Pending US Law Offers Big Boost to CO2 Storage Credits in Exchange for New Fees on Methane Emissions
Using a carrot-and-stick approach, the US federal government is poised to spur the nation's oil and gas industry into doing more to combat emissions.
The odds of carbon capture and storage (CCS) becoming a profitable business in the US just increased markedly.
This comes after the Inflation Reduction Act (IRA) cleared the US Senate on 7 August with a 51-50 party line vote. The Democrat majority in the US House of Representatives is expected to vote in favor of the bill late next week, at which point it will need only a pen stroke from President Joseph Biden to become law.
Despite its name, the IRA's $369 billion in funding for energy and climate initiatives will make it the largest environmentally focused spending legislation of its kind ever passed in the US. Champions of the bill claim it may trim the nation’s carbon emissions by 40% from 2005 levels by 2030.
That will, of course, mean some big changes are in store for the US oil and gas industry.
The bill includes a sweetening of existing financial incentives for storing CO2 along with a substantial decrease in the size of qualifying facilities. There is also an assurance that the growth of offshore wind energy will not come at the cost of continued offshore oil and gas development.
However, the IRA would increase royalties for production from federal lands and waters while also introducing a new punitive measure in the form of fees for companies that report excessive methane emissions. US oil and gas lobbying groups have been vocal in their opposition to these methane fees with the American Petroleum Institute suggesting such a measure would “discourage investment in US oil and gas.”
Among the US producers holding a more optimistic impression of the overall bill is Houston-based Occidental Petroleum (Oxy) which is investing in many of the types of projects that stand to benefit from its provisions. This includes CO2-based enhanced oil recovery (EOR) and direct air capture (DAC).
Vicki Hollub, CEO of Oxy, said last week on an earnings call that with the bolstering of tax credits and the company’s existing efforts to curb emissions “this is turning into a net positive bill for us, should it get passed.”
Darren Woods, CEO of ExxonMobil, said on his earnings call on 29 June that the bill shows how the conversation on energy transition is evolving beyond just promoting electric vehicles and wind and solar energy to include more focus on carbon capture, alternative fuels, and hydrogen production. He told investors that “it is encouraging to see the recognition and the desire to try to catalyze investments in this space because as we’ve said, we think they’re going to be absolutely critical for society” to reduce emissions.
Though its final text may change before passage, a summary of some of the most important industry-related proposals in the Senate-drafted bill includes:
Oil and Gas Production
- New Methane Fees. Oil and gas facilities will be limited to a maximum annual rate of 25,000 mtpa of carbon dioxide equivalent (CO2e) greenhouse-gas emissions (i.e., about 1,000 mtpa of methane) or else face what is being called a “waste emissions charge.” This has also been called a “methane fee” because it applies to methane that is vented, released, or flared. For facilities reporting emissions of more than 25,000 mtpa of CO2e, the new fee, or tax as some consider it, would be levied against facility operators at a cost of $900/ton starting in 2024. The fee rises to $1,500/ton in 2026.
- Reduction Incentive Program. The IRA includes more than $1.5 billion in incentives, grants, contracts, loans, and rebates to promote methane emission reduction programs. Oil and gas companies as well as communities are eligible for the funding which can be used to enhance monitoring, reporting, and leak mitigation.
- Government Take Rises 33+%. Offshore oil and gas royalties will increase from a minimum of 12.5% to between 16.66% and 18.5% for 10 years. Minimum offshore bids also increase from $2/acre to $10/acre over the same period. Onshore royalties from federal lands rise from 12.5% to 16.66%. Annual lease rental rates for both offshore and offshore will double to $3/acre. Additionally, royalties from federal lands will account for all methane produced on location vs. the current regime which only collects proceeds from methane that is sold.
- No Offshore Oil, No Offshore Wind. Any new lease issued for offshore wind projects over the next 10 years must follow a government auction of at least 60 million acres for offshore oil and gas development held in the prior year.
- Clean Hydrogen. A tiered system for low- and zero-carbon hydrogen production will be created for projects that start construction by 2033. A credit of $3.00/kg of hydrogen produced will be issued for up to 10 years to facilities with the lowest carbon intensity. The credits drop to $1.00/kg, $0.75/kg, and $0.60/kg as carbon intensity rises to a maximum of 4 kg CO2e per kg of hydrogen produced.
Carbon Capture and Storage
- US Tax Credits Rise to $85/ton. The IRA will increase what is known as the 45Q tax credit from $50/ton to $85/ton of industrial- and power generation-sourced CO2 for CCS and CCUS in saline aquifers. The deadline to start construction on new CCS and CCUS projects is extended from the end of 2027 to between 31 December 2022 and 1 January 2033. The minimum size of a qualifying CCS/CCUS plant reduces by half to 12,500 mtpa.
- EOR Credits Nearly Double. Tax credits for CO2-based EOR rise from $35/ton to $60/ton.
- Bigger Boost for DAC. Tax credits for DAC storage rise from $50/ton to $180/ton; from $35/ton to $130/ton for utilization and EOR. Eligible DAC facilities include those capable of capturing just 1,000 mtpa vs. 100,000 mtpa in the existing tax code.
- Pairing With Power Plants. CCS/CCUS projects sourcing from electric generation units must capture at least 75% of the unit’s CO2 emissions. Credit-eligible CO2 capture capacity at electric facilities is lowered from 500,000 mtpa to 18,750 mtpa.
- Direct Pay for Credits. Seen as a simplification of the existing 45Q code, direct pay will make it easier for companies to claim tax credits and to transfer them in a non-taxable cash sale.
- Lease Sale 257 Is Back. Held in 2021, Lease Sale 257 attracted $191 million in high bids which made it the largest offshore lease sale in US history. That is until it was nullified by a federal judge in January of this year who found that an inadequate environmental assessment on the bids violated US law. The IRA would reinstate the lease sale results which notably included 94 high bids totaling $15.5 million from ExxonMobil for shallow-water blocks. Because the blocks are not considered attractive oil and gas resources, it has been widely speculated that ExxonMobil was moving to secure locations for its proposal to inject 100 million mtpa of CO2 offshore the Texas coast by 2040.