Executive Q&A: Denbury’s Road from EOR to CCUS

Presented by:

Carbon capture utilization and storage (CCUS) is a hot topic among the oil and gas industry. As the world tackles climate change and zeroes in on zero-emission goals, figuring out how to minimize the impact of carbon emissions is vital for the long-term health of producers.

It might seem baffling to some or impossible to others. But at least one producer has already established itself as a leader in carbon sequestration, and that stems from its long-time commitment to EOR.

Denbury Inc. has established its reputation as a company “that is doing it” when it comes to sequestration. CEO Chris Kendall talked about the company’s success at length at Hart Energy’s Energy Transition Capital Conference in Houston. He recently connected with Hart Energy’s editorial director, Len Vermillion, to further the discussion.

In this interview, Kendall discussed his thoughts on CCUS and why the industry isn’t as far-off from permanent sequestration as some may think. He also delved into the company’s unique position as the policy changes thanks to two decades of commitment to EOR. How’d they do it?

Len Vermillion: Let’s talk about CCUS first. What are your thoughts on it, and how can it help emissions reduction in the industry? You’re doing a lot of it, so I want to get your thoughts from an operator point of view.

Chris Kendall: When we think about reducing emissions in the atmosphere, if you’re like me, the first place your thoughts go are to wind and solar and to what we can do with that. I think that’s the right place for thoughts to go first. That’s what we’ve seen as the big movers in energy transition in reducing carbon emissions and our whole energy complex. And those have grown rapidly.

“When we’re talking to industry right now, we are telling them that we can provide them certainty today in EOR because we have that.” – Chris Kendall, CEO and president, Denbury Inc.

Unfortunately, they are only going to be able to grow at some rate, and every day you see signs of how they run into challenges. Whether it is space to put the facilities, permitting along the way (or) endangered species in some of these areas that you would think were ideal candidates. The bottom line is that you have that.

Then you have energy demand in the world still growing year-in, year-out, at 1% and change. Your pie is getting bigger along the way. There needs to be more than just this. There needs to be more than biofuels. There needs to be more than some of the other low-emission energy sources that we’ve talked about. What’s fascinating to me is when I look back on what Denbury has done over 21 years of the EOR business, moving massive amounts of CO₂—10, 11 million tons a year right now—and putting massive amounts of CO₂ underground using technology that is existing, this is not something that needs to take a technological leap to work. This is something that can be done at a much greater scale than it is today.

Just for example, today we’re taking 3 million tons of industrial source CO₂ a year out of that whole amount of CO₂ I mentioned and putting that underground. The question is, how can you put more industrial source CO₂ underground? When I look at what the world is doing with industrial source CO₂, just to kind of throw out a couple of numbers that might show where we are and what the opportunity is. Today, the world is capturing about 40 million tons of CO₂ from industry a year. Of course, the world is emitting more than 30 billion tons a year, so 40 million is just not much.

The International Energy Agency (IEA) put together this scenario for a net-zero future by 2050, where all carbon emissions are offset. You would see that wind and solar are top, and you’d expect that, and those will continue to grow. But the great No. 3 in there, which I think surprised people, is carbon capture. To go with my other end of the spectrum from that 40 million tons a year to what the IEA is talking about in 2050 is taking that 40 million to over 7 billion tons a year. So, you can see we’re not even in the first inning of this game. We are just scratching the surface. But even the IEA shows that carbon capture can play that big of a role in offsetting the 30, 40 billion tons a year of CO₂ emissions that the world has.

And we can do it at scale. We can do it with geology that we know about that we’ve been using for years and years for EOR. We can use people that are trained in handling CO₂ for EOR to put CO₂ in other places where it’s safe and secure. We can even use the same infrastructure we have now.

So, we are very fired up about it because we see the scale (and) we see the place that Denbury has in the space. And then we just see the opportunity, fundamentally to make a difference in carbon emissions, which is what we’re all after. I think we can really do it here.

LV: Denbury is kind of unique, and you have already been doing this. You’re not new to this. I think you mentioned 21 years of EOR. Why were you actually doing this when everybody else was into shale and everything else?

CK: I have always said that we’re a unique company, and that has been through good and bad. We’ve remained unique. Through that, you talk about CCUS and how you end up in CCUS. The problem with just going straight to some plant and capturing emissions off of the plant and putting the CO₂ underground is it’s an expensive proposition. So up until now, at least, people haven’t been willing to just go out and spend hundreds of millions of dollars to do that. But what did work was enhanced oil recovery. It started from being able to produce oil from older oil fields that can only be extracted using, essentially, a solvent. Just like you’d use a cleaning fluid and some household application, CO₂ at the right conditions underground is a solvent for oil.

We actually built a business over a couple of decades that had a lot of CO₂ involved that we could pump into oil fields and use that solvent effect to get oil out. We did very well with that. But it was all in the context of a world that needed more oil. And now we’re in kind of a different place.

I mean, the world’s going to need somewhat more oil for some time in the future, but it’s not this endless growth that might have been what people thought 10 years ago or so. To do more of this business, we needed more CO₂, and that’s how we started connecting to some folks who would be capturing industrial CO₂, like Air Products down in Texas.

We pay them to take the CO₂ because it was valuable enough for us in the production of oil. All that justified this pipeline system for CO₂ that is the longest operated pipeline system in the United States, which Denbury has. It led us to have almost 300,000 hp (horsepower) of CO₂ compression in our fleet to get CO₂ to a liquid form to use it. It’s led us to build a staff of over a 100 technical people who are either engineers for pipelines that move CO₂ or wells that we drill and operate that inject CO₂. (It’s led to) the geologic work of looking under the surface to make sure that the CO₂ is going where we want it to and staying there. We were able to take all that, and then when we see where we are today, now you have a new policy in place that has actually significantly enhanced some of the industrial emitter decisions whether to add that expensive equipment.

Where we see it taking off to where it is going from that base on enhanced oil recovery—I need to interject one thing here, enhanced oil recovery, what I talked about, the CO₂ stays in the ground. It comes out with oil, but we separate it and put it back in the ground immediately—the net effect is that we’re putting CO₂ permanently underground.

There are ways that we can put CO₂ underground that never need to come back out that aren’t associated with oil production. We can continue doing industrial recovery. The fact that we use so much CO₂ to produce oil makes it incredibly low carbon. And then we can go beyond that and just inject CO₂ underground, using what we have already in terms of people and pipelines.

LV: Will you increase those pipelines or that infrastructure? Is that an investment that you will have to make as long as, well, everybody else is?

CK: Oh yeah. What’s neat about it, Len, our intent is to grow this business significantly. What we won’t probably grow significantly is the oil side. We think that the 50,000 barrels a day or so that we operate at is a good level, and it can generate enough cash for us to invest in the growth of the capture and the expansion side. Now, we have a backbone from this incredible 1,000-plus-mile pipeline infrastructure that we can build off. So, we’re not starting from scratch. But what we can do is we can take that backbone, and then we can put extensions into high-emission areas that we might not quite be in today.

Or, we can expand the capacity to where it can move more, which is fairly straightforward in this business. We can invest in underground storage outside of enhanced oil recovery. So, acreage that can be used just for storage. We’ll be making investments in that probably not in the last few weeks of this year, but we’ll start to see some of that next year. What we love about it is the oil side of the business (is) it already has some really great qualities to it, (and it) can fund those investments that we want to make.

LV: You were talking about the utilization part of CCUS that often gets overlooked. Can you tell people what that involves, and how it can be used?

CK: Well, it’s a very tricky question, and to date, the primary utilization that is in the CCUS acronym is enhanced oil recovery. You have this great ability to put literally millions of tons of industrial CO₂ underground using that. For example, today we are injecting, on any given day, about 10,000 tons of CO₂ just for that. What’s also nice about that is that’s under existing law and existing permits. So, if another plant came tomorrow and said, “We’d like to send you our emissions,” we could take them and put them into EOR with no new permits or anything. We could do that under what we have today. Now, if you go beyond EOR and you’re looking for an answer to the “U,” there are a lot of interesting things being looked at.

I see some that I think have some potential. One area is called electra fuels where they will use carbon dioxide as an input to help produce low-carbon electricity. There’s some potential for that I think we’ll see. But beyond that, everything that I see looks very challenged in how much scale you can apply. A good example is just seeing some folks looking at injecting CO₂ into concrete when it’s being mixed, and it gets ingrained in the concrete and is pretty effective at permanently locking up the CO₂.

But I’m sure what you’ve seen, when you’ve seen concrete mixing plants, they’re not in areas that are convenient to refineries and power plants. You have to transport the CO₂ to the mixing site, which I think is a real challenge to the scalability. So to me our recovery is a proven, scalable way of utilizing CO₂. Maybe this electra fuels concept can be something that could grow. Otherwise, I think your best choice is to bury it underground in safe places.

LV: I guess what we’re talking about really is permanent sequestration? How far do you think we are away from that?

CK: Yep, and we’re not far. One of our key strategies right now, Len, is for Denbury to add a series of storage sites along our infrastructure that will be storage of that nature, sequestration. There are other projects underway where that’s happening as well. The challenge with that, and we see it across the whole industry, is that to inject CO₂ in this manner, you require an EPA (Environmental Protection Agency) Class VI permit. To date, as far as I know, there have only been two Class VI permits that the EPA has ever issued in the United States. There are many more being put into the process right now, but then there’s uncertain timing of the approval. In the past, it was more than five years, which is terrible.

The EPA has stated that they think they can do them now in two years, which is more tolerable, I’d say. But it’s still two years. So, there’s a tremendous effort right now being put forward to make all this happen. And many different classics permits are being put together. But I think that we’re probably a couple years away from seeing the first of those.

When we’re talking to industry right now, we are telling them that we can provide them certainty today in EOR because we have that. And then we can transition into sequestration when it’s permitted. And they like that, because that lets them start their projects now without wondering what happens if somebody’s permit does not get approved.

LV: Are a lot of people starting projects at this point?

CK: There are a handful. It’s early days, still. Just as an example, the panel I just got off of, the CEO of California Resources said that they have initiated Class VI permitting for some work that they’re doing in California. Honestly, just a week or so ago, this agreement that we announced for a sequestration site with Gulf Coast Midstream Partners, they had already initiated the process as well. That’s to the southwest of Houston. There’s some of it, but it’s like I said, it’s early days. I think in another year or two we’ll start to really see a good number of these coming together.

LV: What is carbon-negative oil? Because I think you were talking about that before. Kind of explain it to me.

CK: I’m glad you asked. I’m going to the Aspen Institute Global Energy Forum, which is an awesome event because it brings together people from all ends of this spectrum. There are people like me that are leading this company or even people (who) are just leading straight up energy companies, E&Ps. Then you have people in the government who are adamantly opposed to that. And it’s a nice forum for everybody to just talk about these issues in a safe environment. But along the way, what was interesting is a lot of these guys said, “Look, we love what you’re doing and how you guys can manage CO₂, but you’re producing oil, and we just can’t tolerate that.”

“There are ways that we can put CO₂ underground that never need to come back out that aren’t associated with oil production. We can continue doing industrial recovery. The fact that we use so much CO₂ to produce oil makes it incredibly low carbon.”

We said, “Yeah, but it’s a low-carbon oil.” And they didn’t quite get it. We really started to work on some numbers around it and the bottom line, Len, is that it takes a lot more CO₂ to get a barrel of oil out of the ground than it will ever emit once you get it out of the ground. And just to put some numbers around that, the total emissions that you get from a barrel of oil. I don’t know if you’ve heard of EPA Scope 1, 2 and 3 designations, but Scope 1 is direct emissions like your motors that you’re running to do your business, whether it’s a vehicle or a compressor. Scope 2 is electricity that you use, for example, indirect emissions.

So, the electricity that you use, you have to count the emissions for how that electricity was generated. It depends on where you are. You may be someplace it’s all renewable. You may be someplace it’s all coal. For Denbury’s business, just for example, those Scope 1 and 2 emissions together are just shy of 200 pounds of CO₂ per barrel.

So, you say, OK, 200 pounds per barrel, that’s interesting. But Scope 3 emissions are what a lot of people really struggle with, and those are the emissions that are primarily associated with the combustion of the gasoline or the diesel or the jet fuel that’s created from the oil. The number, just to compare that 200 pounds that I mentioned, the Scope 3 emissions of a barrel of oil are 1,000 pounds. It’s a big number compared to your Scope 1 and 2.

Together, you’re looking at 1,200 pounds per barrel. EOR, like I said, the CO₂ stays in the ground permanently. On average for our company to produce that barrel of oil takes about 1,700 pounds of CO₂. So when we look at it, we say, “Well, we’re injecting 1,700 pounds per barrel. The total footprint of that barrel is 1,200 pounds. This is actually a carbon negative barrel, unlike any other in the world.” We put it in our public materials, and people really see it. They understand what we’re talking about now.

We’re actually working with a third party to get the carbon intensity score verified so that we can have a little bit more in our hip pocket when we’re talking about it. But that’s what it is. We called it blue oil just because it’s something that we think is distinctly different from other oil. And we only count it, Len, when we’re using industrial-source CO₂. We use natural-source CO₂ for part of our business, but about a quarter of our production is based on industrial-source CO₂, and that’s where that really comes into effect.

LV: Just let me ask about the forms and the taxes. What’s the future of 45Q tax credit for sequestration, and how will that help get more companies on board?

CK: It’s great to have what we have, and what we have today was put in place just literally at the beginning of this year. So, we are still early days, even in 45Q. And just to put it in perspective. We have a tax credit of $50 per ton of CO₂ that is sequestered under that program.

If we look at the whole spectrum of cost of capture, the nature of the plant has a very low cost of capture. Then you have plants that have a very high cost of capture. For example, a coal-fired power plant has a very complicated emission stream to capture CO₂. Why that matters is that a $50 credit is basically going to enable you to attack very low cost to capture industries like natural gas processing or ammonia manufacturers, but it won’t touch the coal plants. The coal plants, you need to get up above $100 a ton.

Then there’s a whole bunch of different high-emission industries like cement manufacturers, for example. So, what we see happening in the policy right now is that $50 a ton is enough to get people excited and to get them started. But it is broadly recognized that if we really want to achieve those big numbers, like I mentioned that the IEA put out, policy needs to move much faster. And so, in a bipartisan way, Republicans and Democrats both support this, but in a bipartisan way, they’ve put in this reconciliation bill that’s sitting in, I think it’s sitting in the house right now. I think there’s a chance it’ll get voted on in the next few days.

But there is an enhancement to 45Q that increases at $50 per ton to $85 per ton. And that will allow another more than a hundred million tons per year of emissions in the U.S. to be captured, so we’re excited about that. I think there’s a good likelihood that either in that form or some other form, it will pass, and it will come out here. It’ll just make things that much better. Ultimately, I think that we need even more incentives to honestly capture those more complicated emissions, like coal-fired power. And I think those will come. I’m not sure what it will look like or when they will come, but the support is there on both sides of the aisle.

LV: Why should operators really be excited about CCUS, and why should they really take it seriously and be part of it?

CK: I love that question, Len. I mean, it’s very straightforward for us because of our legacy EOR business and all of the CO₂ expertise that we developed along with that, but operators, in general. I said this to a couple thousand people at a petroleum conference in North Dakota a few months ago. “Look, instead of being viewed as being part of the problem,”—which I don’t really agree with but that is a way that we’re viewed as an industry—“instead of being viewed as part of the problem, we can be viewed as part of the solution. If we use the same technologies that we have used in oil and gas, whether that’s building and operating pipelines, drilling wells, looking underground and having a good understanding of what is underground and how secure fluids can be contained there. Every bit of that applies to CCUS.”

I had a town hall with our company, and I said, “Guys, oil and gas is, we’re always depleting our reservoirs. You’re doing your best when you’re maximizing how fast you are putting yourself out of business.” Kind of, if you think about it. I said, “This world we’re going into, it will never end. Not in our lifetimes. There will be emissions from ammonia plants and steel plants and cement plants and power plants for a long time. And we can be a key part of making those emissions low and helping achieve this lower carbon future, using the same skills that we have.” It’s just incredibly invigorating to our company. I mean, a lot of people, especially the young folks in the industry, they’re getting beat up by what they see in the news and even some of their friends. This is something where we can be part of the solution, which I just think is fabulous.