We are seeing a flood of CCUS announcements in the US in 2022, but they look like “gathering” exercises at this stage rather than projects that are ready for FID. Companies are chasing potential pore space and, like Talos, leasing onshore and offshore (mainly offshore) acreage, where they believe opportunities exist to sequester CO2. These announcements sometimes include firm commitments from companies that have CO2 surpluses and sometimes are more speculative. At this stage, it seems like a “land grab” and “customer grab”. There is wide agreement that the incentive structure in the US – centered around the 45Q tax credit scheme – is not enough to drive much real investment, unless it can be stacked with other credits like the LCFS structure, which only applies to fuels in California today. We see the land grab as relatively low-cost and low-risk positioning in the hope that incentives or economics change. There are some instances where investments will go ahead, and these will focus on processes that have a reasonably low cost of carbon capture – fermentation, urea, natural gas clean-up for LNG, and a handful of other processes. The LSB Industries announcement for Arkansas, highlighted this week, is likely an example of where the economics work even if LSB cannot get much of a premium for the low-carbon urea.
Source: Denbury – 1Q22 Earnings Release Presentation, April 2022
Denbury is in a stronger position than most because of its existing pipeline network and what we understand to be significant spare capacity on the network. So far Denbury can use the CO2 for EOR, but as yet does not have a permit filed for CCS, which it would need to take much more volume on the system as there is a limit to how much can be used for EOR. Denbury has announced several CCS partnerships and opportunities but these are again waiting for more favorable economics in our view. While the API proposed carbon tax has many shortfalls (see our commentary yesterday on methane emissions), if it is passed as suggested and is stackable with 45Q, we would expect a rush to bring many of these CCS projects to life – possibly overwhelming the EPA evaluation and approval capacity.
Source: Berry Global – 1Q22 Earnings Results Presentation, April 2022
Separately, we question the feasibility of what Berry Global is attempting, summarized in Exhibit 10, and readers of our ESG and Climate work will know that we struggle with the practical limits of both recycling and renewable polymers with a 2030 target. Even if all the stars align for renewables in terms of customer acceptance and financing, we will still have limited volumes available by 2030, and if we push too hard, against a backdrop of a globally stagnant agriculture policy, we will hit ingredient limits and higher input prices. On recycling, we are beginning to see some of the needed redesigns for recycling, but not yet enough, and the rate of change needs to increase. Berry itself needs to be pushing that with its customers as well as its suppliers to ensure that as much of what goes out the door as possible can come back in.
