Carbon capture and storage

Carbon Storage Potential Moves Toward CO2 and Energy Return on Financial Investment

Will CO2 storage resources increase the valuation of oil and gas companies and counterbalance environmental, social, and governance pressure?

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As oil and gas companies continue making net-zero declarations, Santos, an Australian-based oil and gas company, may have set in motion a new industry practice by including and declaring its CO2 storage resources (100 million tons capacity) along with its reserves statement. This pivotal revelation, made recently, raises the following question: Will CO2 storage resources for carbon capture and storage (CCS) increase the valuation of oil and gas companies and counterbalance environmental, social, and governance (ESG) pressure? After all, an oil and gas company’s reserves are a key factor in its valuation, but through the lens of the energy transition, such reserves can be viewed as problematic.

On the other hand, CCS is endorsed by the UN, the unifying body for the 2015 Paris Agreement. Thus, CCS is a component, much like renewables, of the energy transition, despite renewables being incapable of capturing CO2. Considering the enigmatic classification of oil and gas companies, in the context of the transition, such companies are now operating in a space that the author sees as generating revenue through CO2 and energy return on financial investment (CERFI). As such, revenue is made on two fronts—from produced hydrocarbons and by capturing emissions (while addressing ESG concerns) associated with hydrocarbon production, processing, and consumption.

The CCS and ESG Domino Effect
Moreover, it is likely that other companies will follow Santos’ approach to declaring their CO2 storage. Case in point: BP’s net-zero declaration had a domino effect in 2020 as multiple oil and gas companies followed suit that year, such as Conoco Philipps, Equinor, Occidental, and TotalEnergies. Fatih Birol, the executive director of the International Energy Agency, has said that, without CCS, reaching net zero is nearly impossible, augmenting the U.N.’s perspective on CCS. This aligns with Santos’ CEO expressing that “carbon storage capacity booking is another tangible example [of the company] establishing the foundations to support the energy transition.”

Importantly, not only oil and gas companies are pursuing the realm of drilling and completing storage wells. For instance, in the US, Lonquist has substantial experience in the realm from developing wells that adhere to America’s Environment Protection Agency (EPA) requirements for geological storage. Additional drilling and storage (D&S) companies that are not focused on hydrocarbon production, such as Lonquist may rise to meet the net-zero demands of the market and the general population. These companies, nevertheless, will require oil and gas professionals who have seismic, drilling, and downhole experience.

Revisiting Australia’s CCS Efforts
Although Australia has faced challenges with sequestration in an unrelated project in its territory, the reality remains that Equinor and ExxonMobil have proven (since 1996 at Sleipner) that sequestering millions of tons CO2 in offshore reservoirs is a tried and proven method. That said, Santos aims to sequester CO2 from the land-based Moomba gas plant. What differentiates this project from other recently announced CCS endeavors is the fact that it reached a final investment decision in November, making it is a tangible project with a financial commitment. First injection is expected in 2024.

Notably, the Australian government assigning carbon credits for sequestration is undoubtedly a driving force for Santos. The company expressed that they “successfully registered … with the Clean Energy Regulator … [which provides] a crediting period of 25 years.” The company adds, “the project will qualify for Australian Carbon Credit Units for emissions reduction from Moomba CCS.” In the US, similar to Australia, the 45Q tax credit is spurring companies into action, as recently illustrated by Lucid Energy, which was permitted an EPA well in the Permian Basin for sequestration, in which credits will play a key role. By the logic of CERFI, it is not surprising that Santos chose to disclose its CO2 storage capacity in its reservoir statement because this can be converted to potential revenue in the future.

ESG and Capital Flight
Oil and gas companies that disclose their CCS capacity not only are reinforcing their focus on the energy transition but also are positioning themselves to counterbalance ESG pressure. This has been in play lately as investment firms—as well as individual investors—are stimulating “ESG capital flight” from companies that are not viewed as placing emphasis on decarbonization. Furthermore, ExxonMobil, in 2021, faced ESG-activists from an investment firm that led to three board seats being captured by the firm. Presently, ExxonMobil is concentrating its CCS efforts through its flagship Houston Ship Channel endeavor. With this project, ExxonMobil says that it intends to decarbonize industrial sources by sequestering captured CO2 in offshore reservoirs through underwater pipelines. To what extent ExxonMobil’s CCS ambitions allay the company’s ESG pressure remains to be seen.

Additionally, D&S companies may attract capital as nonoil and gas companies that can provide CO2 storage as a service (SaaS) to industrial emission sources that are under ESG pressure. To remind, the US, according to BP’s Statistical Review of World Energy for 2021, had a refinery throughput exceeding 14,000,000 B/D, making it the world leader in this category. In this backdrop, D&S companies can be bundled with US refiners that process hydrocarbons (belonging to oil and gas companies) to collectively provide CERFI via SaaS. The SaaS concept is being developed furthered by U.S.-based Talos Energy, an offshore oil and gas company, as the company “continues to work with both landowners and emitters across the [Gulf of Mexico] to move forward … carbon capture and sequestration sites.” Also, Talos, along with its joint-venture partner Carbonvert, was recently awarded offshore sequestration acreage in the Gulf.

The Future of CO2 Storage Resources Management
Interestingly, Santos used SPE’s CO2 Storage Resources Management System (SRMS) (Fig. 1) on its CO2 storage resources that were included in its reserves statement. Santos claims they are the first company to use the SRMS for such purposes. One of the SRMS’ key objectives is to provide “a consistent approach to estimate storable quantities, evaluate development projects, and present results within a comprehensive classification framework.” Santos may not be the last company to use this system as the CCS market continues to evolve globally.

Fig. 1—An illustration from the SRMS developed by SPE and used by Santos.

Before Santos’ market movements, recent CCS activity was mainly confined to the US and the UK through oil and gas companies. Australia following suit further bolsters a global market that assigns value to a dry hole (or to a once producing but now depleted reservoir) that can store CO2 emissions. Australia is not alone in its region of the world; the neighboring nation of Timor Leste is following a similar path, as highlighted by East Timor’s president of its National Petroleum and Minerals Authority, who said that, “with CCS, we are looking forward to [developing] a commercial model of carbon economies that is relatively attractive … to tap into the unlocked resources that we have remaining in gas and oil fields.” The era of CERFI is now in play.