Carbon Capture and Tax Breaks, Moving Closer to Long-Term Storage
Selling reservoirs’ empty pore space may become a new, big business.
When Joe Quoyeser, the interim CEO of the Permanent University Fund (PUF), said the fund’s 2.2 million acres under management offered a “vast amount of empty pore space,” he wasn’t joking.
He was addressing an audience of more than 100 people who had come to Midland, Texas, in early December to learn about what could become the big business of injecting carbon dioxide into underground storage.
They were attending the CO2 Conference, which was started 20 years ago to share ideas among the local fraternity of oil people using carbon dioxide to revive aging reservoirs. It has since become a forum for the wide range of experts working on carbon capture, utilization, and storage (CCUS).
The reviving of aging reservoirs covers those doing CO2 EOR, a process that leaves a lot of the gas in the ground. If carbon capture significantly expanded the supply of carbon dioxide, another topic highlight would be carbon sequestration—capturing the gas and long-term storage of it in deep formations.
The opening day presentations highlighted that new wave, with presentations on CCS growth, regulatory changes, legal questions, and the rich tax advantages encouraging CO2 capture, which may soon be increased again.
While the conservative voting patterns in the Midland region suggest there is a lot of skepticism about the need to phase out oil to reduce the risk of climate change, the conference showed they are eager to embrace the revenue-creating possibilities in CCUS.
“A hell of a lot of money will hit this area and that was just the first trillion,” said Mike Moore, one of the founders of the conference, who follows what is going on in Washington, DC, as the managing director of East West Strategic Advisors.
After years of studying CCUS, Michael Godec, vice president for Advanced Resources International, is excited to see serious interest in doing some projects.
“In the last 18 months it has gone bananas. We are working on real things for real people spending real money. Before that we were busy, but all of it was government-funded research,” Godec said.
A new crowd is getting involved. “A lot of people in this game have not been in this game and do not have the knowledge and skill sets to get it done,” he said.
Not Just Yet
It is reasonable to ask what those people are seeing that makes this tool real. They are thinking about deals that would require enormous amounts of cheap, CO2 captured from factories, power plants, or the air—none of which is in place for use yet.
On a field trip to Occidental’s West Seminole field, the engineers there noted that the CO2 used to revive production from that massive old field and others nearby is supplied by wells piped in by Kinder Morgan.
That could change. Occidental has said its goal is to be a leader in the field, with plans to build a series of facilities to capture CO2from the air. The first is designed to capture 1 million tons a year in 2024, with a goal of producing it for less than $100 per ton.
Occidental is way ahead of the pack on that one. Kinder Morgan’s new technology investment outlook says the investment horizon for CCS investments is 2–5 years off, according to its presentation at the conference.
Both Kinder Morgan and Occidental see change ahead, but for now Kinder is focusing on a more financially manageable challenge than building the carbon dioxide pipeline network that will be needed if the carbon capture vision is to achieve reality.
Last year, it bought Kinetrex which produces renewable natural gas by upgrading the methane emitted from landfills, as well as capturing a significant amount of CO2. It plans to rapidly expand the concept, using the biogas to create liquefied natural gas to power trucks and sell the CO2.
By capturing two sources of greenhouse gases created from that area’s rotting garbage, the company will garner multiple tax benefits.
It is the oil business, but with a twist. “It is a great time if you are in the energy industry and you can think outside the box,” Moore said.
For those who see a future in CCS, their interest is clearly stimulated now by the rich subsidies offered to accelerate carbon capture in the US, which are known as Section 45Q in the Internal Revenue Service’s tax code.
The value of the tax credits for gas capture depends on how it is used. Currently, the amounts are $35/ton for gas used for EOR and $50/ton if stored. That could rise to $50 and $85 if a massive spending bill now before the US Senate is passed, which is far from certain.
The actual terms are far more complex. In addition to the usual language regarding project evaluations and performance, regulators are required to figure out a way to determine whether the permit applications are consistent with “environmental social justice.”
The size and range of benefits has grown with the bills passed in 2019 and 2020, and there are further increases proposed in what is known as the reconciliation bill now before the Senate.
The payouts in that law are based on a formula that rewards projects that pay the prevailing wage to workers and include an approved apprenticeship program, both based on US Department of Labor benchmarks.
For investors, the point of interest is the language in the bill that would allow direct payment to those who earned the credit. While credits are normally used to reduced tax bills, the law would allow cash payments to project developers who often pay little or no tax due to the deductions generated by large investments.
At this point, this is a largely American story. While CCS needs to be done on a global scale to significantly decrease CO2—the International Energy Agency Sustainable Development Scenario said the volume of CO2 injected will need to be 1.5 times the current volume of global oil production—most of the activity has been in the US.
There are six CCS developments in operation and 60 more under development in the US. Europe ranks second with three operating and 35 under development, said Christina Staib, the senior engagement lead for the Global CCS Institute in Houston. In contrast, China and the Middle East have six operating projects and four under development.
No country has the incentives offered by the US, but the level of credits now in the law will only cover the cost of easy-to-capture gas, Godec said. If the reconciliation bill passes, the incentives will be a higher, but Washington, DC, insiders aren’t predicting the outcome of the bill whose backers are struggling to find the votes needed to pass the $1.7-trillion package.
It isn’t all rosy for project developers, who also need to worry about the volatile price of oil, new processing technology, geologic uncertainties, and the future price of carbon dioxide—which is anyone’s guess. “People are as worried about the economic risk as they are about the regulatory risk,” Godec said.
Storage Can Happen
Last May, the Governor of North Dakota, Doug Burgum, made a surprising announcement at the Williston Basin Petroleum Conference when he spoke of a goal to make the state carbon neutral by the end of the decade.
“We would be a carbon-neutral project by 2030,” said John Harju, vice president for strategic partnerships at the Energy and Environment Research Center (EERC) at the University of North Dakota. He recalled that after Burgum’s announcement, “you could hear a pin drop” in that room full of oil industry executives.
It was a jolt, but it turns out it is not an impossible goal for a state with a multipronged approach to maximizing the value of its oil and coal industries. Its initiatives range from a program to study EOR in unconventional plays to taking control of the permitting of long-term storage from the federal government.
North Dakota oil producers emit about 60 million tons of carbon a year. Harju said that based on the CO2 projects in progress, “we could be halfway there [carbon neutral] by 2025.”
They and other producers also face a far larger challenge—offsetting the impact of the carbon emissions when the oil is used. Godec estimated those could be about five times greater than the emissions related to finding, producing, and transporting the oil.
An example of how they are offsetting carbon emissions is the Red Trail Ethanol Plant CCS project. The facility near Richardton, North Dakota, is the first long-term carbon storage site permitted by the state since it became the first state in the country with the authority to grant permits for long-term storage.
Kevin Connors, principal policy and regulatory strategist at the EERC, led the 5-year effort to gain control of storage permitting and is now helping other states to achieve the same.
He said the process required convincing the US Environmental Protection Administration (EPA) that the state’s rules, which are not a copy of the federal regulations, provide the same level of protection to ensure these sites’ security as the federal regulations.
The Red Trail project was approved in less than a year, which is amazingly fast approval for the Class VI permit required for sequestration, which can drag on for years without a decision by the EPA.
Project evaluation work on the Red Trail project began in 2016. The economic review was aided by the relatively low cost of removing CO2 from the exhaust stream in an ethanol processing unit, and the nearby injection site minimized transportation costs.
Beginning in 2019, the EERC did a geophysical evaluation of the Broom Creek sandstone formation It included two evaluation wells to gather logging data, core, and fluid samples from more than 6,000 ft down to evaluate the injection zone, according to the EERC website.
Putting together the site also required dealing with a variety of owners—from determining who owns the pore space to bringing together landowners into a single unit over the gas storage zone.
The presentation by Connors included a slide that showed how North Dakota addressed those questions with landowners. The state’s CO2 storage unit system, known as Pore Space Amalgamation, recognizes that landowners own the pore space. These deals set out a formula for compensating owners of the surface acreage, and those who do not consent to the deal are to be “equitably compensated.”
The state has also dealt with another potential deal killer: the potential long-term liability associated with risks such as gas leaks to earthquakes.
Laws on that issue and others related to CCUS vary from state to state. In Texas, Quoyeser is wondering what sort of deal he could offer if anyone wanted to use some of PUF’s pore space for sequestration.
“What would be a contract term for storage? We will have to work through that. When you call it storage, it has to have some dimensions of perpetuity,” he said. The state limits leases for facilities to 10 years. With a gas processing plant, it can presume the owner will be around at the end of the term to renegotiate or end the agreement, but no company lasts forever.
In North Dakota, the state has created a system to shift the liability to the state after 10 years. A hearing will be held to determine if that transfer will occur.
“If the storage site’s design has proven sound and they have done things right, they will be released of that liability when that liability is minimal,” Harju said.”