Oil and Gas Investor: The Fracker’s Guide to the Green Galaxy

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[Editor's note: A version of this story appears in the July 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

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OIL AND GAS ENERGY TRANSITION

The pause was palpable—so much that it was becoming fungible. In nanoseconds as measured in Zoom Time (ZT), maybe the presenter had frozen? That would be an NFT moment worth at least a few Ether at Rarible.

More than 4 billion nanoseconds later, the presenter spoke. The ETH worth now: 0.00000001—one satoshi, the same as the mining fee.

The mic-drop question posed by the Dallas Geological Society (virtual) luncheon attendee was, “What’s a recent petroleum grad to do?”

Dr. Raymond Franssen had just presented on “The Energy Transition is Here: What to Do?” He replied. “Yeah, good one. Yeah, that’s a really tough one.”

Franssen, a geoscience consultant and former explorer for Shell Oil Co., said, “We’re not always adding the most value by the deep technical knowledge [we have]. Oftentimes, we add the most value by critical thinking. We’re asking the right questions.”

Take cartography, for example. “Mapping is important. But being able to know when to map is more important than knowing how to map. So, I would focus on transferable skills— management experience in decision-making and policy-making and how to run a business.”

Also, “read as much as you can about the energy transition and the oil and gas industry itself. Someday you will be able to use it and it will be to your benefit,” he concluded.

The editorial team’s been consulting the stars and making notes on navigating the “New Energy World.” Whether mankind’s attempts at reversing Earth’s atmosphere works or not, it’s happening.

Pack well. Buckle up. Lift all tray tables. Seats upright. There’s money to be made.

Fresh paint

Nomenclature matters. Truffles are delicious, for example. Tell the unfamiliar they’re about $400 a pound, and they’re sounding even more delicious.

But add that it’s a fungus. The gastronomically shy are doing the math on the E.R. copay.

In the naming of oil and natural gas, these were assigned to genus “hydro.” Water. That’s cool. And the species “carbon.” Not cool— well, as some folks say while they’re loving using it.

The wizards of Wall Street have come up with some new descriptors for oil and gas, though.

Responsibly sourced. In Colorado, Denver-Julesburg Basin producer Crestone Peak Resources LLC signed a deal to sell its “responsibly sourced” natural gas to Xcel Energy Inc. In this, an independent verifier, Project Canary, will be monitoring Denver-based Crestone’s wellsite methane emissions. The monitor recently received funding from power and gas utility venture capital investor Energy Impact Partners, which includes Xcel among its partners and investors.

Blue water. Recycled produced water.

Sustainable oil and gas. Oil and gas producers that also engage in carbon capture—thus, creating their own offsets—will lower the carbon footprint of the oil and gas they produce. Morgan Stanley analysts report that this may support “a premium for ‘sustainable’ oil and gas volumes.” This may result in “extending demand for these commodities, representing a more than $3 trillion global market.”

Blue oil

Denbury Resources Inc. already injects CO₂ into its EOR fields. The CO₂ is sourced from known fields. It’s planning to sign contracts to take CO₂ sourced from carbon capture projects, which are planned now by others along Denbury’s pipeline paths. Morgan Stanley analysts describe the CO₂ sourced this way as “producing, potentially carbon-negative blue oil.”

Denbury reported to investors this spring that injecting as EOR or injecting into saltwater formations for burial is a perfect fit with its business. In 2018 and 2019, its use of industrial-sourced CO₂ “removed nearly twice the amount of CO₂ from the atmosphere than we emitted to produce our oil.”

By 2030, it plans to fully offset its carbon footprint. This spring, it added to its board Cindy Yeilding, a former BP Plc senior vice president who chaired the U.S. National Petroleum Council’s coordinating subcommittee on CCUS (carbon capture, utilization and storage).

Meanwhile, Oklahoma City-based Riley Exploration Permian Inc. reported in May that it plans an EOR pilot in Yoakum County, Texas, using anthropogenic CO₂ in the 960-acre Champions property in Platang Field. The five horizontals and up to 48 injection wells might take some 80 MMcf/d of CO2, totaling 1.5 million metric tons a year.

Diamondback Energy Inc. has looked at CO₂ capture. “I think getting into [additional] businesses is a three-, five-, seven-year discussion,” said Kaes Van’t Hof, CFO, in an analyst call this spring. The E&P’s focus for now is getting its emissions down “and not just offset it,” he said.

Travis Stice, CEO, said, “We’re not trying to buy our way into carbon neutrality.”

Diamondback emitted 1.4 million tons of CO2 in 2019 and that will be considerably less in 2021, Van’t Hof said.

PETCHEM, PIPE, POWER, OFS A team of 16 Morgan Stanley analysts has these additional outlooks for sub-segments of the oil and gas industry. Chemicals. There isn’t enough green yet to replace oil and gas in chemicals manufacturing and global demand for chemicals is growing. “Net, there is likely no easy near-term alternatives to using fossil fuels in chemical production.” Instead, carbon capture is expected to offset the grey, making hydrocarbon-manufactured chemicals blue. Midstream. Infrastructure will be needed for transporting captured carbon “and create new opportunities.” Initially, the work will be in getting carbon from carbon-capture hubs for nearby injection, including in EOR fields. Electricity. By 2035, carbon-emitting power generation might be just 20% of supply. It likely won’t get any lower than that, though, since natural gas plants provide the reliability of power supply. Wind and solar battery storage would have to advance remarkably first. Oilfield services. Having deep experience in coming up with “solutions to complex problems in the oil patch may also position these companies well to provide solutions to complex decarbonization problems.” Carbon capture and sequestration, for example.

Green currency

The decarbon SPAC. Forming a SPAC was trending—until it wasn’t. New filings numbered about a dozen a week entering 2021. The Securities and Exchange Commission’s announcement in early April that it planned increased scrutiny of SPACs, particularly how warrants are accounted for, tamped the volume of new S-1s and defused most of those not yet on the IPO calendar.

Most of the pre-April filings that hadn’t sold before the news were still on the sales lot in late May. S-1s filed in March totaled 152, mostly SPACs; new filings in April totaled 49, mostly companies already owning assets.

All SPAC filings totaled 248 for $83 billion in 2020, ICR advisory and consulting firm reported in April. In the first quarter of 2021 alone, SPAC filings totaled 298 for $88 billion. Altogether, there were 430 SPACs as of March 31 with $140 billion in escrow, according to ICR.

Among those more than 500 filings in five quarters, 25 were planned for the decarbon space by oil and gas investors and former management, totaling more than $7 billion.

Sustainability-linked debt. Meanwhile, there’s the “sustainability-linked” debt class. S&P Global Ratings expects loans and bonds issued in this category will exceed $200 billion this year.

Types of eligible borrowers are “expanding quickly,” the ratings firm reported. And they include issuers that “are just beginning their sustainability journeys or are in transition and hard-to-abate sectors.”

Oilfield water recycler Solaris Water Midstream LLC’s parent issued $400 million of five-year, 7.625% sustainability-linked bonds (SLBs) in April—a first among produced-water handlers—using the funds to pay off its bank debt and redeem preferred shares.

Participants in Solaris’ new credit facility include Cadence Bancorp, which launched a green desk in third-quarter 2020. S&P reported that contributing to the growth in sustainability-linked lending is that banks “need to fulfill corporate objectives relating to the share of impact financing within their lending books.”

Financing more green makes for a greener loan portfolio.

In 2019, 100% of the SLBs were by EMEA (Europe, Middle East, Africa) issuers, according to S&P. In 2020, North America took a 9% share.

Of the S&P-estimated $200 SLBs this year, it expects North America to have a 15% share; Asia Pacific, 10%; the Caribbean and Latin America, 8%; and the EMEA, the balance.

ESG-washing, green-washing

All sectors are on a quixotic journey of conforming to at least a few of the more than a dozen ESG ratings analytics. “This is the Wild West. It’s early days. There are 15-plus raters around ESG. … Nobody’s figured out exactly what the metrics are,” Dan Pickering, founder of private equity firm Pickering Energy Partners, said in Hart Energy’s Energy ESG Conference in March.

S&P reported that the “need for transparency and effective sustainability-related disclosure practices to avoid ‘ESG-washing’ is crucial” if the buy-in of sustainability-linked financing will grow.

As more and more of a company’s capitalization and its contracts—both with suppliers as well as customers—are tied to each party’s ESG rating, the discovery of ESG-washing may be a career-ender in any industry.

As for the species known as “green-washing,” this applies to a company’s misleading statements about just the “E” part of its ESG.

The U.S. solar industry has an “S-washing” issue, meanwhile, that it’s working to clean up: Components built abroad by slave labor, particularly in China’s Xinjiang region where more than 1 million people are detained, particularly religious prisoners.

At least 175 solar companies have signed a U.S. Solar Energy Industries Association pledge to attest to that their products are free of forced labor.

The color of hydrogen

Hydrogen’s color wheel is based on the feedstock, according to the Energy Information Administration and European Union sources. And the color assigned to each type mostly makes sense, except for pink.

Brown hydrogen is derived from the gasification of coal. Grey is extracted from natural gas or oil. Green is from water, using wind and solar or other renewables in electrolysis. Clear uses the pyrolysis process.

Blue is brown or grey but becomes blue when the carbon byproduct is captured and sequestered. Turquoise is made from natural gas undergoing pyrolysis. Yellow is the same but using solar. Pink is from water electrolysis using nuclear energy.

Green hydrogen is expected to grow into a $2.5 trillion market by 2050, according to the Hydrogen Council, which is co-chaired by Air Liquide’s chairman and CEO and by Toyota’s chairman Takeshi Uchlyamada.

In Oman, a project underway is expected to produce more than 1 million tons of green hydrogen a year, using seawater and 25 gigawatts of wind and solar. The product is expected to be used in manufacturing ammonia, primarily for use in shipping, according to the consortium.

Other future hydrogen uses are in aviation, ground transportation and, for example, manufacturing steel. Asia might begin using ammonia in power generation.

Moonshots and mach diamonds

Earth is still the center of the universe. And the space race is being powered by oil and gas. SpaceX’s Falcon 9 and Falcon Heavy use rocket-grade (RP-1) kerosene and liquid oxygen.

At SpaceX’s Starbase in South Texas, Starship 15 (SN15 aka “the one that didn’t explode”) uses liquid methane and liquid oxygen. Its Raptor engine’s mach diamonds are perfect, according to people who know about these things, namely @NASASpaceFlight.

In West Texas, Elon Musk’s “not bestie” Jeff Bezos’ Blue Origin BE-3 and BE-7 rockets are fueled with liquid hydrogen and liquid oxygen; its BE-4 rocket uses liquid oxygen and liquid methane.

Their and Firefly Aerospace’s idea behind methane is that it could probably be made from Mars’ ice and the abundance of CO2 in the planet’s atmosphere to fuel up for return flights. The other rockets are for use in “local” space exploration and tourism.

‘Premium’ natural gas

Wood Mackenzie expects natural gas to trade at a premium to oil on a Btu basis in the future, driving its forecast of between $3 and $4 Henry Hub at some point. On the demand side, Asian coal-to-gas switching in power generation is ongoing. In addition, natural gas is essential in the manufacture of blue hydrogen. Plus, Wood Mackenzie expects growth in industrial demand.

But the gas and the LNG will need to be there, said Massimo Di Odoardo, Wood Mackenzie vice president, global gas and LNG.

“In North America, [lower expected] oil prices lead to reduced tight oil production, cutting into the availability of cheap associated gas. Greater volumes of expensive dry gas are needed to meet gas demand,” he said.

 

‘THE NEXT BIG THING’

A former oil and gas investment banker, Robert Birdsey, now focuses exclusively on renewables and alternatives. Birdsey and partners founded energy advisory firm Greenfront Energy Partners LLC. Formerly head of BB&T’s energy investment banking group, he has these thoughts on the energy space today and going forward. Oil and gas industry members have been in contact? We’re starting to talk more and more with traditional E&P, midstream and oilfield service firms that are acknowledging the benefits of pursuing alternative lines of business and also implementing sustainability programs within their own companies. They’re very well-suited to this already. Strategy is nothing more than figuring out what you can do that your competitors can’t do as easily. Houston is full of really smart people who are, in my opinion, above average at using creativity to pursue business opportunities in the energy space. That’s with or without a quote/unquote energy transition. The work to be done is very large, and there’s a tremendous amount of opportunity out there for folks who come from a more traditional background. I am seeing it firsthand in the world of finance. That includes oil and gas private equity firms. They’re doing their due diligence. They're applying lessons learned from the E&P and midstream spaces. There’s a tremendous amount of [startups] being formed [in the energy transition] that are pursuing early-stage projects that will eventually get sold or invested in by much larger companies. It’s the same way that you had a very large ecosystem of small private [E&Ps]. Except, here it’s in solar, wind, storage, renewable natural gas, alternative fuels. The same sort of professional personnel is required. It’s certainly going to create opportunities for folks who are coming from traditional energy backgrounds. Private equity is recruiting from among management teams they invested in, in E&P. Scott McNeill and Jim Mutrie were part of the RSP Permian Inc. management team. They formed an NGP-backed SPAC that bought [EV charging company] ChargePoint Inc. They’re doing it again with two more SPACs. It’s a different business model. What’s different? Oil and gas only takes a few million dollars on a well-by-well basis. Those wells can be brought online within three to six months. And they have really fast decline curves. They’re also underpinned by a somewhat volatile underlying commodity market when it comes to those assets generating profit.

A typical renewable power facility, on the other hand, takes years to build. It doesn’t produce anything during the construction period. Then you flip a switch. It has a steady production profile. And it’s usually underpinned by a fixed-price contract in the form of a power purchase agreement. They’re different business models that require different corporate-finance strategies. But there are smart and creative people in the oil and gas industry. It’s certainly within their powers to figure all this out. It just requires flexibility because it’s very different. Renewable power seems more like a midstream business model: Install it and just maintain it. It seems like the energy transition will have fewer jobs, eventually. That’s a fair point from an operating and maintenance point of view, but the development required for these projects is multifaceted and will require growing employment. What about landmen? Land procurement opportunities exist within alternative energy. But the velocity of land getting transacted on seems to be slower when compared to traditional oil and gas. There’s not as much in the way of land transactions taking place as when you saw it in, for example, the Permian Basin during the past 15 years. What’s the next big thing, after wind and solar? My sense is now is the time for battery storage and renewable natural gas [RNG, from anthropogenic sources, such as dairy farms]. Those two are ramping as we speak. I would say carbon capture comes after, then hydrogen just a couple of years behind. Because hydrogen needs build-out of both supply and demand? I believe supply chains for green hydrogen will ramp more quickly than is currently predicted and attendant costs will drop quickly. But understanding the applications and addressable market requires nuance. Carbon emissions from steel-making or cement production, for example, are not generated just from the heat required to make them. Carbon is also produced from the chemical reactions taking place in those processes. You would still have CO₂ emitted even if hydrogen, for instance, was the primary heating feedstock, and those emissions would need to be captured if you want to have net-zero cement-making. So, if you need the carbon-capture systems in place anyway, it seems redundant to also retrofit a factory to run on hydrogen.

Getting along with the greens

In the extraterrestrial world—interestingly, the short-form for both it and for energy transition is “E.T.”—this editor consulted a friend who’s into that sort of stuff. (Sigh.)

The aliens are known as “the greys;” some are known as “the greens.” When engaging, it turns out well in rare circumstances; usually, it doesn’t.

An example of successful contact with “the greens” was in 2008 when Chesapeake Energy Corp. co-founder Aubrey McClendon won Sierra Club executive director Carl Pope’s support of natural gas toward a greener future.

Engaging with the greys or greens requires some understanding first of what Noah kept asking Allie: “What do you want?” Like in “The Notebook,” there was no answer except, “It’s not that simple.” And she left. (Noah also told her, “You tell me when I’m being an arrogant [expletive]. And I tell you when you’re being a pain in the [expletive]. Which you are 99% of the time. I’m not afraid to hurt your feelings.”)

For independents, some relief has come from that the Greens are focusing on the majors—for now.

The terrestrial

A May 2020 land-management graduate walks into a job search. He’s working now for a solar company.

The American Association of Professional Landmen (AAPL) addressed this trend in the April issue of Landman magazine.

Guest author Robert Wilson was a landman for TransContinental Oil Co. and Stonegate Resources LLC in the Rockies after receiving his undergrad degree from the University of Utah. He’s a landman now at AES Clean Energy, a business unit of power utility AES Corp. whose portfolio produces 37% renewable gigawatts globally.

A new-hire landman with no oil and gas experience let some land contracts expire, Wilson wrote. “He was under the impression that, if we just keep making payments, they would be deemed valid.”

Wilson emphasized that the renewables business is in need of the deep experience of oil and gas landmen.

No fighting, y’all

This summer, the annual NAPE Expo will include a Renewable Energy Pavilion. In AAPL’s announcement of it, it added for anyone put off by inviting the Greens: “We want to emphasize that our intentions are not to disrupt the oil and gas community and polarize our show. Instead, our goal is to bring players from all energy sources together to do business, create jobs and spark the economy during tough times.”

NAPE is, after all, an acronym for North American Prospect Expo. In 2021, energy landman prospects are more than oil and gas.

Wilson wrote in his article that, at AES, “I prioritize hiring those with oil and gas experience. … I hope the blending of renewables and oil and gas can … enable us to provide plentiful and affordable energy to all.”

And for the geologist

NAPE is also a mind-candy shop for geologists. There’s room in the energy future for these too, Dan Dolan, president of the Dallas Geological Society, said in the May meeting.

To the recent petroleum graduate attending, he said, “Keep learning. Keep engaging. I’m a six-year geologist for an oil and gas company. I’m taking the professional geologist’s exam, which differentiates more in the construction mining and hydrogeology side.”

In addition to landmen, geologists are needed in finding perfect CO₂-based EOR and carbon-burial sites.

Big rocks

The independent’s advantage is in filling spaces the big rocks can’t or won’t. The majors are going green. That leaves more of the oil and gas business—there will still be an oil and gas business in 2050—to the independents.

And first movers don’t have great track records. In the renewables business, it’s still costly. To date, they’ve only worked with tax breaks. As the Biden administration incents further green and low-carbon buildout, costs may decline.

Wood Mackenzie’s Di Odoardo said the WoodMac carbon-future scenario sees “the end of Big Oil and the rise of Big Energy.”

In this, “financially strong integrated companies step up their investment plans to supplement dwindling upstream revenue with new cash flow from renewables, hydrogen and CCS [carbon capture and storage].”

Morgan Stanley analysts too are seeing carbon capture as the new business of the majors. “Rising investment in CCS, along with a suite of other low-carbon solutions, reinforces this view,” they wrote, “providing investment opportunities to replace erosion in long-term oil and gas demand.”

But the majors themselves have been cunningly slow-playing. Wood Mackenzie sees them as “latecomers to renewables,” yes. But they’re “leaders in CCS and, as large consumers, enjoy a potential early-mover advantage in integrating hydrogen,” it added.

International oil companies’ and national oil companies’ hopes will fade for many more oil and gas windfalls, Wood Mackenzie projects. Slow-playing will end as delaying participation in the energy transition “will not be a sustainable corporate strategy.”

The cows

Yes, cows. Why is it always the cows? Well, relief on the CO₂ front may be aided by cows. Epicurious is no longer publishing new recipes that include beef. Some restaurants are rebranding as meatless, a notable one being Manhattan’s Eleven Madison Park.

A professor at Yale told The New York Times that the restaurant’s gone-meatless decision will “have an influence on the best restaurants in places like Midland, Texas—affluent places that are not Los Angeles or San Francisco or New York.” [Insert “Surprised Guy” meme here.]

Farewell lavender-glazed duck that we’ve never had the chance to try. But we have Chef Greg Martin’s porcini-rub, half-pound, Angus burger with bacon and truffle cheese at Bistro Menil in Houston. And all the BBQ in West Texas.

A more interesting plan is one that changes cows’ feed so they burp less. It seems that adding seaweed to the cows’ feed reduces their methane emissions by up to 82%, according to researchers at the University of California-Davis.

Livestock produce some 14.5% of global greenhouse-gas emissions, Smithsonian Magazine reported, with two-thirds of that made from cows’ burps alone. “In the U.S., the methane [that] cows release accounts for nearly 2% of total greenhouse-gas emissions annually,” it added.

Meanwhile, President Biden isn’t looking to outlaw red meat, Politico has confirmed. “But activists say his greenhouse-gas policies don’t do enough to curb the livestock industry’s role in climate change,” it added.

Speaking of cows, we came upon this new foodie term: BBQ universe. It doesn’t belong in this article. But it’s a cool word. Sample usage: “Tofu doesn’t belong in the BBQ universe.”

The EV

We need to talk about this too. Ford’s electric F-150 that’s expected to debut next spring has a sticker—just under $40,000—that’s the same as the gas-powered one. It comes with a luggage compartment too: the “frunk” that is the space formerly the home of the engine. The frunk includes outlets for running a microwave or power saw.

After federal—and some state—tax credits, “it’ll be cheaper than some used F-150s,” reported Wired.

Biden’s hoping for a half-million charging stations by 2030. There are about 40,000 now, according to the U.S. Department of Energy (DOE). Houston has more than 800 among which more than 50 are free, according to Reliant Energy.

It still takes about 30 minutes to a few hours to fill up. But H.E.B.’s opted for superfast-charging stations at some of its stores. And Cracker Barrel has some regular ones. No word from Buc-ee’s yet.

Equinor ASA’s chief economist, Eirik Waerness, said in a Rystad Energy virtual conference in May that the world’s fleet conversion to electric vehicles (EV) by 2050 would require that all new vehicles would have to be electric beginning in 2030.

That’s because “the oldest car on the road is more than 20 years old,” he said. “So these asset lives—you have to think about [it], particularly when you have an asset fleet that is growing.”

Washington state legislators passed a bill in April that outlawed new-make gasoline- and diesel-powered vehicles beginning in 2030. A subsequent story received less attention: The governor didn’t sign it.

Jay Inslee, whose platform in a six-month run in 2019 for U.S. president called for banning new gas-powered cars by 2030, cited disagreement on how the state would recoup lost pump-tax revenues.

 

ROTATION Christina Kitchens formed 3P Energy Capital last year to source and place energy alternative capital, after working in oil and gas banking beginning in 2000 and, most recently, spearheading a lender’s ESG underwriting and implementation initiatives. Is there too much money in decarbon SPACs right now? More money than exit-stage companies to buy? The proof of earnings still has to be seen for many of these investments. It’s not mature enough to show that there can be a substantial enough return on that capital from the dollars that are increasingly being allocated to it. There are a lot of dollars chasing very few opportunities, albeit most are counting on significant ramp-up of activities. As time progresses, there will likely be some degree of rotation out of that space. And some of those dollars going to more traditional energy projects with bettering ESG integration and performance. There just aren’t enough truly green or greening projects for the dollars to be smartly invested. Everybody’s had a great idea; the market is just not quite there yet. And then you had the popularity of SPACs [meet with] with the popularity of investing in the energy transition. It’s just too many dollars too soon. Oil and gas private equity firms are investing in decarbonization as well. That’s where a lot of the institutional dollars have had interest and, therefore, that’s where the money can be raised. When will the dollars return to oil and gas? You’re going to continue to see rapid growth in transition investments in the interim. The stock market has performed very well since March of 2020. [At some point], there may be people who say, “There’s just too much money already here and the pinnacle of these equities’ values have been met. Where are we going to allocate these dollars [now]?” Hopefully that’ll be energy to some extent if our risk-adjusted performance evidence opportunity, and there is confidence to our bettering commitments to reduce carbon emissions. But then you have funds that are very much oriented towards “impact.” Those dollars are being invested for return of the impact of the dollar, not necessarily the return on those dollars. I think that space will continue to have growth because those dollars are being invested based on principle.

Planes

Equinor’s Waerness also said that the issue with a 2050 target for all-electric or all-hydrogen ships and planes is similar to that posed by the asset life of cars. For example, “the Boeing 727 Max, if we start to use it [again], will still fly in 2050,” he said.

For now, an all-electric or all-hydrogen aircraft isn’t feasible. The issue remains power density, of course, which is the greatest still from petroleum-derived jet fuel—the lightest weight, highest-Btu fuel source for aviation.

Mari Vassdokken Sigstad, a Rystad Energy consultant based in Norway, said, “We have very ambitious climate goals in Europe. Now it’s been decided we want to reduce in the EU the CO₂ emissions 55% by 2030. So to do that we have to tackle transport really fast.” She expects hydrogen might be most practical in aviation.

She flew on a small, fully electric plane a few years ago. “I think we will see battery-electric planes on short-haul flights, but we definitely need hydrogen to get to zero emission, which is the goal,” she said.

Carbon-mining

Royal Dutch Shell Plc bought Australia-based Select Carbon, which operates more than 70 carbon-farming projects involving some 10 million hectares.

It estimated this spring that carbon storage facilities globally had capacity of 40 million tonnes per year (mtpa). Shell is involved in seven of the 51 projects, storing 5 mtpa of about 12.5% of current capacity. One in Canada, Quest CCS, in which Shell has a 10% interest, has captured and stored more than 5.5 million tonnes by year-end 2020 since operations began in 2015.

Shell is also a partner in a project in Norway, Northern Lights CCS. The major’s 2020 investments in CCS were some $70 million. It aims to be involved in 25 mtpa of CCS capacity by 2035, estimating that its roughly 20% of CCS projects’ capacity currently on the table worldwide.

Exxon Mobil Corp. estimates it has been responsible for 40% of global carbon capture since 1970; 48 companies have been responsible for the rest, it reported. The major is currently involved in more than 20 new CCS projects globally.

From the Houston Ship Channel, it plans to inject captured carbon into Gulf of Mexico sandstone fields, potentially up to 500 billion tonnes that, according to a DOE estimate, is the equivalent of 100 years of total U.S. CO₂ emissions.

Erik Oswald, a vice president in Exxon Mobil’s new Low Carbon Solutions unit, said at a U.S. Chamber of Commerce program in May that the market for CCS might be more than $2 trillion by 2040.

The Houston project would “effectively decarbonize one of the country’s most important industrial areas,” Oswald added.

“It’s a massive idea—one that would create tens of thousands of jobs and cost more than $100 billion. So it will need support from many different parties, both private and public, to succeed … Will it be difficult? Yes. Is it possible? Absolutely.”

Natural gas for crypto-mining

Digital mining has a carbon footprint that, well, is an electricity guzzler. The industry’s CO₂ emissions are estimated as the equivalent of 9 million cars, Reuters reported.

Procuring Bitcoin—or Dogecoin or Ethereum, et al.—isn’t likely to be powered entirely by wind and solar in the near future. Just as hydrogen won’t all be made by water, wind and solar in the near future.

So digital mining needs lots of natural gas. And some oil producers in Wyoming and the Williston Basin are using their associated gas to mine it.

Wyoming producer Kirkland Oil and Gas LLC has hired EZ Blockchain to convert the stranded gas into electricity for mining for coin in trailers at wellsites, according to Reuters. Kirkland gets the coin and pays the miner a fee.

Williston Basin operators Equinor (which exited the Williston in April) and Enerplus Corp. (which is adding in the Williston) have had miners at their sites, the companies confirmed to Reuters. Kraken Oil & Gas Partners LLC is a methane-to-computing-power partner with Denver-based Crusoe Energy Systems.

Oil producers whose natural gas is being used for crypto-mining are receiving tax breaks under new North Dakota and Wyoming laws passed this year, Reuters added.

North Dakota state Sen. Dale Patten said, “I think it’s [going to] be a big chunk at what we look at for the future in North Dakota.”

 

‘LET’S DO IT’ Dennis Petito has been taking a deep look at the alternative energy space and the energy transition for a couple of years now. The founder of Montrose Energy Capital Advisors LLC began his oil and gas investment banking career in the 1970s. His new firm is raising capital, specializing in ESG and sustainability exposure and focusing on small- and mid-cap oil and gas clients. Does carbon capture provide a competitive business fit for the U.S. oil and gas industry? Houston is particularly situated to benefit from CCUS. The regional geology provides natural warehouses to store CO₂, and pipelines and distribution infrastructure to transport it to be used for EOR in the Southeast and Permian. So, yes, definitely. The industry must look at CO₂ emissions as a profit, not a cost, center It seems oil and gas personnel are most suited to producing any type of energy. I don’t think you can compete with the competitive spirit of the American oil and gas industry, combined with the technical talent that goes with it. We’ve seen it time and time again. Once the industry is able to get a line of sight and understand what the field of play is, it’s going to dominate. How does the industry turn its net-carbon-zero achievements into money? We’re already seeing significant examples of it where you have a buyer saying, “Look, I’ll buy that LNG, but I want it to be a net-carbon-zero cargo.” [When] people are buying with that as a preference, the product isn’t so much a commodity anymore. Like how you can sell non-GMO products for more. Exactly. That’s a fabulous analogy. [Oil isn’t] a commodity that is going to experience a substantial increase in demand. Quite the opposite: As it becomes less of a rarefied commodity, so to speak, people will be able to impose their buying preferences. So, the way you monetize [your net-zero-carbon achievements] is that the market is willing to pay a premium to net-zero producers. And if you don’t comply, well then, you’d just as well be selling coal. I think any producer that doesn’t adapt to this change is going to become the equivalent of a coal company. How does a producer avoid that? Once they stop fighting it and just accept it and say, “Okay, we’re just going to have to compete on this basis. Let’s do it,” there is no doubt U.S. producers will compete successfully and thrive. I think they’re beginning to understand that they really need to come up to speed on it. Unfortunately, if you’re a small- to mid-cap company, it’s hard. Hell, I’ve spent two years studying this. Once you start focusing on this stuff, it just consumes you. But it’s going to happen really fast and furious. And a lot of small- to mid-cap companies are going to be lost. They’re not going to know where to turn. They can start over? The oil and gas industry is in decline. We’re not going to be losing jobs to something else, like renewables; we’re going to be losing jobs because the industry is in consolidation.

NFTs’ carbon offsets

NFTs are a digital product. And they double down on the electricity: Besides being digital “works of art,” such as Jack Dorsey’s first tweet and the original image of “Disaster Girl,” they’re paid for with Bitcoin or Ether or other crypto.

The stars of “Charlie Bit My Finger” sold the 2007-minted video in May for the equivalent (value at the time of the sale) of about $761,000 in Ether. The family reported it plans to donate a portion of the proceeds to carbon offsets.

The artist behind a digital photo collage that sold at Christie’s in March for $69 million in coin told The Verge that, in the future, he plans to offset his work’s emissions “by investing in renewable energy, conservation projects or technology that sucks CO₂ out of the atmosphere.” The offset cost of the one he sold is about $5,000, The Verge added.

Disaster Girl sold hers—a single digital photo—in April for 180 Ether, worth about $500,000 at the time. An undergrad studying war, peace and defense (yes, really) at the University of North Carolina, said she plans to use the earnings to pay for college—oh, and to make donations.

Disaster Girl’s plan for post-grad study is international relations.

Ask an analyst

Many investment-banking firms have added a green desk. They can put oil and gas producers and service firms in touch with intel on green firms for collaborations.

Be mindful you might get an earful, though: Some oil and gas analysts aren’t very happy about being forced to apply fundamental business principals to green stocks that subsist on tax breaks, etc.

Another option: Your neighborhood oil and gas private equity firm is looking for decarbon management teams. And their portfolios are growing.

The biggest prize

Morgan Stanley analysts estimate there will be a $225 billion market globally for carbon capture and storage in 2050. It could “ultimately offer higher returns than traditional clean technologies such as wind and solar,” they reported.

The oil and gas industry is in a key position to develop the world’s CCS, which is “a required technology in a ‘net-zero’ world.”

The reason is the industry’s geologic expertise and access to fields for storage. The U.S. holds two-thirds of the world’s CO₂ storage, they report.

The value: Captured carbon goes for about $50 a ton in the U.S. and $35 a ton if sequestered in EOR fields. In California, it’s worth some $200 a ton.

In the immediate future for oil and gas, CCUS appear to be the most immediate prize. Dr. Ken Medlock led the “Expanding Carbon Capture in Texas” study, which was released in January, and demonstrated that Texas is the perfect place for CCUS to happen.

He was asked in the Rystad Energy virtual conference in May if “the mindset” had shifted in the U.S. toward renewables now that Biden is in office.

Medlock, who is senior director for the Center for Energy Studies, Baker Institute, Rice University, said, “The mindset had already shifted.” Rather, “the actions have accelerated.” Exxon Mobil’s announcement of building a CCS hub in Houston is one example, he said.

Houston-based retired natural gas trader and hedge fund owner John Arnold has found an acceleration as well. He tweeted in April that, a year ago in Houston, “75% of the talk was [oil and gas] and 25% clean energy.”

This year, 75% “of discussions now are about wind, solar, batteries, transmission, lithium, cleantech, etc. Even those who are not ideological believers are taking the cues from the financial markets, which have no interest in oil production growth anymore …”

Houston Mayor Sylvester Turner is promoting the city, long known as the “Energy Capital of the World,” as the “all of the above” energy capital, saying Houston’s energy leaders will be the world’s leaders in all future energy sources.

Medlock was told by the Norwegian host of the Rystad program, “We have seen American E&P players as laggards in this energy transition.”

Medlock replied, “‘Laggards’ is an interesting statement because it’s a comparative statement.” He’s seeing E&Ps look to leverage their assets “to the fullest extent possible.”

“What that means is ‘How do we actually clean up oil and gas? How do we think about carbon capture? How do we think about converting hydrocarbon molecules to their most basic form and think about hydrogen outlets for energy use? And address the externality that carbon presents?’”

There is R&D underway in the oil and gas patch already, he said.