and sequestration hub lead current project development with the Oil Sands Pathway alliance. This partnership is expected to cut regional emissions by 60%, making oil sands carbon intensity competitive with the Lower 48. And smaller CCUS project developers targeting less than 5 million tons of additional CO2 capacity annually are again led by oil and gas operators who are partnering with natural gas processors, LNG and power generators.
What does CCUS mean for investors?
CCUS is still in its infancy with many potential market accelerators and blockers to growth. Despite advancements in policy and tax incentives, the current policy situation limits the pace of growth given breakeven, transportation and storage costs, making it difficult to justify investment in this emerging market.
Boosting the 45Q tax credit from $50 to $85 per ton of CO2 is likely to catalyze a wave of new CCUS projects, especially in the lowest cost-to-capture sectors. Not all CO2 sequestration reservoirs are created equal. Making or breaking CCUS as a long-term viable industry is the quality of rock in close proximity to CO2 point sources. Large-scale CCUS projects are underway and set to come online by mid-decade, driven by permanent sequestration and hub-style projects that enable developers to capture economy of scale.
Bolstered by an imperative to achieve net zero, CCUS will play an increasingly important role in attaining climate change goals. As an industry, it’s not there yet in terms of profitability. Like a Silicon Valley tech startup with a business plan that anticipates losing money as the business gets off the ground, CCUS project developers understand the economics of capturing, transporting and storing CO2 with the assumption that policy and technology to reduce costs further will finally catchup.
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