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.
In our ESG and Climate piece yesterday we briefly discussed the mid-west carbon capture projects, questioning their economic viability. Two of the most expensive components of any CCS project are pipelines and compression costs and we cannot see how a long network of pipe in the mid-west to pick up what are essentially small volumes can work economically. These projects are reliant on very high LCFS-like credits, and as we showed in last week’s report, LCFS credits have fallen this year and could fall further. The pipeline right of way issue is another major hurdle and we have seen growing resistance to pipelines of any sort over the last few years. Those who oppose CCS in principle could cripple these mid-west plans simply by co-opting enough land-owners on the path of the proposed pipelines and refusing access. We are supporters of CCS, but have done substantial work on economics and show that the process only begins to make economic sense if the sequestration is close to the emissions. Relying on possible artificially high carbon prices to justify the projects will only lead to pain, assuming the pipeline right of ways can be obtained.
The MLP headline linked covers a subject that we have addressed in prior work as it looks at the ESG related opportunities for pipelines, not just because pipelines are the lowest cost and lowest carbon footprint means of moving large scale existing gases and liquids around the US, but because of their future potential role moving CO2 and hydrogen. Because the opportunities to grow earnings in the cleaner fuels space will likely be a function of both opportunity (whether you already have some infrastructure that can be repurposed and whether you are in the right locations) and strategy (whether you seize the opportunities as they arise and think a little outside the box), how to play the opportunity from a stock perspective is more challenging as there will be winners and losers. We suggest one of two paths – either buy a basket of the pipeline names or focus on the idea of a positive sector re-rating, in which case you want to own the company with the highest equity leverage to any EV/EBITDA re-rating, which among the large and liquid names would be Energy Transfer – Exhibit below. For more on this see today's ESG report.