CCS Emerging as Integral to New Midstream Developments

A model heavy industry development is rapidly emerging where production facilities are serving as anchor shippers for carbon capture and storage (CCS) midstream developments. 

In mid-May, BP Plc and Linde Plc announced plans for hydrogen production at Linde’s facilities in the Houston area. The proposal was the second in as many weeks for a low-carbon energy project that included CCS as an integral part of the project from the start.

The BP-Linde project “will support the storage of CO₂ captured from other industrial facilities—paving the way for large-scale decarbonization of the Texas Gulf Coast industrial corridor,” the companies said in announcing the second-half 2022 plan. “As part of the project, BP will appraise, develop and permit the geological storage sites for permanent sequestration of the CO₂.” In particular the companies stressed BP’s trading and shipping business as underpinning the project with “commodity trading and price risk management expertise.”

Linde will use its proprietary technology and operational capabilities to capture and compress the CO₂. Linde cited its “extensive infrastructure of hydrogen production facilities and its storage cavern connected through its pipeline network across the Texas Gulf Coast.” The overall development, expected to be operational as early as 2026, will also enable capture and storage of CO₂ from other large industrial facilities in the region and could ultimately store up to 15 MMmta/y across multiple onshore geologic storage sites.

Hydrogen, ammonia project

In early May, Enbridge and Humble Midstream, an EnCap Flatrock Midstream portfolio company, announced the joint development and marketing of a low-carbon hydrogen and ammonia production and export facility at Enbridge’s existing Ingleside Energy Center, near Corpus Christi, Texas.

“There are sequestration projects proposed in many states, but not all hubs are created equal.”—Steve Huckaby, CEO, Humble Midstream

As much as 95% of the CO₂ generated will be sequestered in new carbon-capture infrastructure, including facilities to be owned and operated by Enbridge. Enbridge’s affiliate, Texas Eastern Transmission Pipeline, is expected to provide the transportation service for feed gas. Enbridge and Humble intend to jointly market the capacity of the facility and are in discussions with several potential off-take customers.

With the project only just proposed, the collaborating companies have yet to fix the exact cost and size of the production units. With that in mind, “we are talking about a world-scale train, which is widely taken to mean about 1 million tons per year of ammonia,” Steve Huckaby, CEO of Humble Midstream, told Hart Energy. “That would require an investment roughly $2.5 billion to $3 billion. Beyond the ammonia, about 20% to 25% of the hydrogen produced would stay as hydrogen for local users.”

That volume of production would require in excess of 100 Mcf/d of natural gas as feedstock.

“We have identified four different ammonia markets and seven hydrogen markets and are in discussions with several,” Huckaby said. “We expect to reach a final investment decision by the end of next year. We are confident we can get there by then, if not sooner.”

The plan envisions the plant to begin commercial operations in 2026. The midstream component includes a pipeline system to deliver CO₂ from the ammonia-and-hydrogen trains, as well as from third-party emitters, to sequestration facilities.

“We at Humble Midstream do not have a mandate to go subsurface, but Enbridge is pursuing sequestration opportunities,” Huckaby said. “We are talking to several possible sequestration projects, because we want diversity to mitigate risk. The bulk of our potential customers for ammonia and hydrogen want that assurance that the sequestration will be done by good, credit-worthy CO₂ management companies.”

‘Not all hubs are created equal’

Expanding on that theme, Huckaby noted that “there are sequestration projects proposed in many states, but not all hubs are created equal. The subsurface conditions and regulatory environment for transportation and injection vary greatly. The quality of the sequestration is key to any capture, transportation and storage project.”

The Enbridge-Humble project is simultaneously a traditional midstream model, as well as a vision of the future for hydrocarbon processing where CCS is an integral part of the planning from the start. The ammonia and hydrogen plant is top be the anchor shipper of CO₂ that enables the midstream operator to build economies of scale by seeking other shippers. It is also developing multiple off-takers for the molecules being moved.

“There has been some willingness to lend for CCS projects, but those are very different from the reserve-based lending that underwrote the shale boom.”—Josh Sherman, partner, Opportune LLP

“We have tried to frame the characteristics and contracts of this project like any other midstream project for hydrocarbons,” Huckaby said. “Rich Kinder would call it good blocking and tackling with a hand on the ground.”

Sound risk basis

“The prevailing approaches to risk reporting of carbon management are in the realm of social and political risks,” Josh Sherman, partner and head of the complex financial reporting group at transaction advisory firm Opportune, told Hart Energy. “I don’t know of any producers or midstream operators who are not concerned with being better corporate citizens.”

As a case in point, Sherman mentioned that he is on the board of a private company that recently spent about $1 million to capture more than 90% of the gas it had been flaring. 

“There is less public pressure on a private company,” he added, “but there is still pressure from the [investors]” to reduce emissions and operate in a more efficient and environmentally benign way.

That is just one operator, but is indicative of industry overall.

“The gross flaring sentiment is gone,” Sherman said. “There are not only the social and political risks, but also the advancement in technology. It used to be that producers would believe that to stop flaring they would have to stop producing. Now there is better technology and better equipment.”

On the financial side, capital markets are a large part of Sherman’s and Opportune’s practice. The companies that have announced plans for carbon management developments have mostly been those backed by private equity, and those that are part of large public midstream companies. That indicates support from both private and public equity, but support from other capital sectors is less obvious.

“There has been some willingness to lend for CCS projects, but those are very different from the reserve-based lending that underwrote the shale boom,” Sherman said. “CCS is a great opportunity, and at present the market timing of emerging technologies feels more suitable to mezzanine debt or venture capital. Even in private equity, lots of folks are interested; they just know it will take more time.”