Methane emissions are one of the more challenging carbon equivalent problems in part because it is lots of small emitters, associated with many thousands of wells and many thousands of miles of pipelines, rather than a large source of CO2 that can be eliminated with a specific investment. The API carbon tax, proposed last week, has a condition in the proposal that would prevent any other emission-based legislation for many years to evaluate the effect of the tax. This will not drive lower methane emissions unless it is a broad carbon “equivalent tax”, which could potentially drive a very punitive tax on methane and would get an almost instant response from those that own the wells and the pipes. Some of the abatement solutions are easier than they first appear and all pipeline operators should look at the technology offered by Pipeotech, for example. Wellhead emissions are more problematic but not beyond the engineering skills that exist within the major E&P companies. The harder problem is what to do with emissions from abandoned wells – here the tax idea would not work as there is no one to pay the tax and a fairly complex financial structure would be needed to encourage someone to take on the role of cleaning up these properties. That said, all these pathways will need to be explored to get to the targets outlined below.
The CCS chart below is one that we have shown before and we make the same observations again as little has changed on the “action” side. The number of facilities under discussion, advanced or otherwise, continues to rise – see the Denbury announcement below, for instance - but very little is moving to the construction phase. While in the US this is in part a permitting issue, with the permit process taking several years, once you have a site plan, we get the sense that everyone is waiting for a more supportive incentive program – either a large CO2 penalty (tax) or an increased incentive – such as increasing the 45Q value. MOUs are being signed with landowners – as is the case with Denbury – and potential offtake partners, but very little cash is going out of the door for any of the US projects yet. Given the EIA analysis above, it would seem critical that something is done to move these projects from planning to action fairly quickly – if the US is going to need CCS at scale in 15-20 years, we need to start down that learning curve now. For more see the energy section of today's daily report.
As we have mentioned before, we see a couple of major challenges with the CO2 pipelines proposed for the mid-West, one of which is summarized in the Exhibit below. The first issue is pipeline right-of-ways, as there are already activists determined to oppose the pipelines, and opposition to pipelines has been a core them of the last 10 years. The second issue is cost. Carbon abatement is a cost for all looking for solutions and even where incentives exist, such as the 45Q program or the LCFS fuels program, the challenge will still be creating a path with the lowest. Compression and pumping costs are high for CO2, especially if the pipeline wants a pressure that will allow for direct injection into a series of wells. Lower pressure transportation by pipe is inefficient and raises the capital cost of the pipeline – so it becomes a trade-off – CAPEX vs OPEX. $4.5 billion of investment – as suggested by Summit – is $375 per annual ton of carbon dioxide sequestered - $37per ton assuming 10-year straight-line payback – twice that if you want a 10% return. This is before a dollar of OPEX and pipeline costs could easily exceed another $30+ per ton, with separation and purification of the CO2 stream also not free. Unless the ethanol producers are paying Summit and Navigator to take the CO2, the math becomes very challenging. See today's daily report and our weekly ESG and Climate report for more.
The carbon capture plans lacking a place to put the CO2, suggested in the two connected stories linked here (link 1, link 2), echo something that we have been highlighting for a while. There have been several press releases with respect to CCS – partnerships – plans to accompany new investments – gathering schemes for the ethanol industry, etc. but none have any specificity around where they will put the CO2. The Houston team, discussed in a recent report is talking about offshore Texas, and given both ExxonMobil and Chevron in the partnership, we do not doubt that there is a plan, but in general, the permit activity at the EPA is, we understand, quite limited today. To apply for a class 6 permit, applicants need to have a detailed analysis of the sub-surface that they plan to target, and once you have identified a location, there are likely at least 18 months of work to get into shape to submit the permit. Some of the oil majors may be able to move faster on acreage that they already have seismic models for, but it is a long process – we wrote about the need for 45Q to change in both value and duration in our recent ESG and Climate Piece.
The tax credits suggested for 45Q in the budget reconciliation plan – see Exhibit below – would pay for roughly 18 million tons of CO2 sequestered or used in EOR over the life of the budget, assuming a credit value of $50 per ton of carbon. While this may seem huge in the context of the current levels of CCS in the US, the country had around 2.5 billion tons of emissions in 2019 that could be addressed with CCS (power and industrials), and if we assume 10% of that needs to be dealt with through CCS, the 45Q provisions in the budget reconciliation would cover less than 8% of the volume for one year and the percentage will be even lower if the “CATCH” act is successful in driving the 45Q value to $85 per ton of CO2. So the numbers are either inadequate, or the government is assuming that the levels of CCS in the US will be much lower than the potential – note that the ExxonMobil proposal for a hub in and around Texas talked about the maximum size for the one project being as much as 100 million tons per annum which should equate to $5 billion of tax credits – per annum. See our ESG & Climate report for much more on carbon markets today.