Q&A: NSAI's Approach to CCS


How has NSAI gotten involved in the CCS industry so far?

Joe Mello (JM): As far back as 2010, NSAI has been leveraging its subsurface expertise to help project operators evaluate reservoirs for carbon sequestration. CCS is relatively new, but NSAI has been around for over 60 years and has been studying similar project types, like CO2 EOR and natural gas storage, for decades. Not to mention our core competency in geoscience and reservoir engineering. That long history gives us a wealth of experience to draw on.

As far as CCS goes, we've helped clients with a number of projects in all stages of development. It's been really exciting to get involved at so many different stages. We've helped with transaction due diligence evaluations for potential partners considering co-investment in projects, and we've done work for operators on things like site screenings, third-party technical assurance reviews, wellbore reviews, and SRMS audits of storage resources.

You mentioned the SRMS – can you elaborate a bit more on what that is?

JM: SRMS is the CCS equivalent of the PRMS, which is one of the key sets of definitions put out by the Society of Petroleum Engineers used in evaluating oil and gas reserves and resources around the world. For example, in O&G, volumes without commercial or technical risk that are reasonably certain to be recovered are called proved reserves. In CCS and the SRMS, volumes of CO2 that are reasonably certain to be stored without commercial or technical risk would be classified as proved capacity. The language and logic are very similar, and anyone familiar with PRMS will feel right at home with the SRMS. Essentially, the SRMS is a framework for classifying resources according to the technical and commercial risk and categorizing the CO2 volumes according to the certainty that they will be stored.

As the industry develops more of these projects will move from a delineation phase to commercial development and operation, and they will become more bankable. Debt underwriting requires technical diligence, and investors will need a uniform language with which to compare projects in terms of risk and uncertainty. That's where a framework like the SRMS comes in.

Press releases are another good example. If a project operator states a project has a certain capacity, say 100MMT, it's not always clear what that means. Is that the maximum that might be stored? Is that a conservative estimate they are likely to exceed? A best estimate? Is it tied to emissions or just pore space? It's not always clear. Definitions like the SRMS help operators and investors communicate clearly in an apples-to-apples manner. And when multiple projects are evaluated by a trusted third party, such as NSAI, investors can rely on the volumes and cash flows associated with various potential options and have confidence in their investment decisions.

What kinds of things should investors consider on the subsurface side of a project?

JM: One of the concerns at earlier stages is technical risk – can the project successfully store CO2 in the target horizon. There can be geologic leak pathways through a reservoir's top seal, or perhaps through faults. There are also anthropogenic or man-made leak pathways – namely through wellbores which may not have perfect cement bond integrity. In the early stages, evaluating these risks and determining the basic viability of a project, at a fundamental technical level, is crucial. Critical deficiencies in the reservoir seal, be they man-made or naturally occurring, will easily derail a project, so careful screening upfront before an investment is important to avoid easy missteps.

But, the permitting process for CCS projects, particularly the Class VI process for permitting geologic sequestration wells, is quite robust and the regulators are looking out to ensure that the risks are managed through up-front data collection and ongoing monitoring and remediation plans, should any leaks be detected. As projects mature a lot of that sort of headline risk is thoroughly reviewed and mitigatedBut that only covers the health and safety of the consumers, what about the safety of an investor's capital? There is a lot of uncertainty that is inherent in any subsurface evaluation of geologic formations that sometimes seems a little bit overlooked with so much focus on the permitting process. It's easier to over-permit and under-inject than the reverse, and the dynamic modeling found in permits typically focuses on the best technical estimate case. In our experience in oil and gas, predictions of reservoir behavior based on modeling without a match to historic performance data are never perfectly correct. Questions like "How much can each well inject?", "How much can the project area store in total?", or " Where will the plume be when it's stabilized?" are not precisely known, and those subsurface outcomes have error bars around the best estimates which engineers and geoscientists come up with. So financial backers of projects really have a strong need to approach projects with a critical eye, understand what the low side outcomes look like, and ensure that they are comfortable with the risk/reward presented by the project. And I don't want to seem overly focused on the negative side. It's also important to keep an eye on the potential upside and an understanding of what opportunities a high-side realization might present. Maybe it opens an opportunity to add a DAC component or take another third party's emissions. The full range of possible outcomes should feed into an investor's decision to back a given project.

How do you approach CCS evaluations?

JM: These evaluations often start with a close look at the geology. Not just the tank size but also the seal and structural characteristics which control the plume migration. We'll look at logs, core, and seismic data to map out a picture of the reservoir and build a static model. From there the dynamic simulation modeling certainly plays a big part, particularly in saline aquifers, because there is so much going on that it is hard to distill down to simple analytical formulas – irregular lease geometries, small structural undulations trapping buoyant CO2, geochemical reactions with the brine and rock. But it's just one tool at our disposal, not a crystal ball. Whenever we can, we like to use other methods, like analogy and volumetrics to triangulate our estimates via multiple methods. In some cases, like a depleted oil or gas field, we can employ techniques like material balance to actually get a fairly precise estimate of CO2 storage resources based on known historical data. Once we have the technical flowstreams from the reservoir perspective, stewing in emissions sources, uptime, operating and capital expenses, and revenue schemes (45Q, LCFS, voluntary markets) we can build up to project cash flows that look a lot like an oil and gas cash flow and report.

Can you walk us through some examples of how uncertainty has played out in actual projects?

JM: There are not tons of post-injection CCS projects out there to choose from, but there are a number of bigger projects you could look at internationally. The Gorgon project in Australia is a prime example of a project that has not met its pre-injection expectations. Injectivity declined much faster than anticipated, there was ultimately less pore volume connected vs expectations, and pressure management through water production was not able to keep up. So it's not a case where the project failed to store CO2, or where there were major leaks or that type of issue, but it certainly illustrates the potential for subsurface characteristics to turn out a little worse than the project developer's best estimates, and have a consequential impact on a project's injection rate over time. If you were an outside investor in this CCS project and your return was dependent on a certain injection profile, you would have wanted to understand the chances of the lower injection rates occurring beforehand and not be completely blindsided by this outcome.

Closer to home, there aren't all that many active CCS projects yet. One of the first Class VI permits issued in the country in Illinois actually wound up with a plume a little smaller than initially anticipated. There are a number of AGI wells in operation around the country -- not pure CO2, mixed with H2S, which from a lessons-learned perspective works pretty similarly. As one example, thanks to our reputation NSAI was asked to serve as an expert witness in a case where an acid gas plume migrated where it was not expected and impacted nearby oil and gas development areas, causing tens of millions of dollars of damages. It was a case where pre-injection, there wasn’t enough study undertaken to understand all of the possible plume migration outcomes, which would have helped the operator anticipate the migration issues that arose. One model is never enough, since any one non-history-matched model is likely to be wrong in some aspect. When NSAI works a project, we run a large number of models to confidently understand the complex behaviors and characterize the full range of possibilities

Stepping back to the big picture, what do you see on the horizon for NSAI and the CCS industry?

JM: From a macro perspective, at NSAI we don't see the world pivoting away from hydrocarbons overnight. While renewables have a key role to play and will certainly continue to grow their share of the energy mix, the growing global demand for energy is simply going to have to be an "all-of-the-above" type of approach. That said, if the IPCC goals of 1.5 or 2 degrees Celsius are going to be met by the end of the century, CCS will need to play a role. In the near term, that includes point source capture from high-quality emissions sources. As financial and public perception incentives to decarbonize grow, we may see more and more sectors decarbonize. Given the post-COVID rebound in global emissions and just extrapolating how things seem to be moving on the policy side, atmospheric CO2 concentrations will likely overshoot the IPCC's targets. So, later in the century, biofuel energy generation coupled with CCS has the potential to provide energy-positive, carbon-negative solutions for reducing atmospheric CO2 to address that overage. So between the current projects that are out there, new types of emitters turning to CCS to decarbonize, and future energy generation tied to CCS, we see CCS as an industry that is poised to enjoy robust growth in the decades to come.

However the CCS industry develops, NSAI's goal is to deliver on our reputation as a reliable, independent subsurface expert. Protecting capital in the energy space is at the heart of what we do – be that for public filers and their SEC reports, reserves-based lending facilities, or transaction diligence – and we see the CCS industry needing the same services in the future. Applying our subsurface skills to the CCS industry is really just one more facet of the work we've been doing for the past 60 years.

Visit https://netherlandsewell.com/carbon-capture/ to learn more. To talk to one of NSAI's Carbon Capture experts, call the Houston office at 713-654-4950 or email info@nsai-petro.com for more information.