Imagine an oil and gas minerals owner or producer keeping undeveloped, proven reserves in the ground versus developing the asset, producing the hydrocarbons and selling them, given the associated risks.
By keeping it in the ground, as some say, the company would instead pursue what can be called a “keep-it-in-the-ground credit.” This alternative method of capitalization would eliminate potential greenhouse-gas (GHG) emissions from reaching the atmosphere, ultimately capturing value when the carbon credits are sold in the emerging multibillion-dollar global carbon credit market.
This method could pave the path for decarbonization and extracting potential profits by creating carbon sequestration plays.
It could happen if carbon credit sales prove more valuable than developing oil and gas reserves.
At least, that’s what the people behind Entoro Capital’s newly launched global platform called Capturiant and Dallas-based Bad Carbon, developers of the Geologic Environmental Mineral Sequestration (GEMS) process, trust will happen.
James C. Row, CFA, managing partner at Entoro and CEO of Capturiant, said he believes now is the right time to introduce the world’s first regulated environmental digital asset exchange. He sees the new platform as a necessity because of the growing drive to sequester carbon, added to the lack of transparency and standards within the carbon credit market.
“This is no different to us than hedging out natural gas price risk,” Row told Hart Energy. “You need to have trusted sources. You need to have standardization, processes. You must have those things to create a robust market. If you don’t have them, a market can’t exist, or there’s a market that’s very lumpy and it won’t work.”
The platform, set to launch Dec. 1, comes as energy players work to match energy supply and demand while reducing emissions in efforts to slow global warming.
“It’s an economic tool. Let the private sector determine what the value proposition is. Don’t let it always be government mandates.”—James C. Row, Capturiant
Created to encourage companies to lower GHG emissions, carbon credit trading schemes permits the buying and selling of carbon emissions. When purchased, carbon credits—which are measured and verifiable emission reductions—allow the owner to emit a certain amount of CO₂, offsetting its carbon footprint.
How it works
Capturiant serves as the validator, clearinghouse and distributor of the product that sells and tracks these so-called keep-in-the-ground credits.
Besides the oil and gas sectors, it can also be applied to the power, mining and petrochemicals sectors, Row said. The product, in the case of oil and gas, is Bad Carbon’s GEMS process of sequestering fossil fuel deposits. Bad Carbon is the product creator and generates the base GEMS product.
Valuation and analytics firm Clear Rating, the company that assesses Hart Energy’s ESG Award nominees, released an economic analysis of the GEMS process.
Similar to other extractive processes, the analysis states GEMS evaluates discovered minerals along with plans to produce and sell them on the market. However, it also alerts upstream owners to the realized value of selling carbon credits if the mineral deposits are sequestered.
The developer must obtain a resource report containing the quantity of minerals deposited and detailed validation/verification from an independent qualified third-party auditor, before the carbon credits can be marketed to buyers, according to the analysis. Bad Carbon’s proprietary methodology for determining original oil in place for credit issuance is based on the U.N. framework classification for resources.
“The GEMS designation opens the pathway for asset securitization,” it said. “This can facilitate price discovery by creating a synthetic market as well as create the optionality for structuring forwards, swaps, derivatives and any other vanilla/exotic options tied to no-drill credits.”
“On a corporate side, this can add value to operators, industry players and moves GEMS assets to balance sheet as portfolio option,” the report continued. “In addition, these instruments can be used for hedging or risk management functions, allowing players to lock in potential cash flows associated with sequestration and other CCS (carbon capture and sequestration) initiatives.”
To produce or not
“Any asset that is proven or ready for production would be applicable for the keep-in-the-ground credits,” said Pedro Blanco, business development, Capturiant.
“You can actually decide which assets to produce, giving companies another tool to address the energy transition,” Blanco added.
Bad Carbon is working on a project in the Permian Basin, with more than 20 million issuable credits representing more than 20 billion tonnes of CO₂, according to the analysis. The project will demonstrate the viability of the method and first-of-its-kind environmental asset registry.
Row added that a producer might have marginal fields that may be more valuable to sell as a carbon credit than to produce.
“There are fields which this likely makes more sense to just be a carbon sequestration spot. It doesn’t mean you put them all in there, given there will be a quality rating and valuation analysis conducted,” Row said. “That’s not the way this works. These are economic decisions, whether to produce or not produce, whether to save or not. By the way, you can take them out if you want to buy all the credits. They’re designed to be 100-plus year [credits].”
“You can actually decide which assets to produce, giving companies another tool to address the energy transition.”—Pedro Blanco, Capturiant
Valuations are among the risks.
The analysis noted widespread variation in the carbon credit market with pricing of reforestation and afforestation projects on the low end at up to $45/mtCO₂e and CCS on the higher end at up to $300/mtCO₂e. However, it also noted carbon emissions reductions trends building around net-zero goals.
‘An economic tool’
As the integrated environmental assessment validator, Capturiant’s focus is on creating new solutions within the carbon credit market. Its targeted buyers include funds focused on environmental assets, Row said, adding it will operate under U.S. regulatory entities and those in other countries, having already filed as a digital assets exchange.
“Combining blockchain technology and highly advanced financial and structuring solutions, gives us the ability to create a whole new portfolio of trading products—tokenized assets, liquidity pools, things like water rights and green bonds,” Row said in a statement.
The analysis pointed out that the point of the GEMS method is not to replace oil and gas production but allow the market to determine the best use of mineral deposits.
Whether the keep it on the ground credits take off remains to be seen.
There’s been initial interest from buyers, particularly in Europe, Row said.
“It’s an economic tool,” he added. “Let the private sector determine what the value proposition is. Don’t let it always be government mandates.”
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