Permits, Policy, Profit: The Hang-ups with Large-scale CO2 Projects

The Inflation Reduction Act kicked off a flurry of carbon capture and storage projects around the U.S. But the nascent CCS sector faces tough regulatory and profitability challenges on its road to growth.

Chris

Mathews

Hart Energy

Wed, 08/30/2023 - 05:00 PM

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The Inflation Reduction Act spurred a deluge of ambitious new projects aimed at emissions reduction and carbon management around the U.S. But as companies work to scale the nascent sector, many are getting tangled in red tape.

U.S. players in carbon capture and storage (CCS), CO₂ transport and other industries focused on reducing industrial emissions are facing a challenging road of permitting delays, policy changes and financial uncertainty, experts discussed during Hart Energy’s Carbon & ESG Strategies conference on Aug. 30.

Some of this uncertainty is weighing on large public companies, which have been more hesitant to actually commit capital toward major CO₂ reduction and abatement projects.

“One of the biggest barriers for deployment is really public [company] acceptance at some level,” said Allyson Anderson Book, chief sustainability officer at Houston-based energy services provider Baker Hughes Co.

While broad public acceptance of emissions reduction projects might be lagging, tax credits passed under the IRA last year have certainly started to move the needle forward.

Major U.S. oil and gas companies have inked several large carbon capture, utilization and sequestration (CCUS) deals in recent weeks. And Exxon Mobil Corp.’s $4.9 billion acquisition of enhanced oil recovery (EOR) company Denbury Inc. might be the most notable example.

EOR—which involves injecting CO₂ into maturing oil reservoirs to maximize hydrocarbon recovery—is Denbury’s core business.

But Exxon isn’t spending billions of dollars to buy Denbury’s roughly 47,000 boe/d of incremental EOR production. The U.S. supermajor is much more interested in using Denbury’s extensive CO₂ pipeline network and having access to 10 onshore sites for permanent carbon sequestration, Exxon CEO Darren Woods said during second-quarter earnings in July.

Later this summer, Occidental Petroleum Corp. announced plans to spend $1.1 billion to acquire Carbon Engineering, Occidental’s technology partner jointly developing a large-scale direct air capture project in the Permian Basin.

And on Aug. 29, Equinor acquired a 25% stake in the Bayou Bend CCS project on the U.S. Gulf Coast. Chevron Corp. and Talos Energy also own interests in the Bayou Bend CCS joint venture.

“I think these are the pieces of the puzzle we’re seeing put together, and I don’t think any of that would have happened without the IRA,” said Dr. Rachel Schelble, head of corporate carbon management and infrastructure at Wood Mackenzie.

Primacy and permits

Once a company decides to move forward with a CCS project, it’s a safe bet some time will pass before CO₂ will actually safely be injected underground.

That’s because companies planning projects in most U.S. states—with the exception of North Dakota and Wyoming—will have to tango with the Environmental Protection Agency (EPA) to get approval to drill Class VI injection wells. The wells are used to inject CO₂ into subsurface reservoirs.

The EPA has the important job of protecting underground water sources from outside contamination, including sequestered CO₂. But the EPA isn’t known for being hasty, and there’s a sizable backlog of Class VI injection well permit applications the agency has to work through, said Christina Staib, global finance sector lead for the Global CCS Institute.

“Another thing I’ll mention is the permitting uncertainties around CCS,” she said. “The time frames are the biggest area of uncertainty from an economic standpoint.”

To speed up the permitting process, all eyes are on primacy. Primacy, or primary enforcement responsibility, allows individual states to make their own decisions on implementing the EPA’s underground injection programs.

The EPA has approved primacy programs for various classes of injection wells for 31 states and three territories. But North Dakota and Wyoming are the only two U.S. states with primacy for the Class VI CO₂ injection wells.

That distinction is driving a lot of CCUS activity in those two states.

“In states that have primacy, we’ve seen them move applications through in less than a year,” Staib said. “Whereas with regard to the EPA, it’s taken them longer to get applications moved forward.”

Louisiana also has its eyes set on primacy. In April, the EPA signed a proposed rule to approve Louisiana’s request to have primacy for Class VI injection wells within the state.

Beyond IRA

Even if everything is lined up for a CCS project—the carbon, the sequestration site, the Class VI permit from the EPA, the money and the wherewithal to actually begin injecting CO₂ into underground reservoirs—a nagging question remains.

Can a company actually make money with a CCS project?

Tax credits included in the IRA, as well as committed clean energy project funding from the Department of Energy, have gotten the financial ball rolling, Schelble said.

But those do little to solve the fundamental challenge of profitability that the CCS industry has to tackle, she said.

“When you look at private equity companies, there’s been a hesitation in some ways to really get into the CCS business because those profitability drivers are not there yet,” Schelble said.

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